JULIE HYMAN: 2020, among many other things, has been the year of the SPAC, the special purpose acquisition company. We have talked a lot about it on the show. We’ve talked to a lot of folks who have SPACs, we’ve talked to a lot of folks whose companies have been acquired by SPACs. And one of the things that’s driven this trend has been that people are interested in investing in these companies with a lot of cash out there that people want to put to work.
One of the people who’s been watching that trend is David Gallers. He’s managing partner and co-founder at Wealthspring Capital. And I imagine a lot of your clients have been asking a lot of questions about SPACs this year. What have they been asking you, and what have you been telling them? What is sort of the top questions that you get?
DAVID GALLERS: Yeah, sure. Well, thanks for having me on. 2020 has been the year of the SPAC, if you will. We’ve seen SPAC issuance explode this year from about 13.5 billion last year to 80 billion this year. And I guess the most common question that we’re getting from our investors is, how far can this go and how big is this market going to get?
JULIE HYMAN: And what do you tell them?
MYLES UDLAND: And David, I guess– yeah, go ahead, Julie.
JULIE HYMAN: What are you– what are you telling them, David, when they ask you that?
DAVID GALLERS: Yes, so look. You know, 2020 has been obviously a big year in SPACs. And it’s hit on some of the– that’s because we’ve hit on some of the real trends that are out there. We’ve had a low-yield environment where it’s not costing investors a lot of money to park their cash in these vehicles, while these sponsor teams go out and search for these exciting companies that they’re buying.
You know, this year, I think about 45% of all IPO issuance has been in the realm of SPACs. So it’s been a big theme in the markets, if you will. And, you know, Goldman Sachs actually just came out with a piece where they said next year, we could see upwards of 300 billion of issuance in SPACs. And we completely agree with that.
I think there’s a real opportunity here as the economics are very favorable for sponsors right now. And we’re really broadening the investor base of this back product.
MYLES UDLAND: David, how concerned are you about these vehicles and sort of what they mean for market sentiment? I mean, all financial innovation, you know, eventually levels out, I guess, over time. But certainly, this has come up quite quickly this year.
DAVID GALLERS: Absolutely. You know, SPACs, you can say, are having a moment in the markets, if you will. And they are getting a lot of press in a way that because they’re buying these exciting small cap companies.
But the actual SPAC structure I don’t think is particularly well understood right now in the sense that SPACs come with an embedded put option where investors have the right to ask for their money back instead of being part of the combined company. And that gives you a lot of downside protection while still effectively owning a call option, which is the upside of these companies that they’re buying, should they choose to participate in the deal. It’s really a very exciting structure that’s gaining a lot of traction in the marketplace right now.
BRIAN SOZZI: What has been some of your thoughts as you go through the filings on these SPACs? When you see some of these really aggressive targets, I’m not sure about you, but for me, I can’t help but to laugh, to see companies projecting that they’re going to go from 0 revenue this year, and in five years, they’re making billions of dollars. Don’t you think those targets, some of these targets we’re seeing on these SPACs are absurd? And then why isn’t the SEC coming in here and cracking down on this?
DAVID GALLERS: Well, again, like, you know, certainly I think you’re speaking more broadly to the equity markets overall and the valuations. And it’s clear that the– you know, some of the macroeconomic factors, whether it’s the Fed buying, has pushed us into the, call it, the 99th percentile of valuations, if you will, across the equity market. And you’re seeing investors chase growth at any price, and that’s feeding into this SPAC market, it’s feeding into all markets, if you will, in the equity world.
Again, I would point to the fact that SPACs have their moneys invested in Treasury bills while they’re out there searching. And should you find– if you’re uncomfortable, if you will, with the company they’re buying and the revenue projections, you always have the right to ask for your money back where you can actually just sell your shares in the open market. So I don’t see the SEC cracking down, if you will, on the SPAC structures, insomuch as that they’re concerned about valuations overall in the marketplace.
JULIE HYMAN: And when you’re thinking about SPACs, first of all, do you consider them to be sort of a separate asset class? And do you compare them with IPOS, for example, or do you just kind of look at them on the merits of themselves and the companies that they’re buying and try to apply the same criteria you would to any other equity?
DAVID GALLERS: Well, you know, let me speak to what we’re doing for our investors here at Wealthspring because that’s the lens we look at the SPAC market through. And, you know, with that lens, our investors, like many investors, of high-net worth individuals, family offices, or RAs, you know, are looking at a cash conundrum where equity valuations are high, rates are low. What do you do with your cash? How do you invest your money righ now? Which is a common problem we’re all facing.
And we’re solving that problem with SPACs. We’re looking at SPACs as a cash management alternative where you have this put option that protects you on the downside while allowing you to give the upside. So when we look at SPACs, we’re looking at them– you know, we’re using them as a tool to solve this cash problem.
Obviously, there’s a lot more deals this year in the SPAC market than there were last year, which creates more opportunity for us to run bigger, better diversified portfolios and deploy more capital into the space. So that’s the lens we’re looking at it through. And I think that’s the lens that a lot of folks are looking at as a way to deliver upside while still protecting your downside, if you will.
JULIE HYMAN: All right, David. Thanks for being here, appreciate it. David Gallers is managing partner and co-founder at Wealthspring Capital talking to us about the SPAC boom that we have seen this year. Thanks so much, David.
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