If you’d like to put together a portfolio of these opportunities yourself, be careful: they have terrific risk:rewards, but you have to execute the strategy perfectly. One errant failure to keep track of a redemption deadline could easily wipe out the upside of the rest of a portfolio. Want us to do it for you? If you’re an accredited investor who would like to participate in our SPAC fund, please contact my colleague Rob Sterner at firstname.lastname@example.org.
House Flippin’ with IPOB
Social Capital Hedosophia Holdings Corp. II (IPOB) is buying the online house flipping company Opendoor at a $6.3 billion valuation. The company works as an agent and intermediary between home buyers and sellers. They raised a $600 million PIPE, a third from the SPAC sponsors and current Opendoor shareholders. Those current shareholders are rolling all of their equity. Opendoor competes with Zillow (ZG) and Redfin (RDFN). Opendoor has about $2.5 billion in asset-backed debt to buy homes at L+250. They are in 21 markets and plan on expanding into another 79. They hope to double their 2% market share in their markets. They focus on $100-750 k houses.
This market will love it. 2020 SPAC investors are forgiving of unprofitable businesses if they have big revenue growth and can boast a large potential total available market. House flipping is capital intensive, but could position Opendoor to grab more profitable side services. For now, margins are tight without SG&A and non-existent with it. That is unlikely to change within the next three years. The company is exposed to losses if interest rates spike or housing prices crash. They have $1.5 billion on their balance sheet to prove the concept.
On the call presenting the deal, they emphasized, of course, the $1.3 trillion US housing market. It is, of course, “ripe for disruption” (fun SPAC call drinking game: take a shot whenever they say “disrupt”). Today, the sales process takes about three months. There is no good reason for it to be that slow and expensive. Opendoor will make it more efficient. The market environment – low housing supply, tax changes, the pandemic, more household formation, and low interest rates – support their business model. They have a 4-6% EBIITDA market (I’m not sure this is right; just the messenger here. I think that they are excluding some expenses that should be netted). They plan to focus on higher margin services such as title, escrow, insurance, warranty, and financing. That could ultimately be half of their profits. They see their comps as Autonation (AN) and Carvana (CVNA). To learn more about Carvana, see this David Kim interview. Those two companies are disrupting the used car market in the way that Opendoor wants to disrupt the housing market.
Their business plan is to hit a 5% EBITDA margin and $50 billion in sales. They are right that this is a big market but TBD if they can capture it. Carvana and Zillow trade around 4x next year’s EV/sales, but they are probably better businesses that deserve to trade at a premium. If Opendoor traded inline, its stock price would be around $25 per share. Ultimately, Opendoor plans to drive the digital transformation of real estate with way Amazon (AMZN) transformed retail, Uber (UBER) transformed transportation and Carvana (CVNA) transformed used auto sales.
I am increasingly interested in house flipping and am in the process of buying my first rental property. I am trying to get it for a good deal, renovate it quickly, and rent it out to a NYC refugee in search of Connecticut’s safer streets and open schools. One of the most common Google (GOOG) (GOOGL) search terms among today's New Yorkers is for U-Haul (UHAL). This is a steep learning curve, but I hope to be able to do it in a low cost and tax efficient way.
This year’s top underwriters include Credit Suisse (CS), Citi (C), and Goldman (GS). It is worth cultivating relationships with top underwriters to get good IPO allocations. Get to know sponsors and bankers. Attend their meetings and let them know you are serious about potentially hanging on post de-SPACing. As a heuristic, the better the SPAC, the more you get cut back. Underwriters that lobby you for an investment are probably pitching a dud. Get a full allocation? Probably worth only a small position. Get cut back? Top off to get to a medium position in the secondary market, even if you have to pay up a bit. Get completely cut out of a deal? Then it could be worth going big in the secondary market.
Top hedge fund SPAC investors by market value of their SPAC investments include Magnetar, Glazer, and Millennium. Different funds focus on different types of SPAC opportunities. To me, the best opportunities are the least speculative. The margin of safety comes from the trust value. These are more defensive than offensive positions. However, unlike many other hedge funds, I am willing to do the fundamental work to come up with a value for the deSPACed business and occasionally, such as with Forum Merger II Corp (FMCI), stay invested after the deal is completed.
The SPAC Research Warrant Index is close to an all-time, having dramatically rebounded from an all-time low in May. I am concentrated on my favorite SPAC warrants including Kensington (KCAC) (KCAC+), Trine (TRNE) (TRNE+), and Apex (APXT) (APXTW). Why did I invest in KCAC+? Because,
over $40 trillion is invested based in part on ESG criteria. It can’t all get invested in Tesla (TSLA), so each one of these EV companies will have a flood of price-insensitive investors ready to invest. Nikola (NKLA) demonstrated it, Fisker reinforced it, and KCAC can be the next big beneficiary which is why I own their KCAC.U units. These include a share as well as a half of a warrant. This is my candidate for the next automotive SPAC to pop 50% like SPAQ did, to impress retail speculators, and to take down their share of the $40 trillion ESG money pile.
Hindery has made a lot of money for investors in his career and made a lot of money for himself along the way. Now, you can safely and profitably invest alongside him at Trine Acquisition Corp via units (TRNE.U) which include a share as well as half of a warrant, equity (TRNE), and warrants (TRNE+).
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.
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.
Of the three, Apex warrants have the most left to make from today’s prices. While warrants are worthless without a deal, virtually all 2020 SPACs have found deals or appear in process of securing them. In prior posts, I describe four ingredients for winning SPACs, three SPACs facing liquidation, and try to answer SPAC FAQs.
The top pre-IPO SPACs by size include Social VI (IPOF.U), Apollo (APSG.U) and Bluescape (BOAC.U). I look forward to potentially investing in all three. IPOF.U’s sponsor, Chamath Palihapitiya, is an experienced SPAC investor and crowd favorite. This SPAC plans for a billion-dollar trust account.
Apollo’s and Bluescape’s will weigh in at $750 million and $700 million respectively. For reasons I’ve previously described, my preference is to invest heavily in the largest SPACs.
The largest IPOed SPACs include Bill Ackman’s Pershing (PSTH.U), Churchill IV (CCIVU), and Foley II (BFTU). All three are experienced SPAC sponsored (as a rule of thumb I have a bias against board members with Roman numerals in their names as they are often nepotism beneficiaries but a bias in favor of SPACs with Roman numerals in their names as they have done this before). As a group, they are likely to announce deals far quicker than their mandates require. It is a good deal environment for SPACs today. Pershing, for example, will probably announce their deal next quarter. Why did I invest in Pershing equity (PSTH) and warrants (PSTH+)?
As for Pershing Tontine, I should disclose we are very long that with significant exposure in both our main fund and in our SPAC fund. It was very thoughtfully put together. I am often a skeptic and certainly a skeptic of self-seeking claims by sponsors trying to promote their own entity but, in this case, Ackman was very careful about improving a lot of things that had been wrong in this industry. He has very good relationships. Scale itself creates a virtuous cycle between getting attention from the media, earned media that he doesn’t have to pay for, so that people will know about this opportunity.
The universe, because of its scale, isn’t that big. Instead of a small one dealing with tens of thousands of possibilities, he has a hundred and fifty opportunities, fifty of them that are of any particular interest. He could probably narrow that down pretty quickly. He will cut that down in half within a month. They should be able to put together a deal very quickly – lightning fast – much more likely that it is 2020 than 2021. You don’t really have the IRR problem of waiting a couple of years. This will not take them eighteen months.
Come December they will have a deal announced for a large well-known brand. The ones that have done the best in the past are almost always large and well-known brands that are familiar to the investing public going into it so he won’t have to explain much about what the company is that he buys.
Bloomberg is the target that makes the most sense; it could be the perfect timing for Mike Bloomberg to take it public. It would be well received by the market and almost immediately added to the S&P 500 (SPY).
I am keeping my Forum Merger II Corp (FMCI) equity and warrant investments after they complete their acquisition of Tattooed Chef and will selectively add to my list of keepers. According to the Tattooed Chef:
Financial Highlights for First Half of 2020 Compared to the First Half of 2019
- Net sales were $67.9 million, a 104% increase compared to $33.3 million in the prior year period;
- Gross profit was $13.0 million, or 19.1% gross margin, compared to $5.3 million, or 16.0% gross margin in the prior year period;
- Net income attributable to common stockholders was $5.8 million compared to $1.4 million in the prior year period; and
- Adjusted EBITDA was $9.0 million, or 13.2% of net sales compared to $2.4 million, or 7.2% of net sales in the prior year period.
Financial Highlights for Q2 2020 Compared to Q2 2019
- Net sales were a record $34.8 million, a 113% increase compared to $16.3 million in the prior year period;
- Gross profit was $3.7 million, or 10.8% gross margin, compared to $1.9 million, or 11.9% gross margin, in the prior year period;
- Net income attributable to common stockholders was $0.9 million compared to a net loss of $0.1 million in the prior year period; and
- Adjusted EBITDA was $2.0 million, or 5.6% of net sales, compared to $0.4 million, or 2.2% of net sales, in the prior year period.
All charts from Robinhood.
The process of picking keepers is highly selective and guided by the fact that 80% of SPACs perform poorly after de-SPACing. Here’s a recent Facebook (FB) poll I conducted of retail investors plans for SPACs they intend to keep after their deals are complete. Favorites include many of the top performing SPACs – (FMCI) (SHLL) (GRAF) (LCA) (SPAQ) (DPHC) (CCXX) (TRNE) and (FEAC).
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