Wariness about SPACs

Steven Weinstein, CEO, Seismic Capital Company

Warren Buffet and I have never met, but I know we agree on one thing: investors need to be careful about investing in SPACs.

The Oracle of Omaha made some good points at the recent Berkshire Hathaway annual meeting[1] about SPACs — that there is a lot of money flowing into SPACs right now, that buying by SPACs is fee-driven rather than value driven (in other words, the sponsors don’t get paid if they don’t close a deal), and that if you only have two years to close a deal (which is the case in most SPACs), you’re going to do whatever you can to get one closed, whether or not the deal is a great one.

Buffet’s partner Charlie Munger said it’s “not just stupid, it’s shameful.”

Which brings us to the strategy my colleagues and I are putting into place at Seismic Capital. We are early-stage investors backing companies that can shake up their space, hence our name: Seismic. Our capital is patient. The companies that we invest in honor diversity and inclusion. Our founders’ interests are aligned with our investors — when we make money for them, we make money too.

Buffet and Berkshire Hathaway have had an incredible run. By buying established businesses and making them better, they have created a juggernaut. They can afford to buy anything they want (with recent cash reserves of $146 billion), and they have massive holdings of companies and other assets. Buffet said that the market for buying additional established companies is difficult right now, because of all the SPACs that are saturated with money to throw at deals. He operates his company to create value, and as a result he won’t overpay. Another thing we have in common.

Our plan at Seismic, is to purchase early-stage companies, grow them with patient capital, give them corporate backup supporting all aspects of business growth, so our CEOs and their companies can focus on developing technology, building product and acquiring customers. That’s how you raise unicorns.

Like Buffet’s, our strategy is to buy and build, using our in-house capability and experience, and our patient capital, to empower or enable our companies to flourish. We are building a diversified portfolio of companies — we expect that some will be billion-dollar enterprises one day. But, like Berkshire and unlike SPACs, all our eggs won’t be in one basket, not ever.

In contrast, SPACs can take two years to buy a single company, and because of savage competition just to find and acquire a target, the acquired company finds itself is behind the eight ball from day one. The target company which commanded a high price due to heavy bidding prior to sale must forevermore struggle to generate enough income to support its selling price.

According to Renaissance Capital[2], “Of the 313 SPACs IPOs since the start of 2015, 93 have completed mergers and taken a company public. Of these, the common shares have delivered an average loss of -9.6% and a median return of -29.1%, compared to the average aftermarket return of 47.1% for traditional IPOs since 2015. Only 29 of the SPACS in this group (31.1%) had positive returns.”

So, why invest in SPACs? Maybe you’ve had such a good investing run that you need a loss. Maybe the SPAC sponsor is someone you know, or someone well-respected in the field. Maybe the current market enthusiasm for SPACs overall will drive up the price of your shares in the one you buy.

Personally, I’d rather put my money in Berkshire (if I wanted a solid, diversified, steady Eddie blue chip value play), but I have invested my money, focus and time in Seismic because I am building a diversified portfolio of swing-for-the-fences companies under one patient, nurturing roof.

Oh, and one other thing, we designed Seismic so our investors will be protected from capital gains taxes when selling after a five-year hold. No SPAC — or even Warren — can do that for you.

[1] Saturday, May 1, at the Berkshire Hathaway annual meeting.

[2] https://www.renaissancecapital.com/IPO-Center/News/69871/SPAC-returns-fall-short-of-traditional-IPO-returns-on-average