Five SPACs Worth Owning Right Now
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You can’t go anywhere these days without hearing about SPACs, and there’s a good reason for that.
Wall Street refers to these by their technical name, special purpose acquisition companies, and they are quickly becoming one of the single best places to park your cash right now.
Wall Street and retail investors alike had a stellar run with SPACs in 2020 with a record $157 billion worth in deals done in just those 12 months, which was more than all the deals done in every year prior.
And the SPACs that won… well, I’ll let the numbers speak for themselves:
- The Diamond Eagle buyout of DraftKings Inc. (NasdaqGS:DKNG): Run by media executive Jeff Sagansky and founding investor Harry Sloan – longtime dealmakers and media operators – this play on sports betting delivered a 7X return on its initial public offering (IPO) price.
- The Kensington Capital buy of QuantumScape Corp. (NYSE:QS): Driven by executives from the auto industry, this driverless car play buying a lithium battery company was a 12-bagger.
- When Kayne Anderson snagged Altus Midstream Co. (NasdaqGM:ALTM): Investors who are experts in the midstream slice of the energy market gave investors a 5.3X windfall.
- And the Fortress Value Acquisition buyout of MP Materials Corp. (NYSE:MP): The backers of this SPAC deployed their private-equity expertise in the rare-earth mining sector and delivered a 4.5X return on the IPO price.
As crazy as last year was for SPACs, count on this year to be much, much bigger. In just the first few months of 2021, we saw more of these “new-age IPOs” than in all of record-breaking 2020.
That’s right. More than $157 billion has been raised in SPAC IPOs between January 2021 and today.
There’s big money to be made with SPACs, but here’s the part of the SPAC story you’re not seeing in the headlines: Not all SPACs are created equal.
And there are five keys you must utilize to grab the right SPACs at the right price at the right time.
Here – in this special report – we’re going to explain every bit of that.
We’ll give you the lowdown on SPAC deals. We’ll show you the checklist that will let you find the winners.
And we’ll get you started making money immediately – today – with a deep-dive look at the five best SPACs we’re looking at right now.
So let’s get you started with a quick primer on this new form of IPO.
As much as I refer to SPACs as “new-age IPOs,” it’s more accurate to call them “blank-check” companies.
A SPAC sponsor does an IPO to raise the cash needed to go out and buy an operating business. And while there is sometimes a general stated purpose or theme for the SPAC, the fact is that prospective target companies SPACs eventually go after with their blank-check money are not ever identified in the IPO. At this point in the process, they aren’t even known to the sponsor.
Because there isn’t an operating company being IPO’d, there’s no need for the usual due diligence or breaking down and disclosing of a company’s products, markets, financial condition, prospects, and risks. It’s just a capital raise to bankroll the merger of a to-be-determined target acquisition.
That makes bringing out SPACs a lot faster and easier than traditionally IPOing an operating company.
As an investor, you might be buying into the “theme,” or sector, or space the IPO sponsors are targeting if there’s one proposed. But for sure, you’re betting on the sponsors’ and founders’ ability to find hot companies to buy and operate them super successfully.
The best sponsors have a track record or specific expertise to bank on, so researching these individuals is key, but we’ll get deeper into that in tomorrow’s report.
One very cool thing about SPACs is you can buy shares with “warrants” attached. Warrants are securities that give you the right to buy additional shares, usually a third or maybe a half of a share – each IPO deal is a little different.
Generally, the warrants, if they aren’t attached when you buy shares of the SPAC, can also be bought through any brokerage service once you have the SPAC’s ticker symbol. The warrants themselves are kind of like call options; they give you the right, but not the obligation, to buy shares of the SPAC usually at a 15% premium to the IPO price, which is most commonly $10.
So if you end up with at least three 1/3-of-a-share warrants, whether they came attached to shares you bought or you buy the warrants separately, you can convert them to a share (or lots of shares if you have lots of warrants) for $11.50 per share, which is fantastic. This was the case with QuantumScape Corp.; it was trading at more than $120 per share last year.
With most deals done at $10, most of the warrants are five years in length with an $11.50 strike price.
With a winning SPAC, those warrants can serve as one heck of a kicker. If the stock goes to, say, $50, you’d make $40 on the stock and another $38.50 on the warrants.
On a $10 investment, that’s a massive windfall.
Like I said, sponsors may identify an interesting social, economic, or demographic trend they want to take advantage of with the proceeds. The sponsors and the management teams they bring in will often have experience in specific sectors – like fintech, electric vehicles, consumer goods, restaurants, energy, logistics, or even casinos to name a few.
Here’s the “wild card.” The prospectus for all of these deals makes clear that these sponsors may target a certain business type or theme, but they actually have the wherewithal to invest in virtually anything they like.
SPAC sponsors have a specific time frame to get a deal done. Most are 24 months, but there are occasions where the time horizon is extended, for example, if a deal is pending a shareholder vote on approving the acquisition.
While sponsors are hunting for a company to buy, the IPO proceeds are held in a trust and invested in U.S. Treasury securities.
If no deal is made in the required time frame, the cash, plus interest, because the Treasury securities the trust invests in pay interest, is returned to shareholders. While every SPAC deal is a little different, and some sponsors use some of the IPO proceeds to pay for underwriting, some legal and accounting, and other specified expenses, there can be a little less than $10 per share in the trust account, or more, depending on expenses paid out and interest earned.
If an agreement is reached on a deal, meaning the sponsors and target company agree on a price and terms for the operating company, and additional financing, which is usually needed since most targets cost more than just the capital raised in the IPO, is put in place, the whole deal must be approved by shareholders before it can be consummated. If it’s a deal you as a shareholder in the SPAC don’t like, perhaps because they invested in a theme or business you aren’t interested in, you can vote “no” and redeem your shares and be paid out of the trust.
In other words, if you like the deal, vote “yes” and keep your shares in the new company.
If you hate it, get your money back.
If you buy the IPO or buy in the aftermarket when shares may trade at a discount to the value of the shares in the trust, the worst that can happen – absent blatant fraud by the sponsor – is that you get your money back, or better yet, your money back with interest.
In most cases, even the so-called “worst case,” you will be left with more than you could’ve earned in a passbook savings account over the life of the SPAC.
But as we’ve already seen with some of the biggest recent winners, if the SPAC team strikes a great deal, you could see returns of 400%, 500%, or more.
To do this – to win big consistently and to squeeze out as much risk as possible – you need a powerful but easy-to-follow strategy.
I have one.
The fact is, you need to look for five things when looking at SPACs.
Everything else – the whipsawing headlines and the patter from all the so-called “experts” – is nothing more than a lot of noise.
The Five Keys to Success with SPACs
With all the attention SPACs are getting, you’d think they were a new financial invention.
But they’ve actually been around for decades.
A number of factors have thrust this investment vehicle into the spotlight – one being the pandemic, which helped bored, home-stuck traders to search out new opportunities. Almost overnight, those traders helped propel SPACs from an unusual backwater of Wall Street to one of the hottest sectors of the market.
New “experts” were minted, and chatrooms, Facebook groups, and Subreddits popped up all over the place – spawning a cacophony of SPAC talk, speculation, and lousy advice.
In all my years working the markets, if there is one thing I learned, it’s this: There is power, consistency, and great success in simplicity. The simplest strategies are not only the most elegant, but they deliver the biggest, most predictable windfalls.
I’ve got simple trading rules I apply in bull markets, in bear markets, in flat markets, for trading growth stocks, cyclicals, every sector where nuances matter. So, of course, I’ve got simple rules for buying, selling, and winning with SPACs.
The fact is that there are five rules, or keys, to unlocking SPAC success. These are the keys to finding winners and maximizing your gains. It’s my strategy – and now it’s yours:
Winning SPAC Key No. 1: Never Overpay
There will be temptations, especially when there’s a buzz about any particular SPAC. Ignore it. Never overpay. You never want to buy a SPAC when its share price is way above its IPO price, which is usually $10. The fact is you always pay the IPO price if you’re able to get into the actual IPO before it debuts on its first trading day. However, in the aftermarket, you want to search out high-potential SPACs whose shares have been knocked down to maybe $9, or $8 if you’re lucky, or some other dollar value below the IPO price. That kind of bargain-hunting can lead to huge windfalls.
Winning SPAC Key No. 2: The Players Matter
You have to do some homework here – studying the sponsors, their backgrounds, expertise, and track records. Buy dealmakers. Ignore the dreamers and storytellers. None of those dreams are likely to turn into a real business that Wall Street will value when a deal is done. Invest with dealmakers who have run real businesses and who’ve then sold them for huge profits. You want to favor SPACs run by people who have done leveraged buyouts (LBOs), are M&A gurus, rule the landscape in private equity, or are real estate dealmakers and moguls. Turnaround artists and distressed-debt investors will have the instincts needed to find businesses with big potential and the shrewdness to get those companies at prices Wall Street will love, and you will too.
Winning SPAC Key No. 3: Avoid the Inane
It sounds pretty basic, but in the heat of the moment when SPAC deals are grabbing headlines, this is easy to forget. If the SPAC concept is a bad one, move on. Lousy ideas deliver lousy results. Hot markets are magnets for schemers, posers, and wannabes pitching ideas that are weak, nonsensical, or downright bogus. If the concept is inane, doesn’t make sense, if the acquisition target is a trumped-up pipe dream, just walk away and don’t look back. There are plenty of really good opportunities as the next key shows.
Winning SPAC Key No. 4: Tap into Strength and Innovation
The best SPACS are the ones that will benefit from powerful social, demographic, and economic trends. Or that tap into fast-growing market sectors. Or that zero in on high-upside innovations. Or that address a huge unmet need. And when you have strong players tapping into a big idea, you’ve got the ingredients for a runaway winner. Even better, combine this with Key No. 2 to tap into the real winners.
Winning SPAC Key No. 5: Protect Your Profits
There’s an old saying on Wall Street: When the market hands you a profit, take it. Part of making money has to do with what you pay (Key No. 1). But you also want to keep what you make. After a deal is struck, and you see a big pop in a SPAC’s share price, use a trailing stop-loss to keep the money you’ve made.
The Five SPACs to Buy Now
SPAC Play No. 1: Equity Distribution Acquisition Corp. (NYSE:EQD)
Our first SPAC recommendation exemplifies our rule that the players matter, because EQD is run by a guy named Sam Zell – one of the consummate dealmakers of the last half century. Detractors nicknamed him “The Grave Dancer,” because of his knack for finding big value in businesses Wall Street was already eulogizing. But his backers would more likely refer to him as “The Gold Dancer” because of the hefty windfalls most of those deals created.
Zell entered the real estate business while he was still an undergraduate at the University of Michigan. He managed his landlord’s apartment building in return for free room and board – and ultimately took over all that landlord’s properties. Together with his fraternity brother Robert Lurie, Zell ended up managing more than 4,000 apartments and owning a few hundred of the units outright.
That launched a now-legendary career in real estate and business. Indeed, Zell is widely viewed as the founding father of the modern real estate investment trust (REIT) industry.
But his ability to turn trash into cash didn’t stop with real estate. He has owned department stores, the Schwinn Bicycle Co., radio stations, drugstores, energy companies, and more.
The SPAC space was tailor-made for Sam Zell.
In September, he brought to market Equity Distribution Acquisition Corp. (NYSE:EQD). Zell and his team are looking to buy a business in the industrial supply-chain space. That meshes with Key No. 4 – about tapping into powerful trends. Zell and his team want to own businesses that make the supply chain “smarter,” faster, and more efficient – a gaping need in the hypercompetitive, every-penny/every-moment counts global industrial sector.
Zell’s co-founder at Equity Distribution is Bill Galvin, the former CEO of Anixter International, a wire-and-cable player that’s now owned by WESCO International Inc. (NYSE:WCC).
Here’s a picture of how these SPAC partnerships are spawned – and why they’re so key. During the period Galvin helmed Anixter, the firm’s chairman was none other than Sam Zell.
Under the stewardship of Team Zell, Anixter’s revenue zoomed from $650 million to more than $8.8 billion. Zell and Galvin then teamed up to sell the company to WESCO for about $4.5 billion – allowing investors to cash out with very full pockets.
The Zell/Galvin duo now sees a dynamic opportunity in industrial supply chains, using artificial intelligence (AI), software, and automation strategies to achieve their goals. If you want to see the potential for yourself, just think about what happened over the past year when there were shortages in food, paper towels, coins for change, or bleach. Think about the issues we’ve seen with the coronavirus vaccine rollout. Or the issues the U.S. Postal Service is still having when it comes to delivering your mail on time.
Every one of those examples relates to a supply-chain problem.
And each is a business opportunity for an entrepreneur with a solution.
The industrial supply chain is a fragmented market that is ripe for consolidation. So you can bet that easy-to-install, easy-to-customize, technology-focused solutions will see some big-bang demand from the giant corporations experiencing some of the supply-chain woes we’ve talked about here.
Zell and Galvin have assembled an All-Star team to make this all happen. Other members include Robert Grubbs, another former CEO of Anixter who’s now a board member with Schneider National Inc. (NYSE:SNDR), provider of truckload, intermodal, and logistics services.
There’s also Bill Simon, who spent 2010 to 2014 serving as CEO of Walmart Inc. (NYSE:WMT) – owner and operator of the biggest supply chain in the world. We also want to mention Charles Swoboda, president of Cape Point Advisors, a firm that focuses on disruptive technologies – and the venture that will run whatever companies Equity Distribution ends up buying.
The SPAC has until September 2022 to get a deal done – meaning it has plenty of time to find and buy the “right” company and technologies. Best of all: EQD is trading at $9.80. With a share price that’s dropped below par (below the $10 offering price), you’re snapping up a bargain. In fact, I’m calling EQD a “Must Buy” SPAC.
SPAC Play No. 2: Spartan Acquisition Corp. III (NYSE:SPAQ.U)
Want additional proof of the importance of Key No. 2 – that the players matter?
Just look at Spartan Acquisition Corp. III (NYSE:SPAQ.U).
The fact is that SPAQ.U is the third SPAC deal pulled off by this sponsor. In the first one, the team ended up buying Fisker Inc. (NYSE:FSR), an electric vehicle company that seemed to hold a special allure for investors. At the shares’ peak, SPAC investors had almost tripled their money.
The second Spartan SPAC inked a deal buying Sunlight Financial, a residential clean-energy play. As we researched this report, the deal had yet to close. But when it was first announced, the SPAC popped 40%, giving investors a chance to sell the stock or put in place a trailing stop to lock in profits.
The success of the two deals was no surprise to us: The architects were affiliates of Apollo Global Management Inc. (NYSE:APO), one of the world’s leading private-equity (PE) and alternative-asset managers.
Apollo’s leadership team learned the deal-making ropes at Drexel Burnham Lambert – at a time when junk-bond pioneer Michael Milken was dominating the market… and the headlines. They actually worked as investment bankers helping structure the high-yield financing on the deals crafted by Milken himself.
Those experiences provided the future Apollo stars with a view of the most-sophisticated PE, merger, and straight-buyout deals that anyone was doing back then. And when Drexel collapsed, these bankers had to restructure some of the companies that had collapsed with the junk-bond market.
They bought up the distressed debt, got management to swap it for equity – and sold the companies when they recovered.
If I am going to give my money to someone so they can go deal shopping, those ruthlessly effective folks are the kind of people I want to invest with.
Initially, this newest Apollo SPAC will search for profit opportunities across the renewable-energy, energy-storage, mobility, advanced-fuels, and carbon-mitigation markets. The SPAC will also consider opportunities in traditional-energy production and power-generation companies.
Apollo has been active with energy deals since it was launched in 1990. It also will have a dedicated energy fund with total assets of about $5 billion. The entire management team at Spartan Acquisition III hails from Apollo’s infrastructure and natural resources group.
Geoffrey Strong has served as the chairman and CEO of the first two Spartan Acquisition deals, and he is doing so with Spartan III. He is a senior partner and co-lead of the firm’s infrastructure and natural resources group. Before joining Apollo, he worked at The Blackstone Group (NYSE:BX) in its private-equity division, with a primary focus on energy deals.
CFO James Crossen is also making his third appearance as a top officer of a Spartan SPAC deal. Currently, he’s the CFO for Apollo’s private equity and real assets group. Prior to that, he worked at other private-equity and investment firms including Roundtable Investment Partners, Fortress Investment Group, and JPMorgan Partners.
The other team members also came from Apollo’s natural resources division. They’re all natural-resources experts and have been career-long investment bankers.
At the time we assembled this report, the shares still trade as a unit together with one-quarter of a warrant per share. Right now, the units are trading at less than $10, which is a fantastic price for the package.
Buy the units at $10.25 or less. After the shares and warrants are separated, look to pay $10 or less for shares of Spartan Acquisition III.
SPAC Play No. 3: Rotor Acquisition Corp. (NYSE:ROT)
Rotor Acquisition Corp. (NYSE:ROT) is a SPAC put together by private-equity veterans who have a record of successfully building businesses and then selling them at hefty profits – and I mean they’ve done this several times in the past.
The group wants to do the same thing this time – but with a really cool old-school/new-school twist.
Rotor’s game plan is to buy moribund old-school businesses in the consumer and industrial-products sectors – and energize their prospects with the addition of new technology.
It sounds simple, I know. But some of the ideas with the biggest upsides are simple.
Rotor CEO Brian D. Finn is chairman of Covr Financial Technologies LLC., creator of a digital platform that helps financial institutions market insurance products. He’s also chairman of Star Mountain Capital, a lower middle-market credit investment firm and an investment partner at fintech venture-capital player Nyca Partners. He’s also a board member of The Scotts Miracle-Gro Co. (NYSE:SMG) and Owl Rock Capital, a leading business development company.
Interestingly enough, Finn began his career at First Boston back in 1982, where he worked in mergers and acquisitions (M&A) and eventually headed that unit. As was the case with the Apollo Global folks, Finn learned his craft during the Golden Age of Deal-Making.
Rotor Chairman Stefan M. Selig started at First Boston in 1984 and was a founding member of Wasserstein Perella, a legendary PE firm. He eventually moved to Bank of America Merrill Lynch (NYSE:BAC), where he eventually became executive vice chairman of global corporate and investment banking.
John D. Howard, a director of Rotor Acquisition, is the founder and co-managing partner of Irving Place Capital, an investment firm. He has 35 years of private-equity investing experience in the consumer products, retail, and industrial businesses. Earlier in his career, Howard was a senior VP and partner of Wesray Capital Corp., an early player in the leveraged buyout (LBO) business.
These three have been deal-doing collaborators for decades. Most recently, Finn and Howard have focused on so-called “disruptive-technology companies” in rocket manufacturing, software, construction equipment, plant-based proteins, wine-and-spirits distribution, power storage, and industrial automation.
The entire board – I’m talking each of the directors – has decades of experience as dealmakers.
Here’s why I put such a fine point on all this.
When you buy SPAC shares, what you’re really doing is hiring someone who will identify and buy a company that will boost the value of the stock you’re holding.
The Rotor Acquisition team has been making deals and running companies for almost 40 years.
That’s who I want to be doing my deals for me.
Dealmakers, not dreamers.
SPAC Play No. 4: KKR Acquisition Holdings I Corp. (NYSE:KAHC.UN)
KKR Acquisition Holdings is the first SPAC entry by legendary private-equity (formerly leveraged buyout) firm KKR. Known back in the day as Kohlberg Kravis Roberts & Co. LP, KKR came to prominence in the 1980s’ LBO boom and was at the epicenter of the infamous and frenzied battle for control of RJR Nabisco – a saga chronicled in the seminal 1989 bestseller Barbarians at the Gate by Bryan Burrough and John Helyar.
Since its founding back in 1976, KKR has made massive profits for its LBO then private-equity investors, with reported annualized gains in excess of 25% a year. That’s staggering.
By investing in KKR Acquisition, we’ll get a chance to pocket some of those stunning gains for ourselves.
While there’s no predetermined industry, technology, or space the SPAC says it’s going after, the prospectus notes KKR is tracking opportunities in digital transformation and e-commerce adoption, health and wellness, and experience-based entertainment. Sure, that’s a wide berth, but KKR’s got expertise in all those areas.
We might be getting something of a heads-up on where the SPAC is heading by looking at the principal executive KKR drafted to be the SPAC’s chairman – Glenn Murphy, chairman of Lululemon Athletica Inc. (NasdaqGS:LULU), the popular athletic apparel company whose stock has been a darling on Wall Street for years.
Murphy was the CEO of The GAP from 2007 to 2014. Before that, he was chairman and CEO of Shoppers Drug Mart, Canada’s largest health and beauty brand.
In 2015, he founded FIS Holdings to invest in consumer companies. FIS is a high-impact, hands-on investment firm that engages with management to help improve the businesses it shepherds
In addition to Lululemon, FIS has investments in Aimbridge Hospitality, Serta Simmons Bedding, Whole Foods Market (now part of Amazon), and Bloomin’ Brands.
Two KKR partners will be on the board with Murphy. Senior Advisory Partner Paul Raether will be a director. He has been with KKR since 1980 and has worked on some of the biggest deals the private-equity firm has done over the last 40 years.
U.S. Consumer Economist and Managing Director Paula Roberts will also be a director. She’s been with KKR since 2017 and leads macro real estate investment research. She also partners with real estate, consumer private equity, and credit deal teams at KKR.
Before joining KKR, she was the executive director at Morgan Stanley (NYSE:MS), where she managed the U.S. consumer sector coverage.
Her experience in consumer-oriented businesses is still another clue about the type of company KKR intends to buy.
The KKR Acquisition units were priced at $10 at IPO and included one share and 25% of a warrant (with each “full” warrant giving you the right to buy shares at $11.50). The warrants expire in five years if not redeemed before then.
If you can buy the units for $10.25 or less, you’re effectively buying at a slight discount to what the trust value will likely be once the warrants are separated from the stock in early May and interest accrues on the trust’s Treasury portfolio.
Once those units are separated, you can buy the stock outright anytime the price falls below the trust value of $10.
SPAC Play No. 5: B. Riley Principal 250 Merger Corp. (BRIV.U)
B. Riley Principal 250 is going to draw heavily on the investment and deal-making experience of B. Riley Financial Inc. (NasdaqGM:RILY), an investment firm with an expertise in small-cap stocks. The firm also invests its own money and has assets of over $1 billion that it manages for its own interests
The firm has also had success with its in-house fund that functions much like a private-equity venture. It acquires large stakes in smaller companies – or just buys them outright – and then works with management to improve operations and profitability.
The knowledge and expertise in understanding and valuing B. Riley Principal’s investments created a window to lend to middle-market companies and even to provide distressed-company financing.
And it easily meets our criteria.
It has a great team with great players. It has a track record with successful SPAC deals, so we’re confident it’ll avoid spurious pursuits. And the success of the businesses backing it makes it highly likely the SPAC will pursue the kind of powerful trends that lead to maximum profits.
B. Riley has experience in the SPAC game, having closed two deals last year – both of which have given shareholders hefty post-merger profits.
The firm has now created B. Riley 250 – and installed its “A” team.
The SPAC CEO/CFO will be Daniel Shribman, the chief investment officer (CIO) of B. Riley Financial and president of B. Riley Principal Investments LLC. In that role, Shribman oversees a billion-dollar investment portfolio that holds bilateral loans and small-cap equity positions in both public and private markets. Shribman is active at the board level in all of the businesses the firm invests in, so he’s got meaningful experience in valuing and running an array of companies.
Before joining B. Riley, Shribman was a special-situations analyst at Anchorage Capital. At Anchorage, he led investments in public and private opportunities across several industries, including transportation, automotive, aerospace, gaming, hospitality, and real estate. These investments included stocks, bonds, private equity, distressed debt, and bank debt.
He was also part of the team that successfully concluded the two prior (and profitable) SPAC deals made by B. Riley.
B. Riley CEO Bryant Riley will serve as chairman of the new SPAC. He founded B. Riley back in 1997 and has steered the company through several acquisitions to get to the firm’s current size and makeup. B. Riley not only provides brokerage and research services, but also serves as an advisor, helps with real estate transactions, liquidates retail companies, provides debt financing and serves as a wealth manager.
What began as a one-office research firm in Los Angeles is now a leading investment bank and financial-services firm with offices across the United States.
B. Riley 250 has not identified a specific industry to target, but has said it will be looking to buy an established middle-market company that could benefit from greater capital access.
The SPAC will target companies with enterprise values (EVs) between $800 million and $2 billion.
This SPAC has not yet had its IPO. The units will be offered at $10 each and include one-third of a five-year warrant with a strike price of $11.50. Naturally, B. Riley will be the lead manager of the IPO.
If your broker can get you IPO shares, be a buyer.
If not, you can pay up to $10.25 for the units or $10 for the shares after the warrants are separated from the common stock.
Betting that a team that has a history of successful deals is a smart play. B. Riley’s latest SPAC could provide you with an opportunity for fantastic long-term profits.
Worst case, you get your money back with a bit of interest.