Egregious Founder Shares. Free Money for Hedge Funds. A Cluster***k of Competing Interests. Welcome to the Great 2020 SPAC Boom

It’s a brilliant, blue-sky afternoon in mid-August, and Bill Ackman is enjoying being, well, Bill Ackman. 

Maybe it’s the sun. Or maybe it’s the aftermath of his latest tour de force — the IPO of a $4 billion special-purpose acquisition company, or SPAC, the largest of its kind during a year when such blank-check deals are exploding. 

Sporting a baseball cap, aviator shades, and a faded polo shirt, the 54-year-old hedge fund mogul eases into the poolside lounge chair at his Hamptons home — where, ever since the Covid crisis hit, he has been living and working — and settles into a Zoom interview, adjusting the computer for the best angle of his incognito look. 

But if you’re expecting Ackman to be relaxed, he’s not. Instead, he quickly rattles off how well his first SPAC has performed. Over eight years, his Pershing Square Capital Management hedge fund’s investment in Burger King — which merged in 2012 with a SPAC Pershing Square co-sponsored and has since become part of a bigger fast-food conglomerate called Restaurant Brands International — has returned 19 percent per year to the hedge fund’s investors. Earlier this year, when Covid punished the stock, Ackman bought more of Restaurant Brands’ shares; it’s now the third-largest holding in Pershing Square’s portfolio, worth about $1.6 billion.

Restaurant Brands’ consistent, long-term gain makes it an outlier for a company that began as a SPAC, a publicly traded shell company that raises money in hopes of finding a merger partner that will endure the higher costs demanded by SPAC sponsors and underwriters to avoid the protracted process of going public on its own. 

Like numerous other forms of Wall Street financial ingenuity, these vehicles have had a checkered history — and shockingly terrible performance. 

Since 2015, the 89 SPACs that have completed mergers have an average loss of 18.8 percent (and a median loss of 36.1 percent), compared with the average aftermarket gain of 37.2 percent for other IPOs through July 24, according to Renaissance Capital, which tracks IPOs. Only 29 percent of the SPACs had positive returns.

But Ackman, always the contrarian, was so taken with the success of the Burger King deal that he had been itching to do another. After the pandemic hit, Ackman thought the disruptive market it created would make SPACs more valuable to companies wanting to go public.

“If we’re going to do it, this is the moment,” Ackman thought. Then he began contemplating the structure — “and how to make it better.”  

That’s not just hype. To start, Ackman’s Pershing Square Tontine Holdings got rid of the premier feature of SPACs — so-called founder shares that typically give their sponsors 20 percent of the new company, pretty much for free.

“I thought it was egregious,” he says. “It is one reason why the track record of SPACs is often poor.”

Ackman also got rid of other common SPAC features that create, in one participant’s words, a “clusterfuck” of competing interests that also drag down performance. He changed the terms of the warrants investors receive along with stock in the IPO and also promised to invest at least $1 billion of Pershing Square’s capital to help complete a merger. Both of these moves should make a costly secondary offering in the form of a private investment in public equity, or PIPE, unnecessary.

Ackman’s SPAC seems to have struck a nerve: It was oversubscribed by three times, meaning he could have raised $12 billion had he wished. Along with the wild success of what Wall Street bankers like to call concept stocks — stocks like Virgin Galactic Holdings, Nikola Corp., and DraftKings, all of whose shares initially skyrocketed after their deals with SPACs were inked — Tontine has been lauded as further evidence that SPACs have shed their dodgy past and become mainstream.

Yet while some other SPAC practitioners have tinkered with such issues as founder shares and warrants, longtime SPAC players don’t think Ackman’s Tontine will force many to make radical changes. And there’s been little move in that direction since Tontine’s IPO. 

“Bill Ackman is Bill Ackman; he stands alone,” says Douglas Ellenoff, a partner at law firm Ellenoff Grossman & Schole who has been advising SPACs for 15 years. “I do not think other firms or sponsors are going to follow his model — because it hurts their interests.”

At a time when money is rushing into SPACs, that statement might give one pause. These boxes of cash have raised $40 billion so far this year, according to SPAC Analytics. That’s three times as much as in 2019. Sports executives like Billy Beane of Moneyball fame and politicians like former House Speaker Paul Ryan are launching them, while everyone from pension funds to sovereign-wealth funds, mutual funds, and Robinhood day traders is getting in on the action. 

Long-time practitioners acknowledge SPACs are now in a speculative market, if not a downright bubble. “I do think the market has gotten very, very frothy, and I do see a couple of cautionary flags,” says Jeff Sagansky, a media executive turned dealmaker whose fifth SPAC merged with DraftKings to great acclaim earlier this year. “There are a lot of SPAC sponsors that just are really not qualified.”

“Is there too much SPAC money chasing too few opportunities?” he asks. “I don’t think we know that yet.”

But the way SPACs are structured seems to make that inevitable.

You can read the rest of my story here:

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