While the surge in blank-check companies worries some investors, Mark Yusko of Morgan Creek Capital Management sees a good entry point for an actively managed exchange-traded fund to sort through the frenzy — and bet on innovation.
The Morgan Creek – Exos SPAC Originated ETF, which began trading this week, will own between 50 and 100 special purpose acquisition companies, Yusko, Morgan Creek’s chief executive officer and chief investment officer, said in a phone interview. About one-third of the SPACS held by the ETF won’t have announced a merger, he said, with the balance having already agreed to a business combination.
“Am I worried that former congressmen are raising SPACs, or celebrities are raising SPACs, or sports figures are raising SPACs? Of course!” said Yusko. “But that’s the whole point of our vehicle. Active management means you are not forced to own everything.”
Getting comfortable with a blank-check company before it has found a merger partner will mean looking for strong sponsors such as Social Capital founder Chamath Palihapitiya, according to the Morgan Creek CIO. While Palihapitiya-backed Virgin Galactic Holdings and Clover Health Investments Corp. are among the top ten holdings listed by Morgan Creek’s new ETF, Yusko said that no pre-merger SPACs appear in that ranking.
Unlike passive index funds that buy everything in the markets they track, Morgan Creek’s ETF aims to “avoid the bombs” in today’s SPAC boom through due diligence and a diversified portfolio, according to Yusko. The burst of SPAC IPOs in 2020 and into this year has alarmed some investors as a pocket of froth in an expensive stock market.
Goldman Sachs Group warned in a recent report that it sees “bubble-like sentiment” in the SPAC market, where 56 IPOs were completed in the first three weeks of January.
In Yusko’s view, 2020 was a turning point for SPACS. Innovative and high-growth companies moved toward the blank-check structure as a cheaper, more flexible way to go public, he said, adding that SPACS also offer more access to capital.
Rule changes around their structures in 2015 allowed SPACs to “be more open about talking about the future,” freeing them to merge with companies without long track records, he said. SPACs now have the opportunity to search for merger partners with visionary ideas and high-growth potential, he explained, describing commercial spaceflight company Virgin Galactic as one such business that is “all about the future.”
Companies that go public through SPAC mergers gain access to capital from individual investors who have been shut out from the traditional initial public offering process, according to Yusko. These companies may not have any profits, but they have a story about their vision to “to build something great,” he said, noting that many SPAC mergers last year were in the space travel, electric vehicle, and self-driving car sectors.
As an investor, “you can get involved with a SPAC early,” before its merger, the Morgan Creek CEO said. “On the combination, you get to choose whether you want to participate.” If not, you can get your money back, he said.
SPACs typically have two years to announce a merger agreement.
Examples of pre-merger SPACs held by the Morgan Creek – Exos SPAC Originated ETF include E.Merge Technology Acquisition Corp., Sports Entertainment Acquisition, and GO Acquisition Corp. E.Merge, which seeks a merger in the software and internet technology industries, is sponsored by principals from Explorer Parent, a regulatory filing shows.
Sports Entertainment, which is backed by PJT Partners, is seeking a deal in sports and entertainment that may be tied to technology and services in the sector, according to the SPAC’s prospectus for its IPO last year. And GO Acquisition — created by Noam Gottesman, the founder of family office TOMS Capital, and M. Gregory O’Hara, who founded Certares Management — says in its IPO prospectus that it wants to merge with a travel-related business.
With valuations being “very high” in the stock market today, Yusko said Morgan Creek’s new ETF prefers equal weighting to capitalization weighting. He believes the fund’s diversified strategy can help protect investors from the risky business of buying high-growth companies that lack a long track record — or may not yet have a product to sell.
“That will be less risky than trying to pick individual winners,” said Yusko.
Morgan Creek, with about $1.5 billion of assets under management according to a spokesperson for the firm, hasn’t shied from risky investments tied to visions of the future.
For example, the asset manager, founded by Yusko in 2004, is an early-stage investor in blockchain technology and invests in digital currency through its Digital Asset Index Fund. The Digital Asset Index fund returned more than 300 percent last year, while a bitcoin-only fund that Morgan Creek launched in November was up 47 percent in its first month, Yusko said.
“It was crazy,” he said of the bitcoin fund’s performance.
While Alex Pickard of Research Affiliates believes bitcoin is in a bubble and that prices of the “magic internet money” are likely manipulated, Yusko sees the digital currency as reasonably having more room to run this year. He told Institutional Investor that by the fall of 2021 bitcoin could be fairly valued at $100,000 per unit based on fundamental factors such as usage and the number of wallets in “the most powerful computing network the world has ever seen.”