The Death of the Traditional IPO
The death of the traditional IPO... COVID-19 didn't faze this corner of the market... A long way from its seedy start... A who's who of involved backers... Sending companies to their next growth phase... Retail investors struggle with this space... Why recent volatility is good news... Tune into tonight's FREE Q&A right here...
Editor's note: We reintroduced Digest readers to Enrique Abeyta last week...
Enrique brings more than 20 years of Wall Street experience into his role as an editor at our corporate affiliate Empire Financial Research. And as he explained in the October 2 Digest, he has now found an incredible opportunity to profit in a little-known corner of the market – special purpose acquisition companies ("SPACs").
In today's Digest, we're continuing that discussion as Enrique highlights five reasons why SPACs present a better opportunity for individual investors right now than ever before.
But before we begin, we encourage you to save your seat for Enrique's FREE event tonight if you haven't yet. He'll detail what you need to know to profit in the space... show you how to avoid falling into traps... and share an interview with an investing legend about his latest venture. The action starts promptly at 8 p.m. Eastern time.
With all that said, here's Enrique...
Last year was abuzz with many long-awaited 'unicorns' finally going public...
Ride-hailing firms Uber (UBER) and Lyft (LYFT), plant-based food producer Beyond Meat (BYND), and exercise-equipment company Peloton (PTON) all hit the public markets in 2019.
Home-rental company Airbnb, delivery firm Instacart, and online trading platform Robinhood expected to follow in their footsteps to make their public debuts in 2020. But when the COVID-19 pandemic caused the U.S. stock market to crater earlier this year, these companies decided to indefinitely postpone their initial public offerings ("IPOs").
Airbnb is now rumored to be targeting a December IPO... while Instacart and Robinhood both remain on hold with their plans.
On the other hand, the COVID-19 uncertainties didn't even faze a certain corner of the market...
I (Enrique Abeyta) am talking about special purpose acquisition companies ("SPACs").
SPACs, which are sometimes called "blank-check companies," are essentially big, publicly traded pools of cash whose only purpose is to use that cash to take a private firm public.
Over the past few years, the market for these IPOs and number of SPACs has grown dramatically... From 2014 through mid-2020, more than 215 SPAC IPOs raised approximately $54 billion.
SPACs are becoming an increasing percentage of the IPO market... Last year, SPACs represented 27% of all IPOs and 23% of the capital raised. Over the past three years, they made up 20% of the entire IPO market.
And 2019 was the biggest year ever for the industry, with 59 SPACs raising $13.6 billion... But 2020 has broken many records in the red-hot SPAC market. By early October, roughly 150 SPACs were actively searching for a target, with about $50 billion in cash ready to deploy.
The gross proceeds among SPACs this year has exceeded all of the money from 2013 through 2019 combined, with online gambling business DraftKings (DKNG), men's wellness firm Hims, and electric-vehicle charging network ChargePoint choosing to go public via SPAC...
Today, SPACs present a better opportunity than ever before. And in today's Digest, I'll detail five reasons why everyday investors like yourself can benefit greatly in the coming years...
First, these aren't your father's SPACs that we're talking about...
It's a much more legitimate market nowadays.
As I explained in last Saturday's Masters Series essay, SPACs have a shady history... but they've come a long way from those early days.
Today, SPACs are a well-regulated and increasingly liquid area of the market. It has drawn in more and more qualified investors, regulators, brokers, lawyers, and others.
It's now a fully developed, institutional-class sector... making it perfectly safe for investors.
And on that note, the quality of SPAC sponsors is much better today than ever before...
Far from being sponsored by small penny-stock brokerages on Long Island, the collection of sponsors is an impressive group of institutions at this point.
The ever-growing list includes billionaire hedge-fund manager Bill Ackman, investment bank Goldman Sachs (GS), billionaire Mario Gabelli, private-equity giant TPG Capital, Daniel Loeb's Third Point Management hedge fund, and Howard Marks' Oaktree Capital Management hedge fund.
Earlier this year, Barron's shared the story of famed Honeywell (HON) CEO David Cote's experience with SPACs. Cote ran the industrial conglomerate for 15 years from 2002 to 2017 and was consistently regarded as one of the best CEOs in the world.
Cote recounted how someone approached him with the idea of doing a SPAC, and he was completely unfamiliar with them. After doing some research, he saw an opportunity... The president and chief operating officer of Goldman Sachs later approached Cote, and the two teamed up to raise nearly $700 million for industrial acquisitions.
This doesn't mean every sponsor will do a great deal or make money... But the quality is much better than ever before, and it represents some of the top investors and management teams in the world.
It's also easier than ever to find attractive opportunities in the SPACs universe...
In other words, we're seeing a higher availability of these types of investments.
When I began my career on Wall Street a couple of decades ago, many small and mid-tier investment banks like Alex Brown, Hambrecht & Quist, Montgomery Securities, and others existed. These firms specialized in taking small-cap companies public. Larger brokerage firms and banks eventually bought and absorbed every one of them.
Today, big banks like Goldman have no interest in small deals. This makes sense... Those deals won't move the needle for a blue-chip investment bank that generates nearly $40 billion in annual revenues. But at the same time, it leaves a big hole for smaller companies to raise capital and go public.
Additionally, we've seen an explosion in private-equity investing like never before. Private-equity and venture-capital assets have grown more than 10-fold over the past decade.
Many of these firms see great opportunities in smaller and mid-sized firms, but they also have limits on how long they can hold their investments. Historically, they would go to the IPO market to sell shares and generate profits for their investors.
With the decline in smaller IPOs, this path is becoming more difficult for most companies looking to go public.
Instead, private-equity firms are increasingly turning to SPACs as a way to monetize their investments and send the companies in their portfolio to their next growth phase.
Over the last year alone, we've seen several high-profile companies go public via SPAC, including DraftKings and space-tourism company Virgin Galactic (SPCE), among others.
While SPACs have existed for decades, their popularity has only picked up in the past 10 years...
This means that most investors lack a deep knowledge of the SPAC market. This is true on Wall Street, but it's especially true for retail investors.
SPACs are also uniquely challenging from a research perspective...
When a SPAC initially goes public, no financial information exists as to what the SPAC is going to (or might) eventually invest in. No research is available for investors to make decisions about the investment.
When the SPAC announces the investment, it releases a great deal of information, including historical financials and future projections. And because SPACs go to market much quicker than IPOs, investment banks have a relatively short time frame to produce their research.
They'll eventually cover the stocks, but there's a window of time where a dearth of information exists. Given the complexity of the structure and the process, many opportunities emerge during this time.
For instance, during the height of the COVID-19 pandemic in early 2020, many SPACs traded at 5%, 10%, or even bigger discounts to their cash held in trust.
This means you could buy $1 worth of U.S. Treasury securities (where the SPACs typically hold their cash) for $0.93... and get the warrant and the huge upside for free.
It was a short window, but an incredible opportunity... and one that doesn't exist in the traditional IPO market.
That brings us to the final reason why you should consider looking into SPACs right now...
I'm talking about the recent market volatility.
With the recent pandemic-related global economic crisis, the opportunity for SPAC investments became much better...
Remember, at the core, SPACs are experienced and sophisticated teams of investors with large pools of uninvested capital. As an investor, you have the opportunity to partner with them and get a free look at their potential to deploy that capital.
With the heightened market volatility, thousands of viable and vibrant businesses suddenly found themselves in desperate need of capital.
The average SPAC is sitting on hundreds of millions of dollars of uninvested capital that it can now look to deploy... and these experienced investors will likely be able to deploy that capital with great returns.
This might be the best opportunity they've ever seen...
The powerful combination of an experienced group of deep-pocketed investors, a target-rich environment, and the recent market crash means this could be the best time in history for individuals to invest in SPACs.
Investors who bought shares of Virgin Galactic, DraftKings, and electric-truck maker Hyliion (HYLN) at the outset had the chance for quick, multibagger returns. Virgin Galactic rose 270% five months after its SPAC took it public. DraftKings soared 500% in nine months. And shares of Hyliion were up 420% in less than three months.
The good news is, you haven't missed a thing...
With world-class investors like Wall Street billionaires Bill Ackman and Peter Thiel still on the search for a target – and big names like Goldman Sachs joining the party – the incredible returns from the recent resurgence of SPACs are just getting started...
That's why I'm hosting the SPAC Investment Summit in just a couple of hours. I hope you'll join me for this first-of-its-kind event TONIGHT at 8 p.m. Eastern time.
During this FREE event, I'll explain everything you need to know to navigate the burgeoning world of SPACs. We'll even be joined by Ackman, who was my colleague Whitney Tilson's roommate at Harvard University... He'll share the details behind the SPAC he just launched a few months ago and tell you how you can invest alongside him.
We've been hard at work planning this event for months. You won't want to miss it. Reserve your spot right here.
New 52-week highs (as of 10/7/20): ARK Fintech Innovation Fund (ARKF), Autohome (ATHM), BlackLine (BL), Dollar General (DG), New Oriental Education & Technology (EDU), Comfort Systems USA (FIX), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Innovative Industrial Properties (IIPR), Jushi (JUSHF), McDonald's (MCD), MongoDB (MDB), Procter & Gamble (PG), Rollins (ROL), Sea Limited (SE), TFI International (TFII), The Trade Desk (TTD), and Zendesk (ZEN).
In today's mailbag, more feedback on Tuesday's Digest that featured John Doody's bullish case for gold. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"The story I like to tell [about money debasement] that is more understandable to kids and the common man is this...
"I take out my 1964 quarter and show it to the group, handing it out for passing around.
"[I say,] 'When I was a kid, you know what I could buy with that quarter? I could buy lunch at McDonald's (burger $.15, fries $.10). Or I could buy a gallon of gas.'
"[And then, I say,] 'Today what can it buy – a gumball maybe?'
"But wait; it's a 1964 quarter made of silver. It's worth about $5 today. So you can still buy lunch at McDonald's or a gallon of gas with it, maybe more! That's because precious metals hold their value." – Paid-up subscriber Jeff J.
Regards,
Enrique Abeyta
Phoenix, Arizona
October 8, 2020