Not That Jeff Epstein

Summary

• 98% covered by cash value.
• Target rich environment for this smart, connected team.
• Potential pop when they announce a deal.

Who are those guys?

I own Apex Technology Acquisition equity (APXT) and warrants (APXTW). Their co-CEO Jeff Epstein is a partner at VC firm Bessemer. He had been CFO of Oracle (ORCL) and before that DoubleClick, which was then sold to Google (GOOG) (GOOGL) and a Nielsen (NLSN) subsidiary. Before that he was an investment banker. He is an expert in B2B software and marketplaces. He has been on the boards of Booking (BKNG), Twilio (TWLO), and Shutterstock (SSTK). He got his undergrad degree at Yale and MBA from Stanford; he also teaches at Stanford’s engineering school. His co-CEO, Brad Koenig, was CEO of FoodyDirect.com, which was bought by Goldbelly. He had been at Goldman (GS) for over two decades where he had been head of global tech i-banking as well as co-head of global TMT. He got his undergrad degree from Dartmouth and MBA from Harvard. They are both bright, well-connected investors. Why do I start with management? Because at this point that is really all that there is – a couple of guys and a pile of money – so it really matters who those guys are.

What are they going to do?

Buy something. They are going to try to find a software and internet technology business to buy between now and September 19, 2021. They can leverage the over $350 million that their SPAC has in trust to buy something for well over a billion dollars, especially if the target rolls over their equity into the newly formed public company. The sponsors personally have over $8 million of their own money at risk that they could lose if they don’t find something. Based on their history, incentives, and opportunities, they are quite likely to find something.

What could you lose (or make)?

Let’s start with losing. As of this writing it costs $10.27 to buy a share of APXT. But you’re not really risking $10.27. Far from it. With that $10.27 share, you own $10.06 of cash in trust, that you can redeem later on if you want. If this goes bad for you (and if it does, it will have gone much worse for Epstein and Koenig), you will lose only the $0.21 of premium. Your yield to maturity would be negative, but only by about 1% of what you invest. That assumes that you size this in a way that you can hold onto it until there is an outcome. If not, you will be relying on the fickle vagaries of the market and when the S&P 500 (SPY) tanked in March, APXT sold off by a few percent.

But unlike the S&P 500, this is purely a matter of liquidity demand; SPACs are bound to recover from such selloffs which is why I asked in March if they were the best thing out there. That month, I suggested SPACs for low-volatility exposure. Because their cash is invested in T-bills, their equity tends to trade in line with their cash per share in trust. A basket of SPACs trading at a discount to their trust values including Trine (TRNE), another SPAC I own and have recently discussed, at the time offered a yield to maturity of over 9% with fundamental downside protection. These spreads were tighter than merger arbitrage spreads but there is no equivalent of broken deals to drive down the average IRR. Once things stabilized Trine quickly recovered, giving a good indication of how SPACs perform in panicky markets.

The Apex warrant offers a different risk; if they fail to find a deal, it goes to zero. Size accordingly. How the warrant works is that its holder has five years and a $11.50 strike price, terms that are pretty typical of SPAC warrants. Each unit (and I’ve split mine into separate equity and warrants) consists of a share as half a warrant (again, pretty standard stuff). As a rule of thumb, the less demand that underwriters expect, the more that they have to add to a unit to get their IPO to work. That means that the nominally generous ones are typically of a lower quality whereas stingier ones are typically higher (with this one on the stinger end of the range).

What could you win? While you might have to wait until September of next year, it is unlikely that you’ll have to wait that long. This is a target rich environment and these guys are dealmakers. A deal is more likely to be closer to this September. And the reception to a good deal in today’s market could be intensely positive. Interest in Apex’s targeted sectors is high and interest in SPAC deals is as high as ever (indicated by the SPAC Research warrant index doubling to its all-time high over the past few months). The best five out of the past ten SPAC deals have popped by an average of 40% over the subsequent five days. Apex’s stock could easily do the same if they can quickly announce a good tech deal while the market is hot. If they do, the warrant will more than double on such an announcement.

So what?

So the right time to announce a tech SPAC deal is… now. If you start a new SPAC, it could be too late. That is why you might be better served by a bet on an existing SPAC close to a big announcement. That could be Apex. You can make a conservative bet with their APXT equity or an aggressive bet with their APXTW warrant; I, for one, have done both in anticipation of their upcoming deal announcement.