Unicorn SPACs and Cargo Quants
Social Capital Hedosophia Holdings Corp. is an entertainingly named (pleasure-wisdom?) blank-check special purpose acquisition company that wants to acquire an unspecified unicorn to spare it the pain and embarrassment of a traditional initial public offering:
The traditional technology company IPO process, which has been largely unchanged for decades, has also acted as a driving force to deter private company management teams and their pre-IPO stakeholders from pursuing IPOs. We believe management distraction, a sub-optimal price discovery mechanism and the resultant longer-term aftermarket impact have discouraged private technology companies from pursuing IPOs.
Is selling to a SPAC an optimal price discovery mechanism? The plan is for Hedosophia to go public and then "take a minority position in one of the more than 150 private U.S. technology companies valued at $1 billion or more," gently shepherding its chosen unicorn out of the Enchanted Forest and into the public markets.
Look, there are three ways for an IPO to go:
- The IPO prices at like $15 and falls to $12, leading everyone to declare it a disaster and to worry that the unicorn bubble has popped.
- The IPO prices at like $15 and then jumps to $25, leading everyone to complain that the company left money on the table and that the IPO mechanism is broken; or
- The IPO prices at like $15 and then jumps to $18, leading everyone to give a quiet nod of satisfaction and then move on immediately to complain about the next deal.
It is a fraught process, no doubt. But remember that an IPO has a price discovery mechanism: You market it, and people put in orders, and you triangulate around a price that raises a lot of money while still creating some aftermarket demand. A SPAC acquisition is just a privately negotiated acquisition: The SPAC offers a price, the unicorn asks for a higher number, and they go back and forth until they agree. It's the same as if the unicorn were selling out to Facebook Inc. or whatever, except that with a SPAC, you find out pretty immediately if the price was right or not. So there are three ways for this to go:
- Unicorn sells stake to SPAC at a $1.5 billion valuation and then the public valuation falls to $1.2 billion, leading everyone to declare it a disaster and worry that the unicorn SPAC bubble has popped and also probably sue the SPAC for overpaying its unicorn buddies;
- Unicorn sells stake to SPAC at a $1.5 billion valuation and then the public valuation jumps to $2.5 billion, leading everyone to complain that the company left money on the table and that the unicorn SPAC mechanism is broken; or
- Unicorn sells stake to SPAC at a $1.5 billion valuation and then the public valuation jumps to $1.8 billion, leading everyone to give a quiet nod of satisfaction and maybe complain a bit about the SPAC's fees.
I don't understand the problem this is solving. IPOs are annoying, but then they end, and you have price discovery and an investor base and a relationship with the capital markets. The problem of going public is not so much going public -- writing a prospectus, doing a roadshow -- as it is being public -- filing quarterly financials, dealing with investors, forever. The SPAC doesn't solve that. It's just an interesting technological gimmick to deal with some of the superficial difficulties of the process. I guess that's what tech companies are into these days.
One thing I sometimes wonder is why Alphabet Inc., which owns Google and is steadily amassing all of the world's information, doesn't start a hedge fund with all that information. If you know everything, can't you use that to predict stock prices? One possible answer is "it's harder than that," but I don't know, Google seems to be pretty smart at using information. Another answer might be that selling ads for everything in the world is more lucrative than trading stocks. Both advertising and financial trading are businesses that are essentially derivative on the real commerce of the world: People buy and sell goods and services, and advertisers and financiers try to take a cut of that business. Perhaps Google thinks its current approach maximizes its cut more efficiently than trading would. Still, I mean, why not do both?
In any case, if you work in a product market -- if you buy and sell goods and services -- you probably generate information. Perhaps you could use that information to predict stock prices? (Or commodity prices, or interest rates, or whatever.) Similarly if you are a quantitative hedge fund, you probably generate (or at least analyze and use) information. Perhaps someone could use that information to make better decisions in a product market? Perhaps you could team up and find gains from trade:
Maersk Tankers has invested in CargoMetrics, a quantitative hedge fund backed by the likes of Paul Tudor Jones and Google’s Eric Schmidt, in order to utilise its shipping data and analytical models to improve the deployment of its fleet of vessels.
CargoMetrics, meanwhile, will get "access to Maersk's tanker information." The hedge fund tells the shipper where to send its ships, and in exchange, the shipper tells the hedge fund where it is sending its ships. Everyone wins. "We are already learning a lot from them, and they from us," says CargoMetrics's founder.
Venezuela has a fairly crafty debt-issuance program in which various arms of its government issue bonds to each other, wait a while, and then sell those bonds to the public through brokers as though they were just any old investors. If you buy a Petróleos de Venezuela SA bond issued last year from a broker who sourced it from Venezuela's central bank yesterday, then you might not think that you are directly funding the increasingly lawless government of Venezuelan President Nicolás Maduro -- but in economic reality you probably are, as Goldman Sachs Asset Management found out to its continuing embarrassment.
One obvious purpose of this craftiness is that, even if banks and investors decide that they are unwilling to finance the Maduro government, they probably won't stop trading bonds between themselves on the secondary market. Even if other countries impose sanctions on the Maduro government, and forbid their banks from underwriting new Venezuelan bonds, they probably won't ban secondary-market trading. And so if the Maduro government can sneak some primary issuance onto the secondary market -- if it can sell bonds through brokers in ways that look like regular-way secondary trades rather than new issues of bonds -- it can get around moral opprobrium and perhaps even sanctions.
Except that if it's too obvious that that's what Venezuela is doing, it can backfire. Credit Suisse Group AG, for one, has cut off secondary trading in some Venezuelan bonds that seem to be used for primary financing transactions. And now the U.S. is considering sanctions that would ban secondary trading:
The Trump administration is considering banning trading by U.S. banks of new debt issued by Venezuela or its state-owned entities, and possibly some existing debt, The Wall Street Journal reported on Wednesday. ... Investors couldn’t recall a time when the Treasury prevented financial firms from trading debt among themselves in the so-called secondary market, a move the Journal reported the administration is considering.
That move would aim to hurt the government of President Nicolás Maduro and his associates who hold these bonds, but could also harm U.S. and other private investors who own Venezuelan debt, analysts said—a factor officials have considered in the past when deciding which sanctions to implement.
You know, yesterday I speculated that "if Uber had been public through the last few months, I suspect its stock would have bounced around by more than 15 percent," but I really had no reason for saying that. I just said it because of all the scandals and executive departures, which are ridiculous enough. But it's always possible that, if Uber Technologies Inc. had been public through the last few months, it would also have released financial statements at the appropriate quarterly intervals, and those financials would have been great, and investors would have shrugged and said "sure the CEO was pushed out and they're getting sued left and right, but look at these bookings numbers," and the stock would have moved steadily up.
I guess that can happen anyway:
Uber's gross bookings were up 17% in the second quarter, the number of trips taken rose 150% in the past year and its adjusted loss fell, according to numbers provided to Axios by the company. Uber drivers have earned $50 million in tips since the program started in late June.
That's from Dan Primack at Axios, who notes all the scandals, but adds that "the ride-hail giant's core business, however, appears to have kept humming along." "While some investors and outsiders have expressed concern that Uber’s business was in jeopardy because of the internal dysfunction, Wednesday’s results showed a positive trajectory for the business," reports the New York Times. It is still losing money -- $645 million in the second quarter, on $1.75 billion of revenue and $8.7 billion of gross bookings -- but it is losing less money, which is all you can really ask of Uber for the foreseeable future.
Obviously one advantage of staying private is that you can publicize your financials when the financials are good and the other news is bad, while keeping the financials to yourself when they are bad. (I mean, not literally to yourself; presumably you're sending financial information to your investors. But not necessarily, if you are Uber!) "Excited for Uber to go public so the company can start handing out numbers that aren't unilaterally positive for their image," tweeted Mike Isaac, though endless nine-figure losses might not be unilaterally positive. But in any case, the timing of Uber's financial results -- almost two months after quarter-end, one day after reports that big mutual funds had marked down their Uber stakes -- was convenient.
Elsewhere, a "poll of 502 investors (who had at least $50,000 invested in the market, with half of them having investments of more than $250,000)" found that 35 percent thought that Jeffrey Immelt should be the next chief executive officer of Uber, while about 25 percent thought that recently ousted CEO Travis Kalanick should come back. I don't know why it's any business of theirs, though.
There are no more stock splits.
One of my weird quaint semi-beliefs is that the correct price of a share of stock is $100. It just seems like in the very olden days, when markets were low-frequency, people did not distinguish that carefully between common and preferred stock, dividends trumped capital appreciation, and shareholder value was not the law of the land, you would expect stock to trade near its issue price if all went well, and $100 was a nice round issue price. This seems not to be especially historically accurate, but anyway it is now coming true:
Add a nine-year rally, and the result is way more companies trading above $100 -- almost a third of S&P 500 members, as of Tuesday’s close. On average, shares cost $99.95, the most on record.
That's from an article about how companies have stopped doing stock splits, because they have all finally learned how arithmetic works, and so now stocks trade at very high -- almost $100 on average -- prices per share. This allegedly reduces volatility, deters short selling, reduces the market impact of big trades, encourages long-term shareholders, and discourages both high-frequency traders and retail investors. This is all presumably because no one has yet taught the investors how arithmetic works.
Debt and taxes.
Max Abelson went out and asked Wall Street people why they were so worried about budget deficits five years ago, but now they're so enthusiastic about deficit-increasing tax cuts. The answer was more or less a shrug and a "tax cuts, man," but there are scenes like this, at the 21 Club:
Standing in a brown Brioni pinstripe suit with a martini in his hand, Alfred Angelo, an investor based in New Jersey, gestured to the other guests. “We’re those villainous people,” he said. “Nobody put me on this Earth to pay for everybody’s health plan. I know that sounds like Scrooge or somebody. But this is the real world.”
Elsewhere, here's a headline that would have been appropriate pretty much any time in the last five years: "Debt Ceiling ‘Brinksmanship’ Could Test U.S. Top-Notch Credit Rating." And here's an only-in-2017 one: "Trump Shutdown Threat Complicates Congress’s Debt Ceiling Plans."
Blockchain blockchain blockchain.
Here's a story about a guy named Jehan Chu who bought some bitcoins in 2013, "enabling Chu to quit his job, start a venture capital firm investing in blockchain technologies last year -- and now, launch a cryptocurrency fund that’s seeking to raise $100 million." I wish I had bought some bitcoins in 2013. Anyway:
Chu said his clients mostly comprise of family offices and wealth angel investors. Kenetic Capital offers protection against hacking, offers hedge fund strategies and early access to ICOs, he added. The fund charges a traditional 2-and-20 fee structure.
“We have a different level of access to tokens than the average person off the street,” Chu said. “We have relationships and we add value to these teams and these businesses and companies that we’re committed to longer term.”
I am so glad that cryptocurrencies and initial coin offerings are democratizing finance so that the person off the street can invest in promising new technologies and break the monopoly of venture-capital firms, or whatever. "We're looking at the fundamentals based on years of experience," says Chu, about his plan to invest in ICOs.
Elsewhere, "Estonia could offer ‘estcoins’ to e-residents." Oh and the Bank of England's Bank Underground blog looks at cryptocurrency volatility and asks, incredulously but perhaps also jealously: "Who would want to lend or borrow in a currency with such an unstable value?"
Three challenges facing investors ahead of Mifid II. Amsterdam’s Secret Brexit Sauce Is a Friendly Regulator. Paris or Frankfurt? BofA Executives Debate Trading Hub Location. Bespoke tranches are back. Saudi Aramco Triggers Rush for IPOs in the Mideast. Lack of Disclosures Raises Questions About Who Controls Chinese Conglomerate. Russian Conglomerate’s $2.3 Billion Fine May Chill Investors. Fearing Trump effect, US governors seek to reassure foreign investors. FTC allows Amazon, Whole Foods deal to proceed. "I had no knowledge to make decisions, nor the competence," says Samsung Group heir Jay Y. Lee. Billionaire Porn King Reinvents Himself as Japan’s Startup Guru. Martin Shkreli is still buying websites with journalists' names, revealing his own address and phone number in the process. You Can Rent a Dad in Japan. Americans Are Eating More Brains as Offal Edges Into the Mainstream. America Is on the Verge of Ratpocalypse.
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