Seth Klarman (Trades, Portfolio)’s investment portfolio is full of exciting ideas.
One interesting theme that’s appeared in his portfolio recently is the acquisition of SPACs. For example, at the end of the second quarter, Klarman owned shares in SPAC Silver Run Acquisition Corp. (SRUN, Financial), Conyers Park Acquisition Corp. (CPAA, Financial) and Saban Capital Acquisition Corp. (SCAC, Financial). He also owned warrants in these three firms.
Complex business but easy if you know how
SPACs are unique investment vehicles. Known as special purpose acquisition companies or “blank check companies” these cash shells raise funding with the goal of identifying a merger partner. The sponsors of the transaction usually receive a significant equity share in the business to encourage promotion. Therefore the interests of equity holders tend to be aligned with management.
SPACs often come to market at $10, and the participating investors receive a unit that is comprised of a share of stock and a warrant. The SPAC has 18 to 24 months to identify a transaction, depending on the deal terms. That $10 per share goes into a trust account.
With SPACs there’s a lot that can go wrong. Many have performed dreadfully over the years, thanks to bad investment decisions and misaligned incentives. Those that do succeed produce solid returns for all involved. SPAC prospectuses usually contain more information than typical IPO prospectuses because there’s no business to evaluate at the start. The process of a SPAC is to identify attractive acquisitions and build the company out. Much of a successful SPAC strategy then rests on knowing a) quality underwriters and b) management. Underwriters that have a reputation for bringing quality SPACs to market and management with an excellent reputation should put you on the right track.
What's to like about these companies?
As SPACs Saban and Conyers are particularly interesting. Both are special purpose investment funds.
Saban was founded by media mogul Haim Saban, raising $235 million reportedly for pursuing a deal in the emerging digital media space. Conyers Park completed an acquisition in July, buying Atkins Nutritionals Inc., a leading developer, marketer and seller of branded nutritional foods and snacking products, for around $500 million. Meanwhile, Silver Run Acquisition II is an oil and gas startup led by the former chief executive of Anadarko Petroleum Corp. (APC, Financial). The firm recently agreed to buy oil and gas producer Alta Mesa Holdings LP and Kingfisher Midstream LLC, a pipeline and gas gathering company.
The fact that Klarman owns positions in these stocks indicates to me that he has confidence in the management teams behind the businesses. As these companies are still in their early stages and not particularly undervalued (based on the current figures available), it looks as if he’s focusing on management's ability to create value in the future.
Silver Run’s sponsor is Riverstone Holdings LLC, a private equity energy investor that formed Silver Run earlier this year. The company's goal is to raise funds to buy struggling oil and gas assets, which it appears to have accomplished. Riverstone has a history of sponsoring SPACs that go on to produce huge returns.
Previously, the firm quadrupled its investment in a SPAC led by former EOG Resources CEO Mark Papa. And Silver Run seems to be heading in the same direction. Even though the share price has hardly budged from the $10 offer price, management believes that the expected market value of the combined Altas and Kingfisher could be about $3.8 billion based on its projections of future earnings. The current market value of the SPAC is just over $1 billion.
These aren't the only SPACs on the market, but it looks as if they are Klarman’s favorites, which could indicate that he’s spent time getting to know the managers as well as sponsors and believes they will achieve excellent results for investors.
Disclosure: The author owns no stock mentioned.
