La Casa Del SPAC (#16)
Printing cash, Michael Scott, fund letters, and Paul Singer
Today I’ve got:
SPACs and La Casa De Papel
The Michael Scott theory of social class
Signs of the times
A podcast with Paul Singer
Letters, ideas, write-ups
La Casa del SPAC
The boom in SPACs continues. An example from this week: EVgo, a network of 800 DC fast charging sites for EVs (with many more in the pipeline of course) in a deal with an equity value of $2.6 billion (investor deck). The stock has popped to $22, in other words the valuation more than doubled. Capex of a charging station per the company’s unit economics chart is $165-260,000. Meanwhile, the current 800 sites are basically valued at more than $6 million each ($5bn / 800). The company has trailing revenues of $14 million and projects 2027 EBITDA of $500 million. I’m sure we’ll need a ton more charging stations but how does this not turn into a commodity business with intense competition?
But that’s the future and today the market wants this asset. With a rich valuation the market is signaling to investors that the future return on this investment will be muted - and to entrepreneurs to create more of these kinds of highly valuable revenue streams. In that situation, you don’t want to be the investor and earn the return on capital, you want to sell that return. But how?
You can build a company: risky, hard, and takes a long time.
Or you can can make an existing asset investable. You can get paid for providing access. It’s the asset management business in a nutshell: let me invest for you in a way or asset you can’t in exchange for a fee. You want to invest in EV-related companies but there aren’t many listed? Well, it’s your lucky day.
This reminded me of a Netflix show: La Casa de Papel (Money Heist). It turns the old saying “What is the robbing of a bank compared to the founding of a bank?” on its head. Why get involved with either stealing or running a bank when you can just make your own money? That’s what the robbers do as they break into the Spanish mint to print their own fortune. They take a shortcut straight to the source.
Like the crew in La Casa de Papel, SPAC sponsors tap right into the moment of “value creation.” In this case the value is created by bridging the gap in demand (and valuation) in public vs. private markets by making a private asset investable. And the sponsors gets paid for each asset, not a portfolio as he would in a VC or PE fund. Which means that investors pay full carry for all the winners and can’t offset gains with losses from deals gone bad (an issue known in the industry as netting).
Much like in a heist, the operation isn’t done until one has safely exited the stage and cashed in the winnings. While it’s hard to create sustainable, successful companies, it’s not nearly as difficult to make assets investable to the public. Case in point, we just turned $14 million of charging revenue into $5 billion of equity value. And many of these deals will require continued cash infusions. Barron’s famously ran an article on dotcom cash burn in early 2000, right when the bubble started to deflate.
Shoutout to @NoSunkCosts, a very smart (but locked) account who articulated all of this more succinctly: “We are in the asset creation phase A company inside a SPAC is worth more than outside a SPAC, which means more companies will SPAC.”
Just to be clear: I’m not saying SPAC sponsors are hostage-taking thugs. I just imagine the closing of their deals to look something like the below: 😉
How can one benefit from this? You can go long a SPAC where little optionality is priced in (but the opposite is the case for many brand name SPACs now). Even then you’re on the wrong side of the table and mostly betting the boom will continue. Fundamentally, most SPACs should not rally much after getting a competitive deal done at what presumably was fair value (sure, sometimes sponsors will find a great deal). Currently they do but in general and on average they shouldn’t. Which is to say that these new SPAC ETFs look like pure-play bets that the enthusiasm continues.
In rare cases a public company will be the sponsor. For example the Liberty SPAC. “In one day, Liberty leveraged a promise to write a $250m check in the future into a >$250m gain.” Unfortunately the gain on the SPAC is unlikely to move the needle in a large company. The underwriters also benefit. Perhaps one has to think about it more creatively: find companies that are good at incubating, acquiring, and spinning off assets. Something like IAC.
Ideally of course you want to be the sponsor. And if you are, I ask no more than you reach out and bring me on to your founding team😇
Have a good week!
If you’re a fan of The Office
This was my favorite piece to read this week. If you’re not a fan of the Office you might not enjoy it as much: The Michael Scott Theory of Social Class
What’s interesting here isn’t the language of Labour or of the Elites – both of these groups see the world more or less as it is. It’s the language spoken by and to the Educated Gentry. Both reveal the extent to which this group has become detached from normal reality, and also the care taken by others (mostly labour) to manage this detachment carefully.
Language is the fundamental reinforcement mechanism of why arbitrarily constructed environments eventually turn you into Michael Scott. The more you have committed to being seen as interesting within your particular area, the more you detach from reality and move into a construct of your own creation.
The Michael Scott Theory of Social Class, which states that the higher you ascend the Educated Gentry ladder, the more you become Michael Scott
This does hit home. As a writer I strive to be interesting, not just valuable. Watch me detach from reality in real time. And when I think back at my first analyst gig at a global bank: playing the social game was at least as important as hard work. It’s not something I enjoyed (or was good at) and I left when my two years were up.
Another interesting idea from the piece: “finally, at the top of this ladder, are the Barbarians. These are the scariest people in the world.” These are the people worth studying. Self made, entrepreneurial, scary competitive, spending their lives conquering.
Signs of the times
“At some point we all become hostages to something, and when you accept that, that’s when you make up your mind.” La casa de papel
“My first PM had a great line: at the top, everyone’s time horizon extends to infinity.” Skeletor Capital
A sign of the pain short sellers are experiencing: Goldman Sachs Group Inc.’s basket of the 50 stocks with the highest short interest as a share of market capitalization was up a total 25% for the year through Friday, compared with a total-return of 2.4% by the S&P 500.
Related: if you enjoy financial history, check out A Story of Short Squeezes and Market Corners
Watching the growth of /Wallstreetbets
Speaking of r/wsb, here’s a good piece on it from November 2020: The New Kids On The Block
WSB exists as if you were to give someone with absolutely no knowledge of the market an infinite sum to manage with the task of figuring out something (anything!) that works.
A common trade type on WSB that seems to work persistently is the mass buying by the collective of out-of-the-money (OTM) calls on various equities. The lower free float, the better. I have seen this enough now to declare the following: They have hacked Wall Street in this regard.
I contend that WSB is a consequence of the current market structure, which has accidentally enabled their goal-seeked market hacks and rendered older regimes of market thought inert. Not to mention that zero fee trades have become the norm across brokerage platforms. This is yet another key element to exploiting the thin market structure.
This about sums it up right now:
And the bubble discussion continues.
Brooklyn Investor, Happy New Year! Bubble Yet?:
Sure, there is a lot of speculation going on, and there are a lot of things I would stay away from.
But at the end of the day, for me, as a stock investor, I just care about valuations. Is the stock market in a "historic bubble"? I don't know, but it doesn't really look like it.
The numerous and way too early warnings about the dotcom bubble
But in March 2000, five years after Dalio and Lynch first warned of a bubble, the NASDAQ turned a corner. What started with an announcement of rising interest rates by then Fed chairman Alan Greenspan—raising serious questions about the dot-com darlings' valuations and ability to repay debt—trickled into a market selloff, scandals of bad accounting practices, and major bankruptcies. By October 2002, the NASDAQ had fallen 75% from its peak, giving up all of its gains in the bubble and returning the index to 1996 levels.
Dalio, Lynch, Marks, Klarman, Soros, and Buffett had all spotted the bubble and warned investors of the dangers. But their foresight came too early.
Paul Singer made a rare podcast appearance. It’s an hourlong conversation about the Fed, inflation, MMT, gold, market psychology. I enjoyed it but it’s probably not for everyone. I loved how the conversation ended (~54.30). Singer goes: “Gentlemen, unfortunately, I'm going to have to bail. Do you have anything else?” and waits a beat for a thank you, then rattles off “thanks so much guys, this was fun, hope it was useful, take care," and immediately hangs up. Very unlike a podcast, very much like a busy PM.
 “I think there’s a really good chance of a tremendous surprise: some combination of actual consumer price inflation bursting out and keeping ongoing. stunning central bankers.”
 “It’s best to think of financial markets as examples of mass human behavior rather than anything scientific or modellable.”
Letters, ideas, write-ups
It’s Q4 letter season and I’ll try to highlight a few less known letters. Pick and choose, depending on what you’re interested in.
Steel City: discussion of a podcast stock called Liberty Syndication and a spectrum play.
Fundsmith: “whilst Sir John Templeton did say that the four most dangerous words in investment are ‘This time it’s different’ (which is actually five words before anyone points this out) sometimes it really is different and if you miss such inflection points it is to the detriment of your net worth.”
If you’re interested in the gaming space: TTWO write-up
Baron Real Estate. “2021 investment themes 1. COVID-19 recovery beneficiaries 2. Opportunities in residential real estate 3. The intersection of technology and real estate and the digitalization of real estate.”
Promoted stocks with a good story are, in part, the raw material from which Bronte's short returns are typically made. The rise in garbage stocks has been very difficult for us. We short garbage stocks.
Unsurprisingly SPACs are being assembled by the full pantheon of Wall Street characters from the highest quality executives and fund managers to people we think are organised crime adjacent The latter of course will use the cash raised to buy rubbery assets from undisclosed related parties. Even the fund managers with the best records (and reputations for integrity) seem to like that. A few are cashing in their reputations
We should not hide the horror of this. In shorting frauds, this is the sort disaster that sometimes befalls you: a.) You short a stock at $10 run by a promoter who you suspect is a liar. You are (as nearly as possible) certain that this stock is worthless. You hope to cover at $1. b.) The promoter makes up a story that somehow retail seems to think is real and the stock trades at $40. c.) You are forced to buy some back – because there is no conceptual reason why the stock can’t trade at $80. After all it is no sillier at $40 or $80 than it was at $10 (it was worth 100 percent less at all times). d.) After you cover the stock normally goes to $1 (as you expected all along) though it might go through $100 on the way.
Massif Capital: talking valuation of mining assets and Kazatomprom: “The asymmetric return potential of a pre-production junior in an environment where uranium prices double is probably not in the cards for Kazatomprom. However, the firm has paid us 8% a year in dividends to wait for a future pop in uranium prices while also appreciating roughly 35% since our initial purchase in 2019.”
Tao value. An interesting framework based on Sun Tzu:
Tao: The “spiritual” consideration of a business, including mission, value, culture, and benefit to all stakeholders.
Meteorology: Addressable market, competitive landscape
Topography: Profitability, moats, financial strength
Commander: Management (integrity, capital allocation skills, transparency, fairness to minority shareholders)
System: Governance, incentive system, etc.