Who wants to be a Spac millionaire?
Putting a dollar figure on the elusive concept of the so-called promote
Opendoor: Palihapitiya convinces start-up to try a backdoor IPO
Go on CNBC, they said. You’ll get some great publicity, they said.
If there is a support group for Spac founders where they can share tips, surely Bill Ackman and Chamath Palihapitiya could tell their peers that doing a television interview on CNBC doesn’t always garner the attention you want.
Yes, we’re talking about special purpose acquisition companies again. The reason? Spacs are the breakout product on Wall Street during these strange coronavirus times. Or as the rapper Megan Thee Stallion (pictured below) would say, it’s been a hot Spac summer.
Palihapitiya, who was raising money via Spacs before it was fashionable, has just landed his second deal — a $4.8bn merger with SoftBank-backed property start-up Opendoor.
While doing the usual round of interviews, the former Facebook executive had an extremely awkward exchange with Andrew Sorkin on CNBC on Tuesday morning, over how much he was making in fees through the deal. The question of founder fees and Spacs is subject of much confusion at the moment, as a mainstream audience is being lured into a complicated product. Here’s the deal: what Palihapitiya was making isn’t technically a fee.
When sponsors first launch a Spac, they will pay a nominal price for what is known as “founder stock”. If the Spac executives don’t find a target, they won’t get proceeds from the liquidation of the Spac — unlike investors who buy shares on the public market — so it acts as a reward (often, a generous one) for putting money at risk.
On the other hand, if a deal is done, the founders receive shares equivalent to 20 per cent of the Spac’s proceeds for putting the deal together. It can therefore be a huge windfall for relatively little capital.
That brings us to Palihapitiya’s CNBC interview and the “$70m in fees” he confessed to be making from the Opendoor deal. Can founder shares be egregious? Yes. We’ve written extensively about this and about Spac sponsors who say they’re trying to get rid of this feature or at least put investors and sponsors on equal footing.
Are they unusual? Not among Spacs. In fact, it’s pretty much the benefit that keeps Spac sponsors coming back for more. Palihapitiya has done three, and there’s a rumoured fourth one. If DD readers cast their mind back to last summer, Palihapitiya (pictured above) oversaw one of the most high-profile Spac deals to date in a merger with Richard Branson’s Virgin Galactic.
Let’s not forget that former Citigroup dealmaker Michael Klein, who has launched four Spacs, uses his firm M Klein & Co as an adviser on the deals, reaping millions of dollars in fees.
What really happened with Palihapitiya’s interview on CNBC is that he put a dollar figure on the elusive concept of the so-called promote and all of a sudden it crystallised in people’s minds just how lucrative this business of setting up a Spac can be.
Finally, if anyone needs a reminder that the road to Spac stardom is not always paved with gold, take a look at Tuesday’s DD on Nikola.
FT reporters on Tuesday revealed that the US Department of Justice has also been making inquiries into claims levelled against Nikola, the truckmaker start-up that went public via a Spac earlier this year.