A portfolio manager at $38 billion Baron Funds shares his checklist for investing in the most promising SPACs — and names 3 of the booming 'blank-check companies' he finds attractive now
- David Goldsmith of Baron Funds explains how he and his firm are investing in special purpose acquisition companies.
- Goldsmith says the increasing prevalence of SPACs makes sense as market uncertainty grows and new but later-stage companies try to access the public market.
- Founded by billionaire investor Ron Baron, Goldsmith's company manages $38 billion in assets.
- Visit Business Insider's homepage for more stories.
A lot of blank checks are getting cashed on Wall Street, but it's not just a doomed fad.
David Goldsmith, an assistant portfolio manager at Baron Capital, says the rush of special purpose acquisition companies happened for clear reasons and fulfills some specific needs.
For example, he notes that the boom in private equity and venture capital funding has created a glut of companies that are ready for a public debut. At the same time, the uncertain economic and political environment means investors in those companies are less excited about IPOs and all of the filings and work that come with them.
The SPAC trend started drawing more attention in 2019. And as the pandemic turned 2020 into a historically uncertain year, their appeal became more obvious to investors.
"SPACs… can provide greater confidence than a traditional IPO that a deal can be made at a given valuation without being subject to the vagaries of a volatile market," Goldsmith wrote.
That drew the attention of big banks and more famous investors, which kicked off a virtuous cycle.
"Prominent and respected sponsors with highly reputable management teams and investment firms are raising large pools of money, acquiring high-quality businesses, and offering investors palatable terms."
He adds that the companies have raised more money in the last two years than they did in the 16 previous years. So far there's no sign the trend will slow down.
Goldsmith's firm managed more than $38 billion as of the end of the third quarter, and it's known for a long-term, meticulous investment process. He says Baron has found SPACs appealing for years, but follows some strict rules before investing in them.
"We do not invest until a target company is in hand, since we are looking for a business that fits our investment criteria, not a blind pool," he said.
Once that target is named, the firm will put the SPAC on its restricted list and learn about the leaders of the SPAC as well as its acquisition target, its management, and the industry it works in.
"This access gives us the chance to perform our own extensive due diligence and decide if we would like to invest based on our own investment criteria rather than relying on the reputation of the sponsor," he said. "If we decide it's a go, we have the opportunity to invest significant amounts of capital up front at a designated price."
Goldsmith says he and his firm like these three SPACs in particular.
(1) Utz Brands
The maker of potato chips, pretzels, and other snacks went public in a SPAC deal that was announced in late August.
Utz's SPAC sponsor was Collier Creek, which has links to CC Capital and was co-founded by longtime food industry executive Roger Deromedi. Goldsmith says it has an "exceptional" leadership team.
"Utz is aiming to leverage its access to public markets to acquire smaller brands in a fragmented market and expand its geographic reach outside the Northeast and Northwest," he wrote.
Vertiv made its public debut through Goldman Sachs' first SPAC. It's led by former Honeywell CEO David Cote and provides equipment and services for data centers. Goldsmith says its improvements in growth, profit margin, deleveraging, and future acquisitions could all send the shares higher.
"The story is fresh and exciting — a leading niche business in a growing industry that had been neglected inside a bigger entity (Emerson Electric) and is now on its own and led by a very accomplished management team," Goldsmith said.
Fintech and payment-processing company Repay was an early participant in the SPAC trend through its deal with acquirer Thunder Bridge. Goldsmith says the pandemic sped up trends that will help it succeed.
"Cash has long been falling out of favor as consumers increasingly shift to digital payments, but some industries, like the ones Repay services, have been holdouts," he said. "The COVID-19 pandemic has made it more difficult to use traditional payment systems, driving many of these businesses to switch to electronic payments."
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