Calculated Risks in the SPAC World

Psalm Chapter 118 verses 5-6 state, "When hard pressed, I cried to the Lord; he brought me into a spacious place. The Lord is with me; I will not be afraid. What can mere mortals do to me?"

I think that it is much easier to cry out to God when times are hard. When things are going seemingly well, it isn't always the first thought on my mind, how much I need God every day. I like what Pastor Greg Laurie says. Roughly paraphrasing, we are either coming out of one of life's storms, or at a point where the next one is coming. This isn't meant to be dreary or negative, but rather for us to constantly think about our need for God, and to be prepared for life's circumstances through Him.

There's a lot of interest and skepticism for Special Purpose Acquisition Companies (SPACs). What I have found is that the SPACs I have owned with a very strong management team, including a major investor such as Chamath Palihapitiya or Peter Thiel, have all performed exceptionally well.

But sometimes I can get a little too greedy and begin looking where the grass may appear greener. It is here that I think about Psalms words of wisdom, to seek the Lord. The term "hard pressed" can easily describe any situation. For investing, there are many difficult decisions to make on any given day, especially with market volatility.

So what I have done is diligently reviewed SPACs that have not only strong management teams, but a clear defined leader who is highly likely to execute on identifying a target, and getting a merger completed. The goal here is to have a public company trading on a stock exchange. I find it rewarding to initially purchase warrants as soon as they become available for such cases.

I have also taken a more risk in pursuing SPACs related to the electric vehicle, EV, craze, but substantially reduced holdings related to this. Last year, my total return on SPAC investments was 62%. This was the first year using SPAC warrants as a short-term strategy. I am holding select post-SPAC public companies as well.

For 2021, I have reduced exposure to SPACs significantly. To date, the portfolio's holding exposure is around 6%, with the following in the table below.

Of these, only Social Capital Hedosophia Holdings V (IPOE) has announced a merger target in SoFi. All the others have witnessed substantial appreciation, and yet have no target announced. This is a fundamental point, getting into SPAC warrants early, with a key leader to execute by itself, commands a premium based on market expectations. This is justified by the amount of private unicorns available for consideration, which serves as a solid pipeline.

If Bill Ackman were to land a company like Stripe or SpaceX, I wouldn't be surprised to see my warrants jump towards 300% or greater. I am optimistic that I may be able to realize around a 600% return on SoFi prior to the merger date, which is expected in the first quarter of 2021. At the same time, Chamath Palihapitiya's other two remaining SPACs are up handily, and still have further upside potential assuming a solid company is added.

Ribbit Leap is the only SPAC where a clear individual leading the team is not as heavily weighted versus the others. Don't get me wrong, Meyer Malka and Cynthia McAdam are top-notch at Ribbit, but a person like Chamath can still get a competitive deal against them.

I did miss out on Peter Thiel's Bridgetown Holdings Limited (BTWN), but I'm waiting patiently for confirmation on whether Tokopedia will not be agreeing to a deal. If the SPAC warrants drop back below $3 per warrant as a result, I will likely initiate. If Mr. Thiel does indeed land Tokopedia, good on them.

One of the recent topics on the Stock Talk forum in the Gold Plan is focused on the new era for SPACs. There are much more mature, legitimate, and strong companies with substantial growth potential that have recently went public through a SPAC. It is important for investors to keep tabs on how these companies will perform over the next two to five years.

In the event big winners emerge, it will fundamentally change the landscape of companies going public. In this scenario, we may see more years than not, more investment in SPACs than traditional Initial Public Offerings, IPOs.

For some, SPACs may seem separated from reality. I get it, there's a lot of so-called opportunities to make a lot of money investing. But I am constructing benchmarks and detailed financial models and comparisons as to provide clear transparency on what is occurring. Opendoor Technologies (OPEN) is a great example of this. Once they file their 10-K and provide their first full-year earnings report, there will be substantial crosswalks between their operations and Zillow Group (ZG). From this point forward, tracking how they compare and compete will be very clear, as will be the thesis of why one would own Opendoor versus Zillow.

Each company that comes from a SPAC and goes public will have its information much more transparent moving forward. The ones with the strongest business models and growth prospects, are likely to afford strong investment return potential.

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