Special purpose acquisition vehicles are offering opportunities for activist investors on both the long side and the short, as my in-depth article for Activist Insight Online highlighted.
Q4 2020 hedge fund letters, conferences and more
Activists like Bulldog Investors, Third Point Partners, and Starboard Value have used their reputations to raise money for SPACs designed to take private companies public in one of the most vibrant areas of activity on Wall Street over the past year. Others, liked Engaged Capital, Pershing Square Capital Management, and Elliott Management are following in their footsteps.
At the same time, looser regulations related to SPACs have given rise to less reputable companies becoming public, making the space a good hunting ground for short sellers. "Frauds, fads and promotes taken public in 2020-2021 will be a key source of short ideas for the next decade," Hindenburg Research founder Nathan Anderson recently noted on Twitter, adding that the average of five SPAC IPOs per day in 2021 has set the pace for 1,250 SPAC IPOs to be launched by the end of the year.
Pershing Square's Second SPAC
One of the biggest advocates for the new industry is Pershing Square’s Bill Ackman, who holds the record for a single fundraise at $4 billion. "We believe we can make an advantageous deal for our shareholders while creating a great opportunity for a company to accelerate its growth, de-leverage its balance sheet and provide capital to investors seeking to exit," Ackman told CNBC in July.
Pershing Square has already incorporated a company that could become its second SPAC, although Ackman has said he will not raise money for Pershing Square Tontine Holdings II without first announcing a transaction for the first. Furthermore, the prospectus for the first SPAC prevents the activist from doing two at the same time.
Competition for the fees generated by SPACs suggest the boom will continue at least a bit longer. A recent shake-up of U.K. listing rules, as part of chancellor Rishi Sunak’s plans to reinvigorate London’s stock market post-Brexit, recommended the removal of a rule that has kept the U.K. from competing with other financial markets where SPACs are being raised in vast numbers.
Lifting The Suspension Requirement
Current U.K. rules require SPACs to suspend trading after a target is acquired, locking investors in even if they do not approve of a potential purchase. Jonathan Hill’s review recommended the Financial Conduct Authority lift the suspension requirement to make SPACs more appealing to investors and with hopes that the trading suspension could be lifted by July, a London lawyer told Activist Insight Online that there is already a queue of clients ready to raise U.K.-based SPACs should the rules change.
But relaxing the rules in the U.K. could draw in bad actors along with the good. While Quintessential Capital Management’s Gabriel Grego admitted that not all SPACs are bad, the short seller told Activist Insight Online that the space provides a source of ideas for new short bets. Grego explained that although SPACs allow companies to go public quickly, easily, and cheaply, these same reasons also attract those who want to game the system.
Activist short seller Muddy Waters Research has been one of the first to capitalize, shorting Multiplan in November and XL Fleet more recently. Founder Carson Block told Activist Insight Online that there are only so many quality companies that are ready to go public in a year compared to the sheer number brought forth by SPACs.
Although he doesn’t know when, the short seller claimed that "there will eventually be a point when all of this gets washed out and SPACs will be radioactive. No one credible will want to go public via a SPAC and eventually we’ll be back to IPOs."
Eleanor O'Donnell - Editorial Associate, Activist Insight Shorts
Biden Administration’s Impact On Public Company Disclosure Rules
The Biden administration’s potential impact on public company disclosure rules is starting to become apparent, following multiple hints of changes from the Securities and Exchange Commission (SEC).
On February 24, the regulator announced a review of its 2010 guidance on climate-related disclosure, examining whether companies are complying with its original guidance. The review will also "absorb critical lessons on how the market is currently managing climate-related risks," and as part of this initiative, the regulator is establishing a task force to identify material gaps and omissions in ESG-related disclosure.
The review was announced in tandem with demands for "enhanced public ESG-related disclosures" and the prioritizing of ESG integration by the SEC from the Global Financial Markets Center at Duke Law, in a report published February 24 and subject to a hearing the following day.
Investors have also written to the SEC, calling for a review of which issues may be deemed material to investors. On January 26, a group of investors wrote to SEC acting chair, Allison Herren Lee, requesting the no-action process be revised to allow investors greater latitude to engage with sustainability concerns. Investors expressed concern with the "radical new limitations" placed upon shareholder proposals since the implementation of the no-action process, suggesting the process has evolved into a system that excludes proposals worthy of "priority attention" under the guise of "micromanaging [a] company." (I wrote about no-action relief in greater detail last week here).
Alterations Would Require A New Commission Vote
While the SEC’s recent commitment to a policy review has been praised by investors, which consider such disclosure as essential to improving decision-making, Republican SEC Commissioners Elad Roisman and Hester Peirce have warned any significant alterations "would require a new commission vote."
"We assume that the new initiative is simply a continuation of the work the staff has been doing for more than a decade and not a program to assess public filers’ disclosure against any new standards or expectations," Roisman and Peirce’s statement suggests.
Climate risk isn’t the only issue that may be subject to potential revisions going forward. Gary Gensler, President Biden’s pick to chair the SEC, indicated in a nomination hearing before the Senate Banking Committee on March 2 that the regulator may make disclosure of political spending, climate risk, and workforce diversity data mandatory.
Political Spending Disclosures
Gensler noted that shareholder activists have been pushing companies to disclose their political spending for many years, an effort that has gained further urgency in the wake of the January 6 storming of the Capitol building, and the subsequent decision by many companies to pause all political action committee (PAC) contributions.
"It’s about investors making a choice about what’s significant or material," said Gensler in the nomination hearing. Investors "want to see what the companies they own are doing in the political arena. So, if confirmed, it is something that I think the commission should consider, in light of the strong investor interest."
That makes disclosure one significant win for ESG-loving investors. But the commission is also planning to beef up its enforcement processes and may be less concerned about shareholders of individual companies. In a speech to the Council of Institutional Investors’ Spring Conference on March 9, SEC Commissioner Caroline Crenshaw emphasized the "vigorous reinforcement" required by its policies.
"If we are going to confront the novel issues today’s markets present and deter ever more complicated and hard to detect frauds, we must revisit our approach," the statement reads. "First, corporate penalties should be tied to the egregiousness of the actual misconduct – not just the benefit or impact on the shareholders. Second, the commission should not treat the presence or absence of a shareholder or corporate benefit as a threshold issue to imposing a penalty."
Rebecca Sherratt, Corporate Governance Editor, Insightia
