Let me talk about SPAC first.
SPAC (Special Purpose Acquisition Company) means "Special Purpose Acquisition Company", also known as "Blank Check" or "Shell Company". As the name suggests, this company has no actual business, and its essence is a financial innovation tool that provides companies with listing services.
More simply, SPAC is a shell resource company established by professional institutions such as investment banks and fund companies as promoters. The sole purpose of this company's listing is to find the target company, through reverse mergers and acquisitions, to achieve the target company's listing and financing.
Most people pay attention to SPAC from 2020, but in fact, SPAC is nothing new. The SPAC structure was first born in the 1990s and was pioneered by David Nabers, who worked for the Wall Street investment bank GKN. However, in the past few decades, compared with traditional IPOs, the number of SPACs is very limited, and the magnitude is extremely small, and it has not attracted widespread attention from the capital market.
In 2020, the number of SPACs listed in the United States reached 248, accounting for half of all IPOs, and the number of funds raised exceeded 83 billion US dollars. In 2021, Wall Street completed 228 SPACs in just 4 months. The whole year last year was almost the same.
Of course, with the popularity of SPAC, this innovative way of listing has also attracted a lot of criticism. For example, Buffett said recently: "SPAC" is a joke, and his partner Charlie Munger also said that the madness of SPAC is difficult to continue.
Let me start with the conclusion. In our view, SPAC will be a flash in the pan and an unprecedented financial innovation. This model may even replace the familiar VC and PE and become the end of the financial capital market.
The reason why we have such a judgment mainly comes from the following three reasons.
First, in the era of water release, the "money finding project" represented by SPAC is more efficient than the "project finding money"
Although many people believe that as the economy recovers and inflation expectations increase, the Fed may end printing money early, we insist that with the normalization of the epidemic and the normalization of high unemployment in the United States, the Fed has continued to operate the money printing machine in addition to the pressure of inflation. There is no other way.
In fact, the Indian epidemic that followed and the unattractive April non-agricultural employment data in the United States have also confirmed this view. The U.S. inflation rate hit a high of 4.2% in April,
The only question then is: How should the Fed choose between high inflation and high unemployment?
The answer is simple but also absurd: choose a high approval rate.
The reason for the increase in inflation expectations is not the economic recovery, but the increase in transaction costs brought by the epidemic to global trade, leading to rising raw material costs and thus inflation.
According to normal economic logic, the best way for the U.S. government to face this “undersupply and over-demand” situation should be to cut taxes, issue employment subsidies, stop printing money, and even call on the whole people to tighten their belts to reduce demand.
In the past, driving a car, now it’s riding a bicycle; in the past, living in a big house, now it’s changed to a shared room; as long as all Americans are united in one mind, the problem of inflation will not be solved.
The question is, will the Biden administration have such determination and courage? Obviously not. In current populist America, if any leader throws out such a policy, the approval rate will only drop to a freezing point.
Therefore, to ensure that the poor at the bottom of the United States can still have food when prices are high, the U.S. government can only adopt another completely opposite method: increase taxes, increase unemployment subsidies, continue to print money, and invest heavily in infrastructure. This is what the Biden administration is currently doing.
What about inflation? Don't worry, isn't the statistical department solving this problem? Since the US government can exclude "people who have given up looking for work" from the unemployed, wouldn't it be easy to adjust inflation?
Worst of all, if you add more subsidies to some commodities that have a high price weight and are related to people's livelihood, such as agricultural products, won't inflation come down?
Don't believe it, this is how the United States came here in recent decades.
Here is a judgment that is not necessarily accurate: the US water release policy is difficult to end earlier than the originally scheduled end of 2022, and it may even be postponed.
Therefore, after the normalization of the epidemic and the normalization of high unemployment, the United States is likely to have a third normalization: the normalization of money printing.
And this will lead to a natural result: the United States lacks everything, that is, it does not lack money.
Under such circumstances, the logic of "finding money for projects" in the past will be completely changed. If the market’s expected return on high-risk investments like hedge funds can reach 10%-12% when the benchmark interest rate is 2%, then when the benchmark interest rate drops to 0.25%, the market’s expected return may decline. To 5% or even lower.
At this time, the market is willing to take higher risks to chase future returns, and the objects that have been "disregarded" in the past will be "rushed." The "money finding project" seems to confirm the madness of the market, but it is indeed a more reasonable and efficient choice in this situation.
On the one hand, as the United States loses its status in the future, technology stocks will become the only "core assets" with global value in the United States. Technology funds represented by ARK are becoming new market leaders, and all Wall Street funds that do not include new energy vehicles, artificial intelligence, digital currency, and Metaverse in their portfolios may be left behind.
On the other hand, in the past, the founders had to spend a lot of energy to "find money" is actually a kind of inefficient performance, "financing ability" to become part of the core strengths of entrepreneurs is itself an unreasonable thing, and the second level The abundant funds brought about by market liquidity means that many “good alternative companies” that have not yet performed well can be spared the blow of insufficient funds.
In this case, the IPO model dominated by underwriters in the past has actually fallen behind the progress of the times. The essence of an IPO is still "finding money for the project". It is difficult for companies to accept the consequences of a failure to go public, and they can only be forced to accept the underwriter's pricing below a reasonable range.
For some popular projects, many investors would rather get the quota through various relationship channels than pay a higher price to obtain value-for-money assets, which is essentially an inefficiency that breeds rent-seeking and internal friction. mode.
In contrast, the "money-finding project" model represented by SPAC can bring more reasonable market-based pricing and more efficient capital allocation, which is obviously a higher level than the IPO itself.
Second, SPAC’s “risk-sharing” mechanism and “advancing, retreating, and defensive” structure are fairer than traditional funds
Many people have a misunderstanding about the SPAC model, that is, the sponsors of the SPAC exchange a very small investment for a great return. Some articles even say that the return of the sponsors of the SPAC is tens of thousands of times, which is actually inconsistent with the facts.
On the contrary, compared with traditional public and private equity funds in the past, SPAC promoters have higher investments and greater risks. In the words of "Black Swan" author Taleb, it is actually a veritable "risk-sharing" mechanism.
For a SPAC with a scale of 50 million US dollars, during the IPO alone, the promoters need to bear US$300,000 to 400,000 in legal fees, US$1.5 million in underwriting fees, and various miscellaneous expenses such as auditing, directors, supervisors, and senior insurance.
The overall cost is 3 million. About US dollars, in addition, the expenses during the operation of the SPAC will also be borne by the sponsors, and the total investment is about 4 million US dollars.
Of course, the cost of launching multiple SPACs is greatly optimized, but it is still necessary to spend almost $3 million in real money for each SPAC. Use nearly 4 million US dollars in exchange for 20% of stocks, which is an expected return of 12.5 million US dollars. Although this seems to be a good deal, risking the investment to zero to earn 200% of the expected return is actually It's a lot more reasonable.
What's more, even if the SPAC can finally successfully complete the merger with the target, if the promoter's judgment on the target is not accurate, the value of the $12.5 million stock will be greatly depreciated during the lock-up period. In the end, not only will it not get the income, but the principal will not be guaranteed. The cognition and judgment of the sponsors of the SPAC are set high enough.
At the same time, for SPAC investors, although their input-output ratio is not as high as that of the sponsors, the unique redemption mechanism makes their investment an extra layer of double insurance. In the past, LP's voice in funds was very limited. Except for "big buyers" such as Saudi sovereign funds, which can have veto power at critical moments, most funders can only leave it alone to projects that GP is optimistic about.
In contrast, on the one hand, SPAC gives investors the right to “go away if they don’t like it”. On the other hand, it also raises the upper limit of their future returns through warrants and other structures, thereby greatly increasing their risk-return ratio. It is a fairer and more reasonable mechanism.
In contrast to traditional public and private equity funds, the mechanism is just the opposite. Regardless of public equity and private equity, GPs do not need to pay a penny to get the starting management fee of 2% per year.
In particular, the GP income of public equity funds is often not related to the performance itself, but only related to the scale of management. This mechanism of ensuring income from droughts and floods obviously makes In sense, they stand on the opposite side of LP's interests.
The result of this is that "fundraising ability" has once again become the core competitiveness of an investment institution. Small and medium funds below the waist have become more and more difficult to raise funds, and funds tend to be the top GP, which is obviously not conducive to the utilization rate of funds. Maximization will only reduce efficiency.
Not to mention the insurance capital represented by Buffett and Munger's Berkshire Hathaway. There is no doubt that Buffett is a respectable investment guru. But we must also see that behind the fruitful investment performance in the past few decades, the ability to obtain low-cost long-term funds based on insurance is his confidence to "value investment" for decades.
Before the Fed opened the floodgates when other players in the market had to bear extremely high capital acquisition costs, Berkshire Hathaway’s insurance business could not only bring in huge cash flow, but the business itself also had a steady stream of money. Profit can be understood as the "negative cost of capital."
We can also understand why Balao is quite critical of SPAC.
In the past, the low-cost capital advantage that only he could enjoy has been universalized in the current release, and many more aggressive new players are competing for high-quality assets in the market with higher bids than him.
But for us, the opinions of celebrities should not "listen to the wind as the rain." In essence, both the SPAC rejected by Buffett and the convertible bonds that Buffett loves are actually financial instruments.
As long as a financial tool appears, it has its rationality under the background of the times and represents the direction of progress of financial innovation.
Third, the opening up of the primary and secondary markets is a trend, and the integration of VC, PE, and M&A funds will have a future
In recent capital markets, some news has attracted attention. On the one hand, private equity funds represented by Hillhouse are rapidly pre-positioning. From the secondary market to Pre-IPO to the recent establishment of Hillhouse Ventures, it has entered the VC field. Private equity funds with large-scale management are competing with VCs for early projects. Share;
On the other hand, venture capital institutions represented by Sequoia are also entering the secondary market and M&A market. With the increase in management scale and the continuous development of investment projects, it is difficult for simple early investments to carry larger funds. Scale and entering a broader track have become inevitable.
In our view, SPAC is the last hurdle to break through the primary and secondary markets. Compared with all financial products in the past, SPAC can be compatible with the investment logic of the primary market, the exit channel of the secondary market, and the essence of the operation of M&A funds.
If investors' biggest concern in the primary market in the past was that they could not withdraw from investment, then for SPACs with their own exit channels, exit liquidity is the least worrying issue.
At the same time, for ordinary investors who could only participate in secondary market transactions in the past, SPAC allows them to participate in primary market investment while also taking into account their focus on liquidity, which can be described as killing two birds with one stone.
Of course, what must be said here is that the special model of SPAC is most suitable for the US capital market, which has a high degree of marketization, abundant funds, and a form of supervision that is more important than substance.
Moreover, even in the relatively mature US capital market, SPAC is still in the ascendant. Recently, although the SEC has issued some regulatory policies on SPAC, such as changing the accounting guidelines on warrants from equity to liabilities, issuing risk warnings, and possibly In the future, the merged company will be restricted from displaying unreasonable financial data expectations in the documents, but on the whole, it belongs to the normalization of the market.
In our view, reasonable regulatory actions within expectations will not shake the fundamental logic of SPAC listing, and will only constitute long-term benefits for the market.
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