WSJ : Reclusive Billionaire’s Bond Bets Backfire

Reclusive Billionaire’s Bond Bets Backfire
Mark Coombs built a nearly $100 billion investment franchise that is now under attack as competitors short its stock and clients like Goldman Sachs exit

British billionaire Mark Coombs made his fortune winning outsized bond wagers in emerging markets like Brazil and Russia. Recently, his luck has soured.

Big trades he made in Argentina, Ecuador and Lebanon all backfired simultaneously in 2020. Ensuing losses hammered shares of his investment firm, Ashmore Group, ASHM -1.98% and cost the reclusive trader around $325 million in personal paper losses, according to data from S&P Capital IQ.

Once an approximately $100 billion powerhouse, Ashmore’s assets under management had fallen to $85.5 billion by September through a combination of withdrawals and investment losses. Clients including the Connecticut state retirement plan have pulled billions of dollars from the company, and competing money managers have placed bets against Ashmore stock. The outflows contrast with the roughly $250 billion investors poured into bond mutual funds this year through September, according to data from the Investment Company Institute.

The losing streak has drawn unwanted attention to Mr. Coombs, who strives to avoid the limelight. “He’s not your typical billionaire jetting around and buying megayachts,” one former colleague said. “He hates having pictures taken of him and is incredibly, fiercely private.”

Mr. Coombs built Ashmore over the past two decades with a signature mix of radical frugality—from his wardrobe to staff salaries—and contrarian trades in risky countries. He has weathered previous rough patches and is responding to the current one in similar fashion—by buying more bonds.

“We’ve done our thing, we’ve bought assets where we saw…cheap prices,” he said on a video call with analysts in September.


Ashmore’s European total return fund, for example, boosted the face amount of Ecuadorian bonds it held to $323 million in June from about $243 million in December 2019, according to Ashmore’s financial filings.

Still, what had been Ashmore’s largest mutual fund, which invests in short-term bonds, has lost 13.75% this year while a comparable index gained 4.15%, according to data from Morningstar Inc. The fund’s assets have shrunk by 69% to $2 billion, forcing it to sell Argentine, Ecuadorian and Lebanese bonds, the Morningstar data and financial reports show.

Meanwhile, funds managed by BlackRock Inc., Eaton Vance Corp. and Wellington Management have bet against Ashmore shares this year, although BlackRock terminated short positions on the stock in recent weeks, according to data from the U.K.’s Financial Conduct Authority. Ashmore shares fell 52% to $3.55 in February and March and have since recovered about half the loss, closing at $5.48 on Friday.

Connecticut’s state treasury decided in May to withdraw a roughly $730 million account with Ashmore, according to regulatory filings. This autumn, Goldman Sachs Group Inc. discontinued Ashmore as an option in its employee 401(k) retirement plan, according to a document reviewed by The Wall Street Journal.

Competitors say Ashmore has grown too large for Mr. Coombs’s high-octane investment style and for his unwillingness to delegate. Mr. Coombs declined to be interviewed. Ashmore’s investments are decided by a six-member investment committee that Mr. Coombs heads, a person close to the company said.

“They’re trying to put a brave face on it, but this is the worst we’ve seen since the financial crisis,” said David McCann, an analyst at London-based brokerage Numis Securities who has a “reduce” rating on Ashmore stock.

Mr. Coombs grew up in London and attended Cambridge University, where he played rugby and studied law. He worked for about 15 years as an emerging-markets investment banker before founding Ashmore in 1999.

The idea was to pioneer investing in emerging markets, where he believed growth would outpace the U.S. and Europe. That has mostly played out—the face value of emerging-market debt outstanding climbed to $26.5 trillion in 2018 from $90 billion in 1984, around when Mr. Coombs first entered finance, according to data from Ashmore.

Former colleagues describe Mr. Coombs as a candid and visionary leader with a high IQ who is propelled by a fierce drive to make money, often going on buying binges in crises when bond prices crashed. Mr. Coombs can be charming with clients and in groups but in private is more taciturn, former colleagues said.

He lives in the same home he owned before becoming a billionaire and limits his clothing to multiple copies of one suit and tie, sometimes wearing old shirts with frayed cuffs to client meetings, former colleagues say. Mr. Coombs competes in triathlons and often eats a single meal per day to stay trim.

Mr. Coombs has kept costs low by packing employees tightly in the firm’s offices, paying below-market salaries and cutting personnel in lean years, analysts and former colleagues said.

The company’s first big break came in 2001 when Mr. Coombs sold all his Argentine bond holdings before the country defaulted. Dodging that bullet, along with large, winning bets in Brazil and Russia, helped Ashmore deliver average annual returns around 18% at the time, one of the former colleagues said.

Mr. Coombs became an emerging-markets evangelist, persuading insurers, pensions and endowments to invest with him, while paying hedge-fund-like fees. When the company listed on the London Stock Exchange in 2006, it was managing $20 billion, and Mr. Coomb’s 47% stake was worth about $1.6 billion, according to data from S&P Capital IQ.

The growth accelerated over the past decade as anemic interest rates stoked demand for high-yielding emerging-markets bonds. Ashmore’s investment dollars jumped to $98 billion last year.

But even in emerging markets, interest rates fell and yield grew harder to find. To deliver, Mr. Coombs went big in three countries that paid high interest rates because they struggled with large deficits and political instability, leading to the unlucky trifecta of Argentina, Ecuador and Lebanon.

Some Wall Street analysts see cause for optimism in Ashmore’s disclosure that outflows slowed to $800 million in the third quarter. Others expect the cash drain to intensify again in January when institutional investors rebalance portfolios.

Mr. Coombs said on the September analyst call that it’s uncertain how many institutional clients will leave. “It could be half of them, it could be 10% of them, he said. “We just don’t know.”

WSJ : Vaccines Are Coming but They Won’t End Covid-19 Anytime Soon

Vaccines Are Coming but They Won’t End Covid-19 Anytime Soon
In the Philippines, inoculating the necessary 60 million to 70 million people could take up to five years, officials say

As Covid-19 vaccine development picks up pace, the Philippines has drawn up an immunization plan. The bottom line, officials say: Getting doses to enough of the population to rein in the virus will take two to five years.

That is the forecast for reaching the target of 60 million to 70 million of the country’s nearly 110 million people, they say, using a patchwork of vaccines from different suppliers. So far the Philippines has struck just one vaccine deal, for 2.6 million shots—enough for 1.3 million people.

Manila’s early blueprint is a reality check for those expecting a swift vaccine-driven end to the pandemic and revival of global trade and travel. While some countries may be able to get shots to large portions of their populations in 2021, some in the developing world may be years away from protecting more than their highest-risk populations.


That means the virus will continue to circulate and claim lives in various corners of the map. Some global health specialists worry about a future in which the coronavirus lurks in such places, becoming endemic—and perhaps evolving in ways that make current vaccines less effective.

“There’s no point having products that do not reach the majority of the world’s population,” said Soumya Swaminathan, chief scientist of the World Health Organization. She cited the hepatitis B vaccine, saying it took 30 years after its introduction in rich countries to reach low- and middle-income countries.

Only one disease—smallpox—has ever been eradicated from the human population using a vaccine.

For countries like the Philippines, the challenge of procuring the vaccine from the limited supply and financing the purchase is just the start: They must then mount large, coordinated operations to get the shots to their far-flung populations. “Our battle with Covid-19 is going to be a long one,” Carlito Galvez Jr. , who leads the country’s vaccine effort, said in late November.

In the U.S., the supply chief for the government-backed Operation Warp Speed vaccine initiative said shots could be available to all by June. In the Philippines, officials say it will take up to two years just to cover the approximately 35% of the population identified as high-risk or high-priority: groups like front-line health-care workers, government staff, senior citizens and people with existing medical conditions. Officials estimate they will be able to inoculate 25 to 35 million people a year.

The Philippines, which is suffering one of the worst outbreaks in Southeast Asia, lags behind in signing advance purchase agreements. Months of talks with 17 companies from seven countries have yielded just one agreement, the 2.6 million-dose deal with AstraZeneca.

The United Nations-backed Covax initiative aims to secure enough vaccines for countries’ highest-risk 20%. Going beyond that benchmark will be especially hard for places like the Philippines. It lacks vaccine-production capacity and has no domestic vaccine candidate in development, and without locking in deals, it may have to wait for deliveries in relatively small batches from multiple suppliers.

Governments have reserved about 9.8 billion doses in deals with drugmakers, with 3.9 billion bound for high-income countries, according to an analysis of procurement data by the Duke Global Health Innovation Center. It cited models showing insufficient supplies to meet global demand until 2023 or 2024.

Philippines vaccine chief Mr. Galvez said last week that more orders are on the horizon. Lawmakers passed a bill waiving a requirement for years of advance-stage trials, and President Rodrigo Duterte this month empowered the country’s Food and Drug Administration to issue emergency-use authorizations that will slash approval time.

Mr. Galvez said he expects the Philippines to secure about 10 million to 20 million doses from each of some half-dozen drugmakers from the U.S., U.K., China, India and Russia, on course for a total of 50 million to 60 million doses by the end of 2021.

Once the shots are in hand, the public health-care system must overcome obstacles that have stymied past vaccination programs. One high hurdle is transportation: The Philippines is an archipelago, with many people living in remote villages.

In the past supplies have often expired before they could be administered, said Dr. Charles Yu, vice chancellor for research at the De La Salle Medical and Health Sciences Institute in Manila. Some Covid-19 vaccines need to be kept at extremely low temperatures that will require custom-built cold-chain storage and transport facilities.

For decades, the Philippines has fared worse on immunization than many of its neighbors. World Health Organization data shows it falling far short of the targets for some of the most ubiquitous vaccines. As of 2019, only 11% of the country’s administrative districts had reached the 80% coverage recommended to achieve herd immunity for diphtheria, and just 2% had reached the 95% coverage recommended for measles.

According to the Philippines’ Department of Health, 66% of infants had received all basic recommended vaccines in 2018, down from about 86% in 2010. Experts attribute this in part to wavering public confidence following a vaccine-program debacle in 2017. The government stopped administering Sanofi Pasteur’s dengue-fever vaccine, Dengvaxia, to schoolchildren after the company said it could put some recipients at higher risk.

“After Dengvaxia, measles went up, and polio, which was virtually eradicated, returned with a vengeance,” said Dr. Yu of the De La Salle Medical and Health Sciences Institute. “Confidence is not very high, but fear of the vaccine may be overcome by fear of this virus and what it’s done to people’s lives.”

(ZH) WHAT WALL STREET THINKS ARE THE BIGGEST RISKS FOR 2021

WHAT WALL STREET THINKS ARE THE BIGGEST RISKS FOR 2021


While the most interesting part of the monthly Bank of America Fund Manager Survey is the question what Wall Street's professionals think is the biggest "tail risk", there is a certain sense of predetermination to a survey that everyone on Wall Street reads, is well aware of, and is tempted to perpetuate. In any case, as the latest FMS revealed, for the past 8 months, BofA found that Covid was viewed as the biggest tail risk.
So in an attempt to provide some granularity (and to remind Wall Street that it conducts a survey of its own) today Deutsche Bank's Jim Reid writes that a record 984 respondents participated in the bank's latest monthly market survey. And while the German bank will released full results on Monday, it offered a sneak preview of what respondents saw as the biggest market risks for 2021 from the list that we provided (naturally, same as with the BofA FMS, this is all everyone cares about to make sure they are not oblivious to some glaringly obvious black swan about to emerge).
Interestingly, all the vaccine-related concerns filled out the top 3 which according to Jim Reid suggests that although consensus is for a good 2021, a successful vaccine roll out could still bring upside surprise relative to expectations. As for Reid's own top pick, he said that it was a tech bubble bursting, which made number four on the list followed by central banks pulling back too early. An early inflation surprise rounded out the top 5 risks.

FT : Rome’s Airbnb landlords suffer after tourism collapse

Rome’s Airbnb landlords suffer after tourism collapse
Estate agents estimate prices are down by about a third as some owners are forced into fire sales

When Tommaso Pediconi turned his family house in the old Jewish Ghetto area of Rome, one of the most ancient and beautiful neighbourhoods in the city, into an Airbnb rental more than 10 years ago he was one of the few in the area to run such a business.

Given the large number of tourists who poured into the city and the boom in the Airbnb model, it soon became his only source of income. Business was going so well that he decided to rent two other flats in central Rome and put them on the platform.

Today, Mr Pediconi, 34, has no clients left. “I had reservations until October but they were all cancelled, I had to pay back a lot of money,” he said.

The collapse in tourists visiting Rome during the pandemic has burst the city’s Airbnb short-term rental bubble, forcing some indebted landlords into fire sales of their flats to avoid defaulting on their mortgages.

In recent years, vast numbers of flats in central Rome close to monuments such as the Colosseum and Trevi fountain have been repurposed for short-term letting by amateur landlords seeking to profit from the Eternal City’s estimated 15m visitors a year.

Now, estate agents say that the collapse in visitors has left landlords overstretched after they speculated on Rome’s tourism boom at a time when the wider Italian economy has been stagnant. Many are rushing to convert their properties into long-term rentals or sell them to pay off debts, and estate agents say sales prices are down by about a third.

“There are forced sellers now, and that is a sad and inevitable consequence of the collapse in tourism,” said Bill Thomson, chairman of Italy for Knight Frank. 

“Many people in places like Rome used their profits to invest in even more properties, some have bought five or even 10 of these. There was always the risk that too many people would jump on the Airbnb bandwagon at the same time.”

Rome was the sixth most popular city in the world for total nights booked on Airbnb in 2018, according to the company, behind only London and Paris in Europe.

The company claimed that it contributed nearly €1bn to the Roman economy in 2018 alone through bookings and subsequent spending by its users — the largest of any city in Italy. This demand provided a rare bright spot in a local economy that has fallen far behind Italy’s financial capital Milan over the past decade.

Mr Pediconi said he used to rent out his former family home for €120 a night. Now it is on offer for between €40 and €50 per night. Because of the pandemic, all bookings were cancelled and reimbursed, and he had to cancel the rental contract for the two other houses he was managing. 

“I never thought this could happen. I’m now waiting and hoping for a swift recovery but I am sure many who started doing this as a job will perish,” he said.

“At the moment I’m trying to rent the house to residents, but I haven’t been able to do it yet, although I have lowered the prices by 75 per cent.” 

Donato Cristiano, an estate agent in Rome, said two-room flats in the city’s historic centre that rented for €1,300 a month before the Covid-19 pandemic were now on offer at €900, including utilities.

“We are talking about flats that a few years ago you could easily rent for €2,000 a month as a holiday rental,” he said.

The boom in Airbnb rentals in Rome in recent years has resulted in the online lettings platform falling under greater scrutiny from the heavily indebted local government, which in June announced a new “tourism tax” levied on guests staying in short-term lets in Italy’s capital.

Rome’s mayor, Virginia Raggi, said the nightly €3.50 charge for Airbnb guests that is paid directly to the municipality of Rome, would help “re-establish fair competition between [hotel] operators, fight the black economy and track tourist flows”.

Estate agents say that as a result of the collapse in short-term rentals many landlords have tried to repurpose their properties into longer-term rentals instead of selling, but supply currently vastly outstrips demand.

“At the moment, the problem is that there are too many properties for rent and not enough people, due to the lack of tourism and prolonged remote work,” said Carlotta Marchionne, an estate agent working in the centre of Rome.

“The phone is no longer ringing. Our office has never been so quiet.” 

FT : Wealth taxes: rich pickings

Wealth taxes: rich pickings
Tapping the rich might be considered less of a vote loser than a return to austerity

Why object to a tax you do not expect to pay? Unsurprisingly, the public mostly back wealth taxes when polled. More strikingly, heavyweight experts supported a one-off levy in a newly-published UK study. Out of fashion for decades, wealth taxes are touted by some academics and pundits as a workable fix for pandemic-hit public finances.

In 1990, 12 industrialised countries — all in Europe — levied wealth taxes. Just three now do so. The last serious proposal for a UK wealth tax goes back to the 1970s. It was scuppered by its unworkability and fears of capital flight.

Some problems have faded. The tax would be easier to enforce, thanks to better data. A transparency drive to prise open tax havens has made it harder for the rich to hide assets overseas.



Taxpayers could relocate though. Argentines keen to avoid new wealth taxes — a one-off tax of at least 2 per cent on those with more than $2.45m of assets — are fleeing to neighbouring Uruguay. A tax could be designed to catch people who had recently moved. But it might look draconian and reduce the country’s appeal to international business people, particularly if it was suspected not to be a one-off.

Intense lobbying for exemptions on assets such as businesses and farmland, to avoid economic disruption, could follow. A perception that loopholes in Sweden’s wealth tax burdened the middle classes disproportionately helped prompt its repeal in 2007. 

A broadly-based tax would hit many people — with capital in family homes and pension pots — who would not consider themselves rich. A 5 per cent on net assets above £500,000, raising more than £260bn for the UK exchequer, would hit 16 per cent of adults. The political backlash would be intense. Raising the limit would reduce opposition — wealth taxes with thresholds as high as $50m were mooted in the US Democratic presidential primaries. But if only applied to the richest 1 per cent, with assets over £2m, the tax take would drop by two-thirds. 


The UK’s Conservative government is unlikely to tax wealth much more heavily than it does currently. Chancellor Rishi Sunak has made his opposition clear. And big tax rises to pay down debt may be unnecessary, if the UK keeps the confidence of financial markets. But wealth taxes could gain momentum if economic woes deepen. Tapping the rich might then be less of a vote loser than deep austerity or ripping up manifesto tax pledges. 

FT : Spacs are oven-ready deals you should leave on the shelf

Spacs are oven-ready deals you should leave on the shelf
Complex structures and high fees mean many of these speculative vehicles will disappoint

Imagine you’re an investor putting money into an initial public offering. How much of what you’re contributing might you expect to be absorbed in fees and expenses?

In the US, it’s about 5-7 per cent of the proceeds. Quite a bite out of your investment. 

But that’s just one way to buy into a newly quoted venture. How about putting your cash into a vehicle without knowing precisely what it will do with it? Known as special purpose acquisition companies, or Spacs, these “blank cheque” ventures are all the rage in the US. As of late November, there had been 182 Spac IPOs raising almost $70bn. That compares with 59 last year and just 46 in 2018.

Spacs, when they’ve been funded, have two years to find something to spend their money on. If they cannot, they can be liquidated. In the meantime, investors’ cash sits in an escrow fund. 

Fans of the structure — of which there are plenty right now — claim they serve a useful purpose, teasing out decent companies that might not otherwise list. Selling to a Spac is less intrusive than the IPO process, with fewer disclosure requirements. At first glance, Spacs also look quite a bargain in cost terms. Fees are on the low side of the IPO range, at 5.5 per cent, and are funded by the Spac’s promoters (which could be some Wall Street bigshot, or well-known business tycoon) until a deal is found.

The snag with Spacs — as with so much of modern finance — comes when a merger deal is finally struck. It’s only then that you start to realise how much these ventures really cost.

A recent paper by two US academics, Michael Klausner and Michael Ohlrogge, examines all of the costs embedded in the structure. Some are more obvious, such as the so-called “promote”, which entitles the sponsor to free equity equivalent to 25 per cent of the IPO cash contributed, or 20 per cent of the enlarged equity. This vests only when a deal is done.

Others are more subtle, such as the right that IPO investors have to redeem their stock at par plus interest if they do not like the eventual deal. Many Spac investors routinely do this — largely because it’s quite a sound strategy. You get your money back while hanging on to the warrants and free rights to extra shares you received at the IPO as compensation for your involvement. 

In the 47 Spacs the authors studied, they estimated that, on average, 58 per cent of shares were cashed in, with redeemers making just-above-market annual returns of 11.6 per cent. 

The flip side of all this generosity, of course, is that it’s paid for by those that stick around. Redemptions drain the cash out of the Spac, while the sponsor’s stock swamps their claim on that which remains. Meanwhile, the warrants and free share rights retained by redeemers add further to the dilution. Messrs Klausner and Ohlrogge have calculated the total cost of all this friction for the median Spac. They estimate that for every dollar of cash delivered to the target when a Spac merges, a staggering 50 cents has been gobbled up in this way.

All of which means that sponsors must do amazing deals to earn back all that dilution. Most do not. Average returns for Spacs in the 12 months post-merger are minus 34.9 per cent, Mr Klausner and Mr Ohlrogge report. That’s not only feeble; it’s disastrously worse than for those that redeemed. 

None of this is surprising when you consider the misalignment of interest baked into the structure. Because they get free equity, sponsors can benefit even when other investors are under water. “The sponsor has an incentive to enter into a losing deal for Spac investors if its alternative is to liquidate,” Messrs Klausner and Ohlrogge write.

A few billionaire promoters, such as hedge fund boss Bill Ackman, have pushed fairer deals but they are a small minority.

Spacs may seem novel. But there is very little new under the sun in finance. They can trace their ancestry back to the giant investment trusts of the 1920s described so memorably by John Kenneth Galbraith in his book on the Wall Street crash of 1929. Or even that artefact of the South Sea Bubble, the company “for an undertaking which shall in due time be revealed”.

The 1920s investment trusts similarly depended on the alchemical skills of their sponsors. There was a great willingness to “pay for the genius of the professional financier”, Galbraith wrote.

Such trust rarely pays off in the long run. “Large amounts of money under management and high fees spell eventual performance disappointment,” warned the late investor Barton Biggs. Those tempted by Spacs should remember that they are structured to underperform.

FT : France urges changes to supervision of EU asset managers

France urges changes to supervision of EU asset managers
Brexit and the cross-border nature of fund management have created complexities, says AMF

France’s top financial regulator has called for a shake-up of how Europe’s €17.6tn asset management sector is supervised, a move that could have big implications for fund groups with EU entities after Brexit.

Robert Ophèle, chairman of Autorité des Marchés Financiers, said the expansion of the fund industry in recent years had created challenges for regulators that required a new approach.

Asset management in Europe is an increasingly cross-border business. Groups frequently set up funds in back-office hubs such as Luxembourg, manage them from financial centres such as London or Paris, and sell them to investors elsewhere in the EU.

But they are supervised by the authority in their home country, creating a fragmented regulatory environment.

“We want to have an appropriate supervision framework for the asset management industry,” Mr Ophèle told the Financial Times. “The cross-border nature of asset management is increasing, and it’s clear that we will probably see further concentration and cross-border marketing of funds in future.”

Brexit has added further complexity because of the widespread practice of delegation — where an EU fund outsources portfolio management to an entity outside the bloc — involving the UK.

UK groups including M&G and Columbia Threadneedle have shifted billions of euros to Luxembourg or Irish fund ranges because of Brexit. But more than £2tn of EU fund assets are still managed from the UK on a delegated basis, according to trade body the Investment Association.

Mr Ophèle’s comments underscore the profound challenges awaiting the UK finance industry. Britain has lost its ability to influence development of European financial regulations at a time when France is pressing for a tightening of the supervisory framework for asset managers across the bloc.

While a French-led EU push three years ago to limit delegation was unsuccessful, the European Commission recently floated the idea of tougher rules on delegation rules as part of a review of EU asset management regulations.

Mr Ophèle said the AMF was not against delegation, adding that concerns about the framework were “only a small part of the story”. He called for the EU to clarify the remits of financial regulators across the region to minimise loopholes and overlapping responsibilities.

“The robustness of asset management could be challenged in difficult times,” he warned. “We have to be able to know what is in our remit as a supervisor, especially in times of crisis.”

Mr Ophèle suggested giving “lead supervisor” status to the regulator in the EU country where a fund management company is based, mirroring the model that exists in banking and insurance.

“It would be useful for the supervisor of the management company, which has a full understanding of the activities and the risks of the asset management group, to be lead supervisor and be in close co-operation with all of the other supervisors,” he said.

Julie Patterson, asset management regulatory change leader at KPMG, said that if the AMF’s proposal was adopted it could lead to greater scrutiny of fund groups’ outposts in Luxembourg and Ireland. “It reinforces the emphasis on management companies needing to have a minimum amount of substance,” she said.

The Irish regulator recently upbraided asset managers for “significant shortcomings” in the governance of their local entities, pointing to insufficient staffing levels and poor due diligence of delegates.

Barrons : When It Comes to SPACs, Don’t Overestimate the Value of Star Power

When It Comes to SPACs, Don’t Overestimate the Value of Star Power

Baseball executive Billy Beane of Moneyball fame, former astronaut Scott Kelly, 15-time NBA All-Star Shaquille O’Neal, and former Speaker of the House Paul Ryan have one thing in common: They are all involved in SPACs, special purpose acquisition companies, now the rage on Wall Street.

A wave of boldface names getting into the game suggests that the market for SPACs is in the throes of a full-throttled mania. But some non-traditional characters joining the industry is not necessarily a bad thing.

More than 200 SPACs have gone public in 2020, raising some $75 billion, according to SPACInsider. That’s more than in the previous decade. Fueling the boom are rock-bottom interest rates and a flood of liquidity, a hunger for new growth companies, and some slick marketing.

With more SPACs on the market, there is more competition for investor dollars and for attractive merger targets. “SPAC offs,” where companies meet with several SPACs in a row and then choose which to merge with, have become commonplace. In some cases, having a celebrity on your side might just clinch a deal.

For investors, there are more opportunities, and it’s important not to be dazzled by celebrity star power. Investors are better off focusing on SPACs from sponsors with strong track records from previous ventures, major institutional backing, and compensation aligned with investors. Management and board members should have a background that suits the SPAC’s target industry. A current or retired CEO with operational experience is most valuable of all.

Of course, famous names can offer benefits as well. Take RedBall Acquisition (ticker: RBAC), which raised $575 million in an August initial public offering and counts Beane and Nobel Prize–winning economist Richard Thaler as directors. Its sponsor is RedBird Capital Partners, a sports-focused private-equity firm.

The SPAC was reported this fall to be in talks to merge with Fenway Sports Group, which owns the Boston Red Sox and the reigning English soccer champions, Liverpool F.C., in a deal that could value the company around $8 billion. An eventual merger could end up being a home run, and perhaps it takes someone like Beane to open the doors to make it happen.

Indeed, when there is competition for deals, relationships and fit matter, a number of company founders about to merge with SPACs tell Barron’s.

SPACs raise money in an IPO, which then sits in a trust until a target business is identified and a merger agreed upon. Once the companies combine, the operating company effectively goes public and the SPAC’s shares convert to shares in the new company.

No Ordinary SPACs
Here are some recent special purpose acquisition companies that have emphasized having seasoned industry managers on board.


It’s up to the SPAC’s sponsors to do the work of identifying a target, negotiating a term sheet, and dealing with underwriters, lawyers, and auditors to close the transaction. They get a portion of the deal as compensation for their efforts, typically as much as 20% of the SPAC’s shares.

In a study published in late September, consulting firm McKinsey found that from 2015-19, SPACs led by individuals with C-suite experience outperformed SPACs without such managers by about 40% in the year after their mergers.

“Operator-led SPACs behave differently from other SPACs in two ways: They specialize more effectively, and they take greater responsibility for the combination’s success,” the study’s authors wrote. The SPACs McKinsey studied tended to have a narrower industry focus based on their leaders’ areas of expertise.

One recent successful partnership between a financial backer and a seasoned manager was at industrials-focused Goldman Sachs Acquisition Holdings, which merged with Vertiv Holdings (VRT) early this year. Former longtime Honeywell International CEO David Cote served as CEO and chairman of the SPAC, and took over as Vertiv’s executive chairman once the transaction closed. Its shares have about doubled from the SPAC’s premerger price.

A SPAC that has made recruiting a team of operators a priority is Omnichannel Acquisition (OCA), which raised $200 million last month to focus on consumer-and retail technology targets. Its board and advisors include a dozen executives and entrepreneurs in related areas. Dragoneer Growth Opportunities (DGNR) and Dragoneer Growth Opportunities II (DGNS), Altimeter Growth (AGC), and Ribbit LEAP (LEAP) are other premerger SPACs that have filled their boards with founders and operators.

During a SPAC’s search and negotiation process, an industry insider can be a major competitive advantage.

The $750 million SPAC Ajax I (AJAX), led by hedge-fund managers Dan Och and Glenn Fuhrman, is focused on software and internet-related targets, particularly in consumer and fintech. Its board is stacked with entrepreneurs, including Instagram co-founder Kevin Systrom, 23andMe co-founder and CEO Anne Wojcicki, Square (SQ) co-founder Jim McKelvey, and Chipotle Mexican Grill (CMG) founder Steve Ells.

“They’re very helpful to us in thinking about which target companies to approach,” Och tells Barron’s. “They bring a different understanding of the companies and sectors. And when we decide collectively to make an approach, they often have a pre-existing relationship.”

It isn’t just about the ability to find a target and complete the due diligence. Founders and shareholders of a company looking to do a SPAC deal decide with whom they will merge. Like-minded SPAC backers attract like-minded founders and CEOs.

Northern Genesis Acquisition (NGA) recently announced a deal with Quebec-based Lion Electric, a maker of battery-powered buses and trucks. After speaking with many SPACs, it was Northern Genesis’ team that sealed the deal for Lion founder and CEO Marc Bédard. The SPAC’s directors Ian Robertson and Christopher Jarratt—co-founders and former executives at renewables-focused Algonquin Power & Utilities (AQN)—will both join Lion’s board once the deal closes early next year.

“It isn’t just about price or speed to market, the people you are going to partner with are key,” Bédard says. “When Ian called, I already knew who he was because of what he had done. I was speaking with another entrepreneur who had already taken his company public, and grew it to a market value of over $10 billion.”

So, what do entrepreneurs better known for other fields bring to a SPAC? Shaquille O’Neal, as a strategic advisor to technology, media, and telecom-focused Forest Road Acquisition (FRX), is expected to lend his expertise in sports and entertainment. Ryan, the former House speaker, is board chairman at Executive Network Partnering (ENPC). “Ryan will leverage his deep network of relationships at the most senior levels of business in helping identify an initial partner candidate but also in helping drive transaction value post closing,” reads the SPAC’s prospectus.

While one may be skeptical about such newcomers, not every SPAC with a seasoned manager works out either. Riverstone Holdings teamed up with former Anadarko Petroleum CEO Jim Hackett on Alta Mesa Resources, which filed for bankruptcy last year.

Astronauts, NBA stars, and other celebrities may get the most attention, but investors’ best bets remain with SPAC teams that feature experienced managers and investors in the industry they target.

Barrons : NIO, Xpeng, and Li Auto Are Not the Next Tesla. Why It’s Time to Unplu

NIO, Xpeng, and Li Auto Are Not the Next Tesla. Why It’s Time to Unplug From Chinese EV Stocks

Electric vehicles are the future of the auto industry, so it’s no surprise they have captured Wall Street’s imagination, especially in this pandemic-plagued year when so many other businesses are starved for growth.

Consider the rise in the American depositary receipts of three Chinese EV companies—Nio, XPeng, and Li Auto. XPeng’s ADRs (ticker: XPEV) have tripled, to a recent $44.52, since the company’s Aug. 27 initial public offering, while Li Auto (LI) is up 180%, to $32, from its July 30 IPO. But NIO (NIO), which came public in September 2018, puts both to shame: Its ADRs are up nearly 600%, to $44, spurred by Chinese state subsidies, falling battery costs, and a rebound in car sales in China.

It can be hard to part with a stock after such enormous gains, but taking profits in the Chinese EV trio looks like the prudent thing to do. First, all three are richly valued: XPeng trades for more than 15 times 2021 estimated sales. NIO fetches 11 times sales, and Li, about 10 times sales. None will have substantial profits for at least a couple more years.

The Chinese EV companies also face several industry, government, and market risks. Chinese state subsidies are falling and could expire, while EV competition is growing in China. Moreover, a recent bill passed by Congress to delist Chinese companies whose accounting practices don’t measure up to U.S. standards could put an unwelcome focus on these companies’ bookkeeping. (See “Delisting Chinese Companies Could Be Bad for Investors. But It’s the Right Thing to Do.”.)

Then there’s the promise of imminent Covid vaccines, which could hasten the market’s rotation away from high-flying growth stocks and into the beaten-down shares of companies hurt most by the virus’ spread and the global economy’s struggles. That shift began last month, and many market strategists expect it to gather momentum in 2021.

A growing awareness of the risks has clipped the shares of NIO, XPeng, and Li by an average of 30% since late November. But more losses could be in store.


Motivated by environmental concerns, China has said it wants battery-operated vehicles to total 50% of all vehicles sold in the country by 2035. That’s up from about 5% this year. To accelerate EV adoption, Beijing has ladled out subsidies that total up to 30% of a vehicle’s cost. The government offers subsidies to consumers and Chinese auto manufacturers. It also provides infrastructure support and zero-emission-regulator credit programs, similar to those that benefit Tesla (TSLA), the U.S. EV leader.

While all three U.S.-traded Chinese EV companies seek to capitalize on the country’s push toward electrification, each has its own strategy. Shanghai-based NIO, the largest in vehicle sales, will sell an EV without a battery, which it then leases to the car buyer for about $140 a month. That includes six monthly battery swaps at NIO-owned service stations, good for about 1,500 miles of driving. Separating the car and battery purchases makes the cars cheaper, and thus more attractive to buyers.

NIO delivered 36,721 vehicles year-to-date, up 111% compared with 2019. The company has sold approximately 69,000 vehicles since its founding in 2014. Like XPeng and Li, NIO sells only in China, although NIO and XPeng plans to sell cars abroad in the future. The company has three models; its best-selling ES6 premium sport-utility vehicle retails for just under $60,000, before subsidies. NIO rang up sales of about $1.8 billion in the past 12 months; analysts see revenue reaching $4.6 billion in 2021.

Li Auto, founded in 2015, sells cars with a gasoline generator that can recharge the battery when a plug isn’t available. The Li ONE SUV, the company’s only model, sells for 328,000 yuan or $50,000 before subsidies. Beijing-based Li began shipping late last year; it has delivered 26,498 so far in 2020. The company generated about $775 million in sales in the past year. Analysts project sales of $2.7 billion in 2021.

XPeng, headquartered in Guangzhou, sells a sedan and an SUV, and has invested heavily in autonomous driving technology. The company hosted an event in China in October where it compared its self-driving solutions to those of Tesla, a pioneer in the field.

XPeng, founded in 2014, has delivered 21,341 vehicles year-to-date, up 87% from last year. The company’s G3 SUV sells for about $25,000 before subsidies, and its P7 luxury sedan retails for about $50,000. Revenue is expected to reach $2.1 billion next year, up 300% from about $530 million in the past 12 months.

As these numbers imply, the gains in Chinese EV stocks aren’t entirely undeserved. In upgrading NIO from Sell to Neutral earlier this month, Goldman Sachs analyst Fei Fang explained what he had gotten wrong about the Chinese EV landscape. Penetration has been much faster than expected: Fang now expects EVs to account for 20% of new car sales in China in 2025, up from 5% in 2020, hitting the higher mark four years earlier than he had anticipated.

NIO is expected to turn profitable in 2022 and earn 79 cents a share in 2023. XPeng is likely to lose money in 2022; Li could make 20 cents a share.

Visions of higher profits—and comparisons with Tesla, which fetches 117 times 2022 estimated earnings—have helped stoke investor enthusiasm for Chinese EV stocks, which now sport market capitalizations approaching those of traditional auto makers. NIO is valued at about $58 billion; XPeng, at $35 billion; and Li at $28 billion.

General Motors (GM) has a market cap of $61 billion, and Ford Motor’s (F) is $36 billion. GM, Ford, and Fiat Chrysler Automobiles (FCAU) together sell more than 17 million vehicles a year. XPeng, NIO, and Li might crack 100,000 in 2020.

NIO declined to comment on the stock’s ascent or its valuation, although Rui Chen, director of investor relations, says, “We are encouraged by our momentum and [the] positive progress of our fundamentals.”

XPeng declined to make executives available for this story, and Li didn’t respond to Barron’s emails and calls.

High valuations aren’t a reason to sell a stock—just ask anyone who bet against Tesla, whose shares have soared about 650% this year. But China’s EV upstarts face potential risks that don’t appear to be factored into their stock prices. Subsidies, for instance, were due to be cut in 2020, until the pandemic hit. With vehicle sales plummeting 79% in February from a year earlier, the government reversed course and extended EV subsidies, helping sales revive.

Subsidy cuts aren’t off the table, however. Direct-purchase subsidies are expected to fall 10%, 20%, and 30%, respectively, over each of the next three years from 2019 levels, according to XPeng’s regulatory filings.

Competition also is heating up. NIO, XPeng, and Li are selling everything they can build and trying to ramp up production, but their inability to do so quickly enough could leave an opening for other auto makers. BYD (1211.Hong Kong), already a large player in China, is planning new EVs for the Chinese market in 2021, as are GM, Volkswagen (VOW3.Germany), and BMW (BMW.Germany), among others.

China is also a critical market for Tesla, which sold about 22,000 Model 3 sedans there in November, and just received approval to sell its Chinese-built Model Y crossover. The company’s China operations are worth around $100 billion, according to Wedbush analyst Dan Ives. That’s enough to make Tesla China the third-most-valuable auto maker in the world. Based on its total market value of $578 billion, Tesla is the world’s most richly valued car company.

In downgrading XPeng stock on Dec. 3 from Buy to the equivalent of Hold, UBS analyst Paul Gong cited the possibility of “intensified headwinds faced by [the] XPeng P7 in light of Tesla Model Y launches and BYD Han’s competitive pricing in the larger-size segment.”

Gong puts XPeng’s “fundamental” value at $40 a share, based on a discounted cash-flow analysis. But his stock-price target, $59, is benchmarked to Tesla’s current 12-month forward market value to sales. The gap between his price target and fundamental-value estimate is another thing that might give investors pause. Gong didn’t respond to Barron’s calls or emails.

Accounting issues, too, have surfaced at two Chinese EV makers. In filings this year with the Securities and Exchange Commission, both XPeng and Li identified what they called material weaknesses in accounting controls. Both cited insufficient staff with an understanding of accounting principles followed by U.S. corporations. In a prospectus for a secondary stock offering filed on Dec. 7, XPeng said it was implementing changes to address the problem.

The possible risks are twofold: Accounting errors can lead to subsequent restatement of a company’s financial results, something investors generally frown upon. But the issue could be more fraught now that the House of Representatives has unanimously passed a bill, approved earlier by the Senate, that could lead to the delisting of Chinese companies from U.S. stock exchanges if their accounting isn’t compliant with U.S. audit oversight rules within three years. NIO has said it believes it is in compliance with the new law.

The aforementioned risks don’t pose an immediate threat to Chinese EV stocks, but current valuations leave little margin for error. All three companies have sold stock in secondary offerings this year, taking advantage of the strong market to raise more cash. Li sold more shares on Dec. 4, just 127 days after its IPO, for $29 apiece, and XPeng sold stock on Dec. 9 for $45 a share. NIO sold stock at $17 in August, and filed Thursday to sell more.

Holders of NIO, XPeng, and Li might want to follow the companies’ lead. China’s EV ambitions are grand, and offer enormous potential for profits. But chances are investors will get a cheaper entry point in shares of these companies somewhere down the road.

>>> Barron’s Weekend Summary

Barron’s Weekend Summary: Electric vehicles may be the wave of the future, but investors in Chinese makers with high valuations should take their profits

* Cover story: Electric vehicles are the future of the auto industry and their stocks have been a hit on Wall Street, especially during the pandemic, when other businesses experienced little or no growth; Shares of three Chinese EV companies—NIO, LI, and XPEV—have made enormous gains, but they are now richly valued, and they face industry, government, and market risks that make taking profits now the prudent approach for investors.

* Tech Trader: The recent DASH and ABNB initial public offerings underscore the fact that growth is the new value, that IPOs remain a wealth transfer from issuers to institutions, and that there will be more such offerings to come even after this year’s wave—there are over 500 unicorns in the private market, according to CB Insights.

* Trader: First-day IPO pops are higher than they have been in decades, according to Bespoke Investment Group, and a basket of recent IPOs has doubled over the past 12 months—though that’s lower than the 350 percent rise such as basket saw during the dot-com bubble.

* Profile: Matt Quinlan, manager of the $2.8B Franklin Equity Income fund, looks for companies, many of them blue chips, that offer payouts and are “investing in the business to ensure the ongoing success of the business,” and prefers companies that are targeting growing markets, such as e-commerce, medical devices, and technology (top 10 holdings: JPM, PG, JNJ, DUK, NEE, MS, MDT, MSFT, TGT, VZ).

* Interview: 1) BLK president Rob Kapito—who oversees the firm’s biggest entities, including the $2.3T iShares exchange-traded-fund franchise, its $2.1T in actively managed assets, and the Aladdin risk-management unit—discusses the outlook for equities, the retirement crisis, and what’s in his personal portfolio; 2) Maria Konnikova, poker champion and author of “The Big Bluff,” talks about why it’s important to understand what factors are driving investment decisions and to develop strategies for making the best choices with the information available, even if it is confusing.

* Features: 1) It’s unclear how the SEC may implement the Holding Foreign Companies Accountable Act, which paves the way for delisting Chinese companies that don’t agree to foreign oversight of audit documentation, but while most larger investors should be able to maneuver through the various ways delisting could play out, smaller retail investors who own individual shares could have a harder time; 2) Positive on MCY: Shares of the California auto insurer—which is No, 6 in the state, with an eight percent share of the private-passenger market—run by 99-year-old chief executive George Joseph, look appealing at around $46, and the company’s lofty dividend of $2.53 a share results in a 5.4 percent yield; 3) Boldface names such as Shaquille O’Neal and baseball executive Billy Beane are increasingly getting into the SPAC market, a sign it may be in the midst of a full-throttled mania—more than 200 SPACs have gone public in 2020, raising some $75B, according to SPACInsider, more than in the previous decade; 4) Personal investing feature says “It’s impossible to know what the future holds, but there are strategies for avoiding the biggest behavioral mistakes. In fact, by focusing more on the process for making decisions and less on whether a decision is good or bad, you have a better chance for success—and a lower probability of driving yourself crazy.”

* Emerging Markets: In Saudi Arabia, a rash of new public offerings has yielded outsize returns, and there are more newcomers in the pipeline, mostly fast-growing innovators filling the consumer-facing space in a middle-income country of 34M, a market long dominated by banks and raw-materials producers.

* Commodities: “Natural gas has outperformed oil in 2020, and prices are poised to do something they haven’t done since 2016 on the heels of US production declines and rising exports: finish higher for the year.”

* Streetwise: The problem with stocks with relatively high dividend yields, says CS chief equity strategist Jonathan Golub, is that on average over the past decade, they have exhibited falling returns on equity, deteriorating sales growth, and elevated leverage and volatility—his list of companies with decent dividend yields and better fundamentals includes AVGO, BMY, JNJ, MMM, PEP, HAS, and PM.