SPAC stocks are very hot now. This video will explain what SPAC stock are, use Pershing Square Tontine Holdings as main example, discuss the investing rational and the market situation. SPAC stocks are special purpose acquisition companies that managers set up to acquire or merge with a private company where they take it public.
This is exactly what Bill Ackman is doing with his Pershing Square Tontine Holdings (NYSE:PSTH) where his plan is to acquire a good company.
Hedge funds get involved too as there is a lot of arbitrage to do, warrants and other investment schemes that are usually not available to the retail investors. Hedge funds make good returns by investing in SPAC stocks while retail investors make very bad returns from investing in SPAC stocks.
The following is a computer generated transcript and may contain some errors.
SPAC Stocks Explained – Bill Ackman’s Pershing Tontine Example (NYSE:PSTH)
Good day, fellow investors there have been a lot of requests for me to analyse SPAC stocks, the special purpose acquisition vehicles that are flooding the market now. So due to my curiosity and I’m always interested also in what great value investors are doing. Because if we look at Seth Klarman portfolio of course, we have eBay that we discussed in video link for the video in the description of course, as always, because then this television assets, but one of the largest portfolio is PS H, which is Bill Ackman at Pershing Square tontitown holdings and new SPAC that we are going to discuss. So let’s immediately start with the definition then discuss pursuing as an example, then the general returns, why hedge funds like set garments are invested, which is not why you might be invested. That’s the key to understand before investing in these vehicles, what are the expected returns on what returns depend? And then also a general overview of what this means for the market? Let’s start so SPAC stocks are blank checks, companies. So you have a person in this case, Bill Ackman, he said, he’ll start a SPAC company five to 7 billion, and then you think your wife is a spender. Look at Bill Ackman five to 7 billion blank check that I can spend on whatever I want. This is a typical example of money printing that we have discussed, there is so much money in the environment. So if your bill, and you can get to five to 7 billion of other people’s money to invest in something, of course, you’re going to do that the companies are already public. So before they have invested into something else, they are public, and they are looking to invest into not listed companies. And by acquiring them, make them public, change that name and then develop them and grow them. And of course, make money is the ultimate goal. They can merge whatever, get the minority larger, whatever. Let’s do an example. And then you’ll see how it really works. If you enjoyed this, please click that like button. So as we said Pershing Square fontein Holdings five to 7 billion blank check acquisition company, what are they doing so they have taken the 5 billion and they want to make an acquisition with it. Bill Ackman extremely smart guy, we have discussed him in a few other videos. And I made the video somewhere in March 2018, or 19. If I’m not wrong, saying how you could invest with him with his company, you can check that now the stock has rebounded significantly. So it’s different now he’s hot, and he can get the money. Two years ago, everyone hated him. But I’m going to continue to follow him because he’s very smart, and hate love sentiment, we might find great buys of his when he’s hated again, and I’m sure given how investing is that he will be hated again in the future. So the business is to identify
and complete the business combination that creates substantial long term value for our stockholders, we intend to merge with one company to a transaction in which our stockholders will own a minority interest in the company that’s created as a result of the initial business company combination. He has acquisition criteria. So they are looking for a simple, predictable and free cash flow generative business with barriers to entry what Buffett calls a moat, competitive advantage, limited exposure to extrinsic factors. So stable business, strong balance sheet, minimal capital market dependency, very strong cash flows, everybody’s looking for these things, large capitalization so that he can put five of 8 billion of his money into the company, let’s say get 10 20% bond, the market capitalization of the currently private company goes to, I don’t know 4050 80 billion like this, all the index funds have to buy etc, etc. And if the company goes up by 20% Bill Ackman makes a lot of money and you do too, so it’s good and attractive valuation. Private companies might have lower valuations that then public companies now so that might be also a point that bill has in his head exceptional management and governance plus with the help of Bill, this might be really, really interesting. If we look at the stock price since start, okay, it has gone higher already. Even if there is no there has been no acquisition announced and why it’s went higher. It’s because of warrants because of hedge funds arbitrage, which is why Seth Klarman is invested. Not really that he is betting on bill and the great found fine he can do it. That’s something to understand very, very well. So let’s discuss the investment rationale. A lot of SPAC stocks, new SPACs, and everybody is running into those. If we look at the numbers 2007, just before the crisis that was, again, a hot way to go public and here we go, again, same old, same old Wall Street stories, or is there something in for you? Is there something that you should invest in, and that you can make a lot of money. So we have a lot of competition. Now, it’s getting hot. There is so much money in the system, and you can get 500 million like this. So all these hedge funds SoftBank Bill Ackman x, Barclays banker, Azhar, 250 million, so if you can get 250 million of other people’s money, if you make 20%, you get your warrants, your cash out your bonuses, your everything, it’s practically a no risk way to make money, I should do a SPAC to if I get 100 million, I go 220 million bonuses unlock, I get 10 million, and I’m set for life. So it’s a no risk of doing business with other people’s money. And the way that the rich gets richer, but there is more to that Spotify. Also in Germany, they’re going to get 400 million euros for a SPAC. So everybody is trying to get as much money when there is so much liquidity in the market. It gets to these kinds of situations where you try everything, there is no risk for you. If you lose, you go on to the next venture. But let’s look at the returns. First, the rationale for hedge funds to investing and then the actual returns that spacs had over the last years for hedge funds very positive for retail investors very, very negative. This is the anatomy of a hedge fund SPAC trade investors paid $10 for one share and get one warrant a warrant is an option so that you can buy another share at the same price. If the stock goes up. Maybe you’ll get another share at 10 bucks and you can sell it on the market 20 So cash is held in a trust account and invested into short term treasury bills. Hedge funds can buy shares if they dip below cash thus they might make money when cashed out so they protect themselves and Warren can be flipped for a quick profit or retain in the case the value rises as we have seen with Pershing tontitown. So if Klarman started here with 21, he invested 500 million he is now at 26 bam bam 20% return plus on the warrants double the money 40% return boom, boom very, very fast. This is hedge funds. When the deal is announced. If the shares go up, the hedge funds can sell on top of the 20% they already made. If the dip below they can redeem they can the money so okay, that’s a risk but still keep their warrants if the stock goes up. Do close as merged entity is now owned by more long term shareholders and this only here is where you come in. If we look at the returns, so the research has been made, and hedge funds have made an annualised 11.6 return on the 47 SPACs that they agreed mergers between January and June 2020 so hedge funds make money on arbitrage no matter what where do you fit in as you’re not a hedge fund this is where you fit in SPAC flops.
So free months the return 14.5% 23.8 negative percent and other 65.3% example of SPAC stocks. Nikola Corporation Okay, boom boom, very high high exuberance guy that launched the SPAC made here banked a lot of money sold water and salt stocks and then he made his money and the rest is history retail investors investing in SPAC here are waiting for something to happen maybe made on the run here up but probably also last here down. We have Pershing Square holdings that’s now very hot if they benefit from this, but also we have seen other SPACs do really really good with Virgin Galactic. That’s good. So if you want to bet on a SPAC, you bet on the jockey you bet on fairly happy to for example, if you think they are really capable of doing that Bill Ackman Of course, so most of the SPAC stocks lose money because they don’t have the power. How can they compete with Bill Ackman very unlikely. So really think how this fits I really wanted to show you where our The returns coming from for hedge funds for those that launched the SPAC and for retail investors as you of course possibly there will be the next nickel or the next Tesla, the next whatever, we’re doing such things a Croatian REMAX company the big hot cars, they have also the option and they have been approached by many many SPACs to go public like that they hope to go the normal way public because he doesn’t like the the owner, I might make a video on them to a very interesting company. So on the market, what it tells us on the market is there is so much money in the system. And simply it’s going wherever they can to find some yield from hedge funds going into onto arbitrage from making public companies just to try on something on a promise. Ackman is looking for great deals and when I look at his acquisition come criteria I’m definitely going to follow because this can be a great long term investment, but of the others work with it we say 120 SPAC stocks a lot will be really crazy, crazy bets. So as always see how this fits your portfolio. If you enjoyed this, please click that like button, consider subscribing and I’ll see you in the next video.