Bill Gates says companies have gone from staying private too long to going public too soon and that he’s avoiding ‘low quality’ SPACs

Bill Gates
  • Bill Gates believes some companies may be going public too soon amid a SPAC boom.
  • The billionaire said he will be sticking to “higher quality” SPACs in this environment.
  • Gates emphasized the need for “extreme” disclosures to protect investors from early-stage investing risks.
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Bill Gates said he believes companies have “flipped” from staying private too long to going public too soon, in an interview with CNBC on Friday.

The billionaire Microsoft co-founder added that he will be avoiding “low quality” special purpose acquisition companies (SPACs) that have flooded the market and sticking with “higher quality” options.

Gates sat down with CNBC’s Becky Quick and former US Treasury Secretary Hank Paulson to discuss his climate-related work for the economic club of New York on Friday. In the interview, the billionaire philanthropist was asked about the rise of SPACs and whether or not they would be a benefit to “green” startups.

SPACs have raised more money in the first quarter of 2021 than they did in all of 2020, raking in more than $97 billion in just three months, according to data from SPAC Research.

Gates emphasized the capital intensive nature of climate change solutions and green companies and said that if investors are willing to take the risk, cash from capital markets would allow “green product companies” to “improve their balance sheet and get capital for projects because the markets are saying this is important.”

On the other hand, Gates warned about the risks in early-stage investments, saying, “you’ve got to make sure your disclosure about the risks is really extreme.”

He also noted that “we’ve kind of flipped from a world where companies would probably stay private too long, to now where, unless you’re tasteful, some of these companies may be going public too soon.”

Gates added that “there will be quality companies that SPAC,” but emphasized there will also be “low-quality companies” that choose to take advantage of the SPAC boom. Gates said he will be looking to stay involved in the only higher-quality offerings.

After a meteoric rise in SPACs over the past two years, there’s been some evidence that the SPAC market is beginning to cool.

Specifically, SPAC IPO prices have begun to fall. In fact, some 93% of SPACs that went public in the last week of March traded below their $10 initial offering price, per Reuters.

SPAC ETFs are also taking a hit, the Defiance Next Gen SPAC Derived ETF (SPAK) has fallen 23% from February 17 record highs.

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US SEC official warns SPAC dealmakers of the risks and complexities tied to blank-check mergers

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A US markets watchdog official on Wednesday cautioned blank-check company dealmakers about the risks and governance issues that come with raising capital through special-purpose acquisition companies (SPACs).

Paul Munter, the acting chief accountant at the Securities and Exchange Commission, said timelines of such transactions are part of the challenges for private companies that merge with SPACs. That is because their development may still be in early stages.

“Many SPAC acquisition targets may be at an earlier stage in the entity’s development compared to companies that pursue a traditional IPO,” he said in a statement, adding target companies should have a plan to address the demands of becoming public on a speedy timeline.

Munter urged market participants to carefully consider risks, complexities, and challenges in the space, including the consideration of whether target companies are prepared to go public.

SPACs have raised $97 billion across 298 IPOs so far this year, exceeding the previous year’s record of $83 billion raised, according to data from SPACInsider.com.

But March was a rough month for companies in the space as firms and individual investors grew increasingly cautious over SPAC investing. 93% of SPACs that went public in the last few weeks of the month were trading below par value, or $10 per share. JPMorgan said SPAC acceleration may be hitting a peak and could slow for the rest of the year.

Munter made his statement about a week after the regulator wrote to Wall Street banks to seek voluntary information on their SPAC dealings.

“Given the explosion in popularity of SPACs, it’s no surprise that enforcement is asking questions – this is the beginning of what I expect will be heightened scrutiny of trading and disclosures to investors arising from the surge of these transactions,” Doug Davison, partner at law firm Linklaters, said.

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Billionaire investor Bill Ackman is eyeing a second SPAC deal even though he will miss his own Q1 deadline to find a first target

Bill Ackman
Bill Ackman.

  • Pershing Square chief Bill Ackman is already planning a second SPAC, but hasn’t yet found a first target.
  • Airbnb, Stripe, and Bloomberg LP were previously said to be among his blank-check firm’s first targets.
  • Ackman said he believes his SPAC will be an important contributor to his hedge fund’s performance.
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Hedge fund billionaire Bill Ackman is already planning a second blank-check company, although he expects to miss his own first-quarter deadline to find a first target.

The legendary investor had hoped his special purpose acquisition company (SPAC) would find a target by the end of the first quarter, but now admits this might not happen. Prior targets on the list of his Pershing Square Tontine Holdings SPAC included Airbnb, Stripe, and Bloomberg LP, according to Reuters.

“While we previously believed that we would be able to announce a potential transaction by the end of this quarter, we will not be in a position to do so,” Ackman said in a letter to investors on Monday. “We do not intend to make any announcements about PSTH’s transaction progress until we enter into a definitive agreement.”

Ackman said he believes his SPAC will be an important contributor to the hedge fund’s performance and he will likely launch a second one after completing a first merger. Investors in his first SPAC should have the right to invest in the second one “without paying a premium to its cash-in-trust value,” he wrote in the letter.

Ackman’s PSTH was the highest-profile SPAC among hedge funds in 2020, when SPACs raised $83 billion across 248 IPOs, smashing the previous record of $13.6 billion, according to SPACInsider.com. His SPAC raised a record-breaking $4 billion via proceeds from investors in July last year, along with an added $1 billion commitment from Pershing Square.

While he has not told investors which companies he was looking to take over, a previous filing stated he is drawn to “high-quality, venture-backed businesses” that could be classified as “mature unicorns.” Unicorns are privately-held startups with a valuation of more than $1 billion.

The SPAC has until July 21 next year to sign a letter of intent and six months after that to close a signed deal, according to Bloomberg.

Shares in Pershing Square Tontine fell 1.3% in pre-market trading on Tuesday.

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The red-hot SPAC market is cooling off as first-day trading spikes evaporate

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The red-hot SPAC market looks to be cooling off as first-day trading spikes that were common in the space earlier this year begin to evaporate.

93% of SPACs that went public over the last week are trading below par value or $10 per share, per Dealogic data compiled by Reuters, That’s 14 out of 15 SPACs this week alone trading below their IPO price.

The biggest first-day jump of a SPAC this month was just 3.5% for Supernova Partners Acquisition Co II Ltd on March 1.

That’s compared to January’s largest first-day pop of 32.5% for Altimeter Growth Corp II and February’s best first-day jump of 24.9% for CM Life Sciences II, per Reuters.

SPACs are “blank check” firms that go public with nothing but cash on their balance sheet. Their sole goal is to merge with or acquire a private company allowing that business to skip the traditional IPO process to make its public debut.

There’s no doubt the SPAC market is booming. SPACs have raised $87.9 billion so far in 2021, according to data from SPAC Research. That’s already more than all of 2020 when SPACs raised $82.1 billion, per Dealogic.

The incredible rise of SPACs means the blank check firms now have over $1 trillion in spending power.

Unfortunately, the rise in SPACs hasn’t always led to great returns for investors, especially retail investors.

According to data from “A Sober Look at SPACs” by Klausner, Ohlrogge, and Ruan 2020, average returns for SPACs 12 months after their merger were negative 34.9% between January 2019 and June 2020.

Billionaire investor Barry Sternlicht told CNBC on Wednesday he believes the SPAC market is “out of control.” These days “if you can walk, you can do a SPAC,” Sternlicht said.

The CEO and Chairman of Starwood Capital, which operates six SPACs of its own, warned about the lack of due diligence done by SPAC sponsors. Sternlicht also said the recent poor performance of SPACs is partly a result of a tech sell-off, because a lot of SPACs are tech-focused.

“People are also beginning to question the euphoria and retail investors are unable to keep up with all these names,” Sternlich told Reuters.

Sternlicht isn’t the only one questioning SPACs recent rise either.

UBS barred financial advisors from making SPAC pitches to clients due to limited availability of research on SPACs before their mergers with private companies. All of this bearish news may be weighing on SPACs’ first-day results.

Read more: Hedge funds are ramping up bets against Chamath Palihapitiya’s SPACs and have already taken home $40 million this year. Here’s a detailed look at the wagers they’re making.

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Short-sellers have tripled bets against SPACs since the start of 2021 amid fears the blank-check frenzy has gone too far

Stock Market Bubble
  • More and more short-sellers are beginning to turn their attention to SPACs, which have experienced a boom in 2021.
  • They’ve more than tripled their bets against SPACs to $2.7 billion since the beginning of the year, according to data from S3 Partners.
  • Recent SPACs that have been targets of high profile short-sellers include XL Fleet and Lordstown Motors, among others.
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SPAC IPOs have been all the rage since the COVID-19 pandemic began, and the trend has only accelerated in 2021. Now short-sellers are beginning to take notice.

The group of investors has tripled bearish bets against SPACs to $2.7 billion, from $724 million at the start of the year, according to data from S3 Partners first reported by The Wall Street Journal.

Short-sellers have a lot of SPACs to sift through, given that the $166 billion raised by SPACs in the first quarter of 2021 exceeds all of the SPAC deals formed in 2020. But high-profile short-sellers seem to be having no problem finding their targets.

Muddy Water’s Carson Block released a report earlier this month on XL Fleet, a recent SPAC IPO that, according to Block, misled investors on an inflated revenue backlog for its retrofitted hybrid vehicles. The share price of XL Fleet has yet to recover from Block’s short report.

Short-seller firm Hindenburg Research, which rose to fame last year after it released a damaging short-report on Nikola, has also had success targeting SPAC firms. Hindenburg released a report on Lordstown Motors last week, alleging that the SPAC-merged company has “no revenue and no sellable product.” Shares of Lordstown dipped more than 20% and have yet to recover from the decline.

Even the SPACs led by billionaire investor Chamath Palihapitiya have been unable to avoid the scrutiny of short-sellers. Palihapitiya’s recent Social Capital SPAC merger with fintech firm SoFi has more than 20% of its share float sold short, according to data from Finviz.

Besides the underlying business concerns raised by short-sellers for SPACs, underlying trends in interest rates could be helping their bets against SPAC mergers. A majority of the companies going public via SPAC merger are not profitable, and don’t forecast profitability until years down the road.

The dearth of profits hasn’t jived well with investors as interest rates have risen over the past few months, sparking a rotation out of high-tech growth companies and into cyclical stocks in the energy and financial sectors.

Read more: ‘It’s been a motherf—ing rocket ride’ : A top NFT artist who’s sold over $60 million worth of crypto art breaks down how he’s capitalizing on the sudden boom – and shares how he positions his own portfolio

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Billionaire Richard Branson’s Virgin Orbit has reportedly hired bankers to go public via SPAC merger

Virgin Orbit Boeing 747

Billionaire Richard Branson has reportedly hired bankers to take his aerospace company Virgin Orbit public through a special purpose acquisition company merger, aiming for a $3 billion valuation, The Wall Street Journal reported Friday.

This move is consistent with the billionaire’s strategy of taking his companies public via blank-check listings amid the explosion of SPACs in recent years. SPACs are essentially shell companies seeking to merge with private companies with the intention of taking them public.

The entrepreneur in 2019 took his space-tourism company Virgin Galactic Holdings public via SPAC and enlisted billionaire investor Chamath Palihapitiya as the chairman. Palihapitiya in early March, however, cashed out his entire personal stake for $211 million.

More recently, VG Acquisition, a SPAC sponsored by Branson’s Virgin Group, announced in February that it has merged with DNA testing startup 23andMe in a deal that would put the company famous for its at-home kits at an enterprise value of $3.5 billion.

Virgin Orbit has hired Credit Suisse Group and LionTree, according to The Wall Street Journal, and is currently looking for a SPAC merger partner.

Branson’s company owns 80% of South Carolina-based Virgin Orbit. Mubadala Investment and the United Arab Emirates sovereign-wealth fund own the remaining stake.

The valuation is not guaranteed but the billionaire is banking on Virgin Orbit’s January test launch, which successfully sent its first rocket to successfully reach Earth orbit, eight months after its previous attempt failed.

SPACs have been around for more than a decade but have since recently boomed. Just three months into 2021, data from SPAC Analytics already show 246 SPACs that raised $76.7 billion versus the 248 in 2020 that raised $83.3 billion.

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Goldman Sachs creates SPAC team in Hong Kong amid surging Asian interest in blank-check companies

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Goldman Sachs has created a SPAC team in Hong Kong dedicated to handling the surge in blank-check deals that have emerged in the Asian region.

The strategic team was set up last year but was not made public, according to Reuters. SPACs – short for special purpose acquisition company – gained traction in Asia moving in step with the frenzy in the United States although with less volume.

Raghav Maliah, the global vice-chairman of Goldman Sachs’ investment banking division, leads the team alongside Vikram Chavali and Edward Byun, Reuters reported.

SPACs, which are shell companies seeking to merge with private companies with the intention of taking them public, have since taken off given. Proponents cite their simplicity and lower cost.

Regulators however have publicly expressed caution over the recent SPAC mania. On Thursday, acting SEC Chair Allison Herren Lee said that SPAC returns don’t warrant the “hype” they’re getting. The agency also released an investor alert that specifically warned of the risks involved with celebrity-backed SPACs.

SPACs have been around for more than a decade but have since recently boomed. In 2019, a total of 59 SPACs raised $13.6 billion in the US, according to SPAC Analytics. The figure quadrupled to 248 in 2020 and raised $83.3 billion. But in the third month of 2021 alone, data already show 246 SPACs that raised $76.7 billion, comprising 75% of initial public offerings.

Meanwhile, in Asia, there has been $2.64 billion worth of SPAC deals in 2021 – already exceeding the $2.46 billion for the entire 2020, according to Dealogic data cited by Reuters.

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Cryptocurrencies and SPACs show signs of ‘irrational exuberance,’ but the stock market is not in a bubble, says UBS

NYSE Trader Blur
Traders working on the floor of the New York Stock Exchange are blur in this time exposure, just before the opening bell, 11 May, 2004.

  • UBS’s Mark Haefele said in a Friday note that while cryptocurrencies and SPACs show signs of “irrational exuberance,” investors shouldn’t worry that the whole stock market is in a bubble. 
  • Within the IPO and SPAC market and cryptocurrencies, prices are discounting future rapid price appreciation, a factor that’s typically present during market bubbles, said Haefele.
  • But large parts of the stock market are not expensively valued by historical comparison, the chief investment officer of global wealth management said. 
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While many parts of the market are showing signs of  “irrational exuberance” that should alarm some investors, UBS’s Mark Haefele says there are still some risk assets outside of bubble territory.

“All of the bubble preconditions are in place,” he explained in a Friday note, citing record low financing costs, new participants entering into the market, and a combination of historically low interest rates and high savings rates from government stimulus that’s left investors who are searching for returns with no alternative but equities.

However, Haefele said that while parts of the market seem speculative, investors shouldn’t worry that the whole market is in a bubble.

“The cryptocurrency markets are exhibiting signs of excessive speculation and the IPO/SPAC markets are the hottest in two decades. But these markets do not yet pose a broader systemic risk,” the chief investment officer of global wealth management said.

Within the IPO and SPAC market, as well as crypto, prices are discounting future rapid price appreciation, a factor that’s typically present during market bubbles, said Haefele.

Speculation is pushing up prices for bitcoin, especially as major investors raise their long-term price targets for the coin, like Guggenheim’s Scott Minerd who sees bitcoin hitting $400,000 in the future.

Read more: GOLDMAN SACHS: Buy these 25 stocks best-positioned to juice profits in 2021 as stimulus and vaccine progress spur economic growth

First-day IPO performance is also the strongest in around two decades. Airbnb leaped 115% on its first day of trading, while DoorDash opened 78% higher than its offer price. SPACs raised more than $70 billion in 2020, more than the entire prior decade combined, he said.

But equities as a whole are not in a bubble, said Haefele. For one, he explained that large parts of the market are not expensively valued by historical comparison. Removing Facebook, Amazon, Apple, Microsoft, Netflix, and Google, the S&P 500 only rose 6% in 2020. 

He also said that valuations of indices look reasonable against the backdrop of low interest rates, and used an equity risk premium approach to explain why stocks still look cheap relative to bonds. 

Against that backdrop, he recommends investors “think beyond the bubbles.”

“One reason that bubbles can be so deceptive is that there is often a grain of truth behind their narratives. The dotcom bubble, for example, correctly anticipated the impact of the internet,” said Haefele. “Many of the narratives linked to today’s bubbles may also prove to be correct. Investors may be able to capture some upside but reduce the risk associated with bubbles by identifying the narrative, yet investing in a more diversified way.” 

He reiterated his suggestion to investors to buy emerging technology investment themes like 5G, fintech, greentech, and healthtech, while staying diversified. He also said UBS is bullish on emerging market stocks.

Read more: ‘Extremes are becoming ever more extreme’: A Wall Street strategist who sounded the alarm before last year’s 35% crash showcases the evidence that a similar meltdown is looming

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SPACs will drive $300 billion in M&A activity over the next 2 years after a monstrous 2020, Goldman says

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  • Blank-check companies looking for their next target could drive $300 billion in mergers and acquisitions over the next two years, according to Goldman Sachs.
  • A hunt for yield, the shift in focus from value to growth stocks, and retail investors looking for early-stage businesses has driven investor interest in SPACs in 2020, strategists said.
  • “If this year’s 5x ratio of SPAC equity capital to target M&A enterprise value persists, the aggregate enterprise value of these future takeover targets would be $300 billion,” they noted.
  • The strategists warned that weak returns represent one headwind to future SPAC issuance.
  • Visit Business Insider’s homepage for more stories.

Blank-check companies looking to merge with or acquire another company could drive $300 billion in M&A activity over the next two years, Goldman Sachs said on Monday.

About 205 special purpose acquisition companies have raised a record $70 billion in IPO proceeds year-to-date, representing a five-fold increase from 2019, strategists led by David Kostin wrote. SPAC IPOs this year account for 52% of the $124 billion raised via 356 US IPOs.

Three major factors drove investor interest in 2020, or what they called “the year of the SPAC.” These include a shift in focus from value stocks to growth stocks, retail investors keen on non-traditional and early-stage businesses, and a hunt for cash substitutes when key policy rates are near zero.

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Goldman estimates that 205 SPACs will need to acquire a target in 2021 or 2022, based on their 24-month post-IPO expiration dates. 

Read More: JPMorgan unveils its 50 ‘most compelling’ stock picks to buy for 2021 – and details why each one will be a top performer

“If this year’s 5x ratio of SPAC equity capital to target M&A enterprise value persists, the aggregate enterprise value of these future takeover targets would be $300 billion,” the strategists said.

SPACs serve as a cheaper and faster alternative to the traditional IPO route as they are created solely to merge with or acquire other businesses, and take the merged entity public. Even after a SPAC goes public, it could take up to two years to find a desirable M&A target. If it doesn’t, the SPAC is liquidated, and funds raised are meant to be returned to investors.

2020 has seen prominent entrepreneurs, hedge-fund managers, and popular celebrities like Bill Ackman, Richard Branson, Michael Jordan, and Shaquille O’Neal become involved in SPACs, and the blank-check firms were led to market by investment banks like Morgan Stanley, Credit Suisse, and Goldman Sachs.

“We expect a high level of SPAC activity will continue into 2021,” Goldman Sachs said, and warned that weak post-acquisition returns represent a headwind to future SPAC issuance.

Read More: Buy these 28 discounted stocks from an LGBT-inclusive index that’s crushed its global benchmark since 2010, says Credit Suisse

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Legendary investor Jeremy Grantham made an accidental $265 million profit on a SPAC deal after previously criticizing blank-check companies

Jeremy Grantham
  • Jeremy Grantham’s early stake in battery producer QuantumScape has surged following the firm’s merger with a special-purpose acquisition company, but Grantham still isn’t sold on the blank-check IPO trend.
  • Grantham invested $12.5 million into the company seven years ago. That stake now stands at roughly $278 million thanks to a SPAC merger and QuantumScape’s subsequent stock rally.
  • The position is “by accident the single biggest investment I have ever made,” Grantham told the Financial Times.
  • Still, the investor sees SPACs as a “reprehensible instrument, and very very speculative by definition,” largely due to their lack of listing requirements and overall regulation.
  • Visit the Business Insider homepage for more stories.

The very kind of dealmaking that Jeremy Grantham previously deemed “reprehensible” netted the famous investor a $265 million profit.

Grantham, who founded investment management firm GMO and serves as its long-term investment strategist, invested $12.5 million in battery producer QuantumScape seven years ago as one of several stakes in early green-tech companies, according to the Financial Times. The position swelled after Kensington Capital Partners announced plans to merge QuantumScape with a special-purpose acquisition company, or SPAC, in September.

The deal valued QuantumScape at $3.3 billion, and shares traded at more than four times their listing price when the acquisition was completed on November 30. The company’s stock rallied another 31% on Tuesday alone, valuing Grantham’s stake at roughly $278 million.

Yet the legendary investor isn’t convinced Wall Street’s SPAC frenzy will last. The QuantumScape position is “by accident the single biggest investment I have ever made,” Grantham told the FT, partially fueled by the so-called blank-check companies’ lack of regulation.

“It gets around the idea of listing requirements, so it is not a useful tool for a lot of successful companies. But I think it is a reprehensible instrument, and very very speculative by definition,” he added.

Read more: We spoke with Wall Street’s 9 best-performing fund managers of 2020 to learn how they crushed the chaotic market – and compile the biggest bets they’re making for 2021

Grantham’s profit stands to climb even higher. QuantumScape soared as much as 37% in early Wednesday trading. Should the rally hold into the market close, it would add another $100 million to his total gains. 

SPAC firms raise capital through an initial public offering with the intention of using the cash to acquire a firm and take the merged entity public. The last two years have seen market favorites including Virgin Galactic, DraftKings, and Nikola go public through such deals.

Blank-check IPOs exploded in 2020 as firms looked to take advantage of a surge in participation from retail investors and hopes for an economic recovery. More than $74 billion has been raised across 218 SPAC debuts in 2020, according to data from SPACInsider.com. That compares to just $13.6 billion raised across 59 deals in 2019.

Wall Street’s obsession with the vehicles could be a sign of unsustainable market optimism, Grantham told the FT, rivaling the overwhelming bullishness seen during the 1920s and the late-1990s tech bubble.

Tesla’s meteoric rise through the year has made electric-vehicle SPACs – and any SPAC related to the EV market – particularly popular. QuantumScape lands in that basket. The firm produces solid-state batteries used in electric cars and has backing from industry giant Volkswagen.

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Read the original article on Business Insider