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SPAC’s place in the world

As its name suggests, a Special Purpose Acquisition Company (SPAC) is a listed cash box that acquires a private company to take it public.  At the time of its creation, the SPAC may state a broad purpose to source and acquire companies in a particular industry but the actual target is unknown when it lists.  Initial investors place their trust in the promoter to find a ‘good’ target however they have an option to redeem their investment if the proposed target is unsatisfactory.  The SPAC promoter has 2 years to find a suitable target or it liquidates.  The promoter, for their part, in general receive 20% of the target company once acquired. 

SPAC’s have been around for many years in various forms but they have become popular recently as a way for private companies to bypass the traditional IPO process in a post-Private Equity world.  The traditional IPO process has historically underpriced companies going public by 27% on average leading to criticism that the process is run by Wall St for the benefit of Wall St.  In 2020 and 2021, moreover, the degree of underpricing of IPO’s has been significantly more than that average where it is not uncommon for newly listed entities to double in price on listing day or more within a week.

Wall Street’s claim that a ‘successful IPO’ is one that delivers a stag-profit to favoured customers is at the core of the search for an alternative financing vehicle.  Stags’ gains are subsidised by the pre-IPO shareholders (founders, angels, venture capitalists and private equity investors) since these stakeholders receive less than the opening day market price places on the company.  For instance, an IPO which prices at $100 and raises, say, $100m in new capital, but then lists the next day at $127 per share delivers $27m to the new investors.  This $27m is money that long-standing pre-IPO investors don’t receive despite bearing much greater risk.

Disgruntlement with the traditional IPO process gave rise to the market for private capital.  ‘Private is the new Public’ enabled the likes of Spotify, Uber, AirBnB and a host of other new companies to grow much larger without accessing the public capital markets by drawing on pools of private capital entrusted to expert deal makers in the private equity and venture capital space.  These private structures were successful in meeting capital demands but could not provide either pricing or liquidity to shareholders.  This is an inescapable function of the public markets.  Is there a way to achieve a public listing without having to suffer the underpricing of an IPO?

Enter the SPAC.  To my mind the main difference between a SPAC and an IPO are the incentives for the promotors/lead managers.  IPOs have an incentive to underprice whereas the SPAC promoter takes 20% of the target so that they have an incentive to overprice.  Indeed, this seems to be the case with something like 60% of SPACs trading at a discount of 20% or more 6 months after completing their acquisition.  Wall St points to these numbers as failures but pre-listing shareholders who sell early are smiling. 

Of course the best result from a market efficiency standpoint is a listing mechanism that delivers a fair price at listing for existing shareholders without either subsidising Wall St or paying a large fee to a promoter.  This mechanism is a ‘direct listing’ which simply takes a private company into a public market and lets risk-takers  (real buyers and real sellers with real money) determine the market clearing price.  This was Spotify’s approach and everybody except Wall St and the SPAC promoters were smiling.

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Socialism fails once again in distributing the Covid vaccine

Reuters headline: “New York and Florida tell hospitals to dispense vaccine faster or lose supply” Jan 4 2021 Which of the following would you expect to see during a pandemic? A.  Unused vaccine serum sitting idle; or B. Shortage of vaccine supply It would seem that the natural tendency would be toward B – that […]

Covid Notepad 3…plus a comment on Brexit

If there was one thing that was certain to flow from the Covid-19 pandemic, it is the volume of fascinating new research into the way people and governments react to the danger that the virus creates. You may recall that early on in the crisis there were dire predictions of breakdown in the health systems’ […]

Why do political opinion polls seem like rubbish? PLUS the First Degree US election Special PLUS the latest release from DJ Dr Fish​

I have seen many electoral events where opinion polls uniformly over many months or years say the same thing. The Brexit polls, Boris Johnson’s landslide victory, Trump’s success in the US Presidential race in 2016 and Scott Morrison’s triumph in Australia in 2019 are recent examples of where opinion polls predict one thing yet on polling day a completely different result occurs.  Why is this?

The statistical theory is more damning than you think…

The problem is far more serious than most people understand.  There is very strong statistical sampling theory that says a relatively small sample from a large population will approximate the true population with, say, 95% confidence. Suppose that the preferred candidate has 53% support from the population of 200million voters.  Then a sample size of 1000 respondents should deliver an estimate of this mean between 50% and 56% and achieve this 19 times out of 20.  The probability of the sample mean falling outside this range is not a coin toss.  The probability of 2 polls being wrong is 1 chance in 400, not 1 chance in 4.

Therefore, if a succession of polls say the same thing but are wrong, the statistical likelihood of systematic error is negligible. Put anther way, polls are not worth the paper they are printed on.  

Sampling bias is a cop out…

The polling organisations blame sampling bias for their errors.  By this they mean that their respondent selection mechanism systematically omits a critical component of the population.  The favourite explanation for the US 2016 error is that dumb white people who voted for Trump don’t have phones.  I personally don’t buy this sampling bias argument due to the long term consistency of polling errors and the cross-section of consistency of all polling organisations saying the same thing. 100 polls with 1000 respondents each giving the same result is statistically equivalent to capturing the population in its entirety.  So how can the opinion polls be so wrong?

Maybe the opinion polls are right?…

My theory is that the polls are not wrong at all.  In fact, they are actually incredibly accurate at the time they are taken. When asked what their voting intention is a few months or even the week before an election, the respondents answer honestly.  My theory, however, is that the small number of swing voters don’t actually decide who they will support until they get into the voting booth. Once there, the gravity of the situation suddenly weighs heavily on their conscience and they do something different to what they told the phone pollster 5 months earlier or even the day before.

I support my theory with the fact that exit polls are incredibly accurate – “who did you vote for?” is a factual question as opposed to “who do you intend to vote for?”. The exit polls that were announced as soon as voting stopped over Brexit, Boris’s landslide, Scott Morrison’s underdog triumph and many other election events were shockingly correct. This suggests people go in to the voting booth thinking one thing but exit having done another.

Underdogs rule…

Related to this propensity to decide who to vote for while standing in the voting booth is the advantage of being the underdog.  If opinion polls uniformly predict one candidate as favourite then why not vote for the other guy? It can’t hurt can it? Achieving hot favourite status going into an election is a real handicap.  I vividly recall the Victorian Premier Jeff Kennett in Australia in 1995 entering an election with a massive 85% approval rating from the opinion polls.  How could he lose?  He lost simply because voters expected him to win!

First Degree’s US Election Special : Biden v Trump…

All this brings me to the Biden-Trump rumble that will be decided shortly. Biden and his supporters are in big trouble.  The political opinion polls are uniformly predicting Biden to be elected next Tuesday.  The pre-poll voter turnout is massive and from all reports the majority are in favour of Biden since they are registered Democrats.  Were I a ‘…thoughtful swinging voter…’, I would walk into the voting booth next week expecting Biden to win and probably expecting to support the Blue Tide.

But what has Trump actually done?  Unlike every other politician, he delivered on his promises.  He built a wall, he pushed back on China, he fought Congress – he turned out to be the maverick that people voted for 4 years ago.  Biden has “a plan” for everything but what has he done?  50 years in elected office and nothing – no bridges, no tunnels, no foreign policy successes, nothing.

What’s in it for me?  Trump wants to cut my taxes, protect my job and he talks my language.  Biden has a plan…am I going to pay for that, and why does the New York Times like him so much?

What will happen in the voting booth?…

The US election is all about Trump.  A vote for Biden is not excitement about his vision for America blah blah blah…it is a vote against Trump. The voters know Trump…and despite what they may have said before they arrived to vote, there’s no compelling reason to vote against him.

Trump will get re-elected. 


…and don’t forget the latest release from DJ Dr Fish


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Tossing coins: The Vaccine v The Fed

AstraZeneca, Pfizer, Moderna and other drug makers are finalising their ‘warp speed’ vaccine trials in order to stop the infection and spread of the dreaded Covid 19.  Simultaneously, the Federal Reserve in the US is set to roll out its new Monetary Policy operating procedures for all to behold. Both the vaccine designers and the […]

Covid notepad 2 : Observations and opinions

Government v covid 19: I Suppose you are the leader  of your country and your chief medical officer came to you with one of the following two statements: A. “We have detected the rampant spread of a new virus that will kill 10% of those who contract the disease.” B. “We have detected the rampant […]

The real G7

Germany, the UK, Japan, France, Italy, Canada and the United States make up the G7 Leading Economic nations.  The membership criterion is, loosely, that these countries produce the most output by virtue of their population’s size and productivity.  Donald Trump, the US President, has proposed inviting a broader range of countries to join the G7 […]