Show Transcript
Special purpose acquisition companies, better known as SPACs, enjoyed a banner year in 2020, raising more funds last year than in the last 10 years combined. Anthony Okolie speaks with Anna Castro, Senior Portfolio Manager, TD Asset Management, about whether the SPAC market can continue that momentum into 2021.
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- Last year, special purpose acquisition companies, better known as SPACs, eclipsed traditional IPOs, which speaks volumes to the allure of raising cash and making deals. My next guest is here to talk about her outlook for SPACs, and what to expect in 2021. Joining me today is Anna Castro, senior Portfolio Manager of TD Asset Management. Anna, we've seen this high level of activity in SPACs. Do you expect this to continue in 2021?
- Hi, Tony. Yes, you're right. It has been an intense fundraising activity for SPACs, IPO, and M&A, in general, this past year. I do expect it to continue in 2021. And, like what you've said, 2020 was a banner year but January, 2021 is another record time period with the number of issuance, almost at the level of half the year of 2019.
- OK. So what's driving this activity? What's driving it? What's pushing it forward?
- So first and foremost, so I-- so SPACs have provided investors with attractive ways to access private equity like returns, early growth stories with downside protection in the structure. And for companies wanting to go public, it has become a fast way for an IPO alternative. This combination is creating more successful deals to come out very well received by the market, and success begets more success. You have more choices, quality sponsors, private equity firms and management teams coming in to lead this, and this-- and the good returns are also driving more investors into the space. So choices and liquidity, for sure.
There are also a lot of ways to use the SPACs now, to access some growth opportunities or high growth companies to go to public. And they are mostly in a couple of sectors such as auto tech, whether it's electric vehicles, or autonomous driving. Other ones are a lot of perceived beneficiaries for climate change policies. Fintech is another one, gaming, sports betting. Of course, E-commerce related one and you also have a few health care names. The other thing, aside from the-- these being well received by the market investors appreciating this high growth theme, is that you're having experienced SPAC sponsors and management teams operate with operational expertise and financial expertise, come back in for their sequel, or second, third SPACs. And in the past month, examples of this would be what you would see with Social Capital, which with his fifth SPAC, come up with a high profile deal with SoFi, a fast-growing, high-tech-- Fintech company, I mean.
And also Bill Foley, a very well respected financial services executive, come up with taking Paysafe public, another Fintech deal very well-suited to his background. And recently we also had TPG, with their SPAC, announcing acquiring EVBox, which is a leader in electric vehicle charging technology. On the flip side, for investors, this remains quite attractive because rates are quite low. This low interest rate environment reduces the opportunity cost for investors. And in a SPAC, you could have-- you have low opportunity cost because low interest rates, but with the potential to participate in an upside deal. In that structure, having that redemption feature or ability to vote when a deal comes out, to opt to have cash in trust and get your capital or $10 back is an attractive downside feature.
- So what are some of the pros and cons of investing in this SPAC space, for example, compared to the IPO, initial public offering?
- That's a great question, Tony, because they are different from an IPO. For an investor, when you invest in an IPO, you know the operating company that you're investing in. You know what to analyze and what you will be getting. In terms of a SPAC, when a SPAC does an IPO, it is-- it does not have any operations. It literally is a $10 cash in trust.
And you are relying-- the investor is relying on the deal-making and value creation capability of the sponsor and the management team. It is only at the point when a deal is announced that an investor can truly appreciate, analyze, and vet that operating company and what they would be getting, and decide at that time if they want to hold shares of that new company or decide to get that $10 cash in trust? For us, the way we look at it, is we acquire selectively SPACs at $10 cash in trust or we would add to them when they fall at a discount below this cash in trust number.
- So Anna, given all that, what does that mean for investors?
- So it's very, very important for investors to remain very selective. There are many SPACs out there, over 200 of them, searching for deals. A lot of capital is out there searching for-- doing, trying to do transactions. So it is possible that some of the transactions don't happen or not good ones. Still in any case, there's always winners and losers. So you have to be very careful about thinking about how does this fit, in terms of your risk appetite. In terms of our investment process, as you've mentioned, SPACs are very hot and new for 2020, but they're really not new.
We have been an early mover in this space and incorporating this in the portfolios. I've been analyzing SPAC transactions for close to 10 years. And with the way I look at it is that just like-- as market conditions change, the investing opportunities can change. And it's still-- the process remains where you have to be selective, it is still a research base, and it's a case-by-case basis. We spend time analyzing the company, meeting management, understanding the business, the strategy, the transaction and valuation. And at the end of it all, we have to weigh the potential for increased returns, as well as managing the risk.
- Anna, thank you very much for your time.
- Thank you for having me.
[MUSIC PLAYING]
- Last year, special purpose acquisition companies, better known as SPACs, eclipsed traditional IPOs, which speaks volumes to the allure of raising cash and making deals. My next guest is here to talk about her outlook for SPACs, and what to expect in 2021. Joining me today is Anna Castro, senior Portfolio Manager of TD Asset Management. Anna, we've seen this high level of activity in SPACs. Do you expect this to continue in 2021?
- Hi, Tony. Yes, you're right. It has been an intense fundraising activity for SPACs, IPO, and M&A, in general, this past year. I do expect it to continue in 2021. And, like what you've said, 2020 was a banner year but January, 2021 is another record time period with the number of issuance, almost at the level of half the year of 2019.
- OK. So what's driving this activity? What's driving it? What's pushing it forward?
- So first and foremost, so I-- so SPACs have provided investors with attractive ways to access private equity like returns, early growth stories with downside protection in the structure. And for companies wanting to go public, it has become a fast way for an IPO alternative. This combination is creating more successful deals to come out very well received by the market, and success begets more success. You have more choices, quality sponsors, private equity firms and management teams coming in to lead this, and this-- and the good returns are also driving more investors into the space. So choices and liquidity, for sure.
There are also a lot of ways to use the SPACs now, to access some growth opportunities or high growth companies to go to public. And they are mostly in a couple of sectors such as auto tech, whether it's electric vehicles, or autonomous driving. Other ones are a lot of perceived beneficiaries for climate change policies. Fintech is another one, gaming, sports betting. Of course, E-commerce related one and you also have a few health care names. The other thing, aside from the-- these being well received by the market investors appreciating this high growth theme, is that you're having experienced SPAC sponsors and management teams operate with operational expertise and financial expertise, come back in for their sequel, or second, third SPACs. And in the past month, examples of this would be what you would see with Social Capital, which with his fifth SPAC, come up with a high profile deal with SoFi, a fast-growing, high-tech-- Fintech company, I mean.
And also Bill Foley, a very well respected financial services executive, come up with taking Paysafe public, another Fintech deal very well-suited to his background. And recently we also had TPG, with their SPAC, announcing acquiring EVBox, which is a leader in electric vehicle charging technology. On the flip side, for investors, this remains quite attractive because rates are quite low. This low interest rate environment reduces the opportunity cost for investors. And in a SPAC, you could have-- you have low opportunity cost because low interest rates, but with the potential to participate in an upside deal. In that structure, having that redemption feature or ability to vote when a deal comes out, to opt to have cash in trust and get your capital or $10 back is an attractive downside feature.
- So what are some of the pros and cons of investing in this SPAC space, for example, compared to the IPO, initial public offering?
- That's a great question, Tony, because they are different from an IPO. For an investor, when you invest in an IPO, you know the operating company that you're investing in. You know what to analyze and what you will be getting. In terms of a SPAC, when a SPAC does an IPO, it is-- it does not have any operations. It literally is a $10 cash in trust.
And you are relying-- the investor is relying on the deal-making and value creation capability of the sponsor and the management team. It is only at the point when a deal is announced that an investor can truly appreciate, analyze, and vet that operating company and what they would be getting, and decide at that time if they want to hold shares of that new company or decide to get that $10 cash in trust? For us, the way we look at it, is we acquire selectively SPACs at $10 cash in trust or we would add to them when they fall at a discount below this cash in trust number.
- So Anna, given all that, what does that mean for investors?
- So it's very, very important for investors to remain very selective. There are many SPACs out there, over 200 of them, searching for deals. A lot of capital is out there searching for-- doing, trying to do transactions. So it is possible that some of the transactions don't happen or not good ones. Still in any case, there's always winners and losers. So you have to be very careful about thinking about how does this fit, in terms of your risk appetite. In terms of our investment process, as you've mentioned, SPACs are very hot and new for 2020, but they're really not new.
We have been an early mover in this space and incorporating this in the portfolios. I've been analyzing SPAC transactions for close to 10 years. And with the way I look at it is that just like-- as market conditions change, the investing opportunities can change. And it's still-- the process remains where you have to be selective, it is still a research base, and it's a case-by-case basis. We spend time analyzing the company, meeting management, understanding the business, the strategy, the transaction and valuation. And at the end of it all, we have to weigh the potential for increased returns, as well as managing the risk.
- Anna, thank you very much for your time.
- Thank you for having me.
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