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Companies of the future are migrating to SPAC mergers: Yusko

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Morgan Creek Capital Management CEO and CIO Mark Yusko talks with Julie Hyman, Myles Udland, and Brian Sozzi about the SPAC market and Bitcoin’s future amid a changing market.

Video Transcript

MYLES UDLAND: All right, let's turn now to what's been happening over in the SPAC market. The hottest part of the market, hottest trade Q4 2020 into the first quarter of 2021, we've seen a bit of a slowdown in issuance, but a couple SPACs coming to market this week. Joining us now to talk about that part of the market and a lot more is Mark Yusko, the CEO and CIO at Morgan Creek Capital Management. Mark, great to talk with you this morning.

MARK YUSKO: Good morning.

MYLES UDLAND: So let's start with this question, which I think is sort of how I think about SPACs right now, which is are SPACs themselves an asset class that is investable just on its own? Or is the SPAC structure just kind of a wrapper for a way to get companies public, and each one needs to be seen on its own merit?

MARK YUSKO: Clearly, the latter. I mean, SPAC is simply a process, right? A Special Purpose Acquisition Company is a form of an initial public offering. That vehicle then provides a reverse merger for a company, a private company, to go public. It's all it is. And what happened last year, the year of the SPAC, right? We had record number of SPACs, record amount of money raised in SPACs.

And that's because one of every four IPOs, one of every four public offerings, was a SPAC merger. That trend will continue to rise because we think high growth innovative companies, the companies of the future are migrating to the SPAC merger as a way to go public. Three ways to go public-- traditional IPO, direct listing, SPAC merger. SPAC merger is the cheapest, most flexible, best for high growth, innovative company. And it's going to continue on trend.

JULIE HYMAN: Hey, Mark, it's Julie here. So you guys have an actively managed SPAC ETF. SPXZ is the ticker on that. It's fallen a bit since inception. And I wonder, as people think about SPACs and investing in them, what should be their sort of time horizon? Because these are, you know, in many cases, fairly immature companies on the-- certainly on the profitability side, but in many cases, even on the revenue side.

MARK YUSKO: Yep, so a couple of things we want to do, and Julie, such an insightful question. We have to differentiate between SPACs and post-merger combined entities. SPACs have about a two-year lifespan. You have to do a deal within two years. The money sits in trust. It's a fixed income substitute. And until the deal is announced, basically, you own a portfolio of treasuries. That is a SPAC. Things like space and Draft Kings are no longer SPACs. They're post-merger combined entities. And they are, to your point, immature companies. They are basically companies that used to stay private that are now public.

What the SPAC process does is a democratization. It allows access to companies that used to be the walled garden for the wealthy, accredited investors, qualified purchasers. These companies stayed private. They got funded by the big bulge bracket venture capitalists. Now an investor can own those companies for the long term. The problem is in January, February, that's not who was buying these post-merger combined entities. It was the speculators, the pajama traders. And they were taking free money, and they were day trading. And that's a bad ownership structure.

Today, you have an opportunity as a long-term investor to buy some of the most innovative companies of the future. 2/3 of SPACs last year came in five industries-- space travel and exploration, online gaming, esports, electrification of vehicles, and autonomy. Now how many space tourists do we have today? Well, that would be 0. Someday, we will have more than 0. It won't be me, but we'll have more than 0.

Most people have no idea that esports will be watched this year by more people than any other league, except the NFL, in the United States, more than basketball, more than baseball, more than tennis. In fact, the young kid who won the Fortnite World Championship this year made more than Serena did for winning Wimbledon. These are companies of the future. Their best days are ahead. And so what you want to do is think about the long-term ownership of these assets.

And investing is the only business I know when things go on sale, people run out of the store. It's silly. You should be buying these long-term assets. I'll give you one great example-- Amazon. How many people bought Amazon 21 years ago and hold it today? That would be four-- Jeff, his mom, his dad, and now his ex-wife. Everybody else was shaken out by the volatility. That stock has had a double digit drawdown every year of 21 years, including this year. The average peak to trough is minus 31%, five times more than 50%, twice more than 90%. When was the right time to sell Amazon? That would be never. So--

MYLES UDLAND: Right.

MARK YUSKO: --you should be buying these long-term companies of the future today.

MYLES UDLAND: Well, Mark, I guess, my question, if you think about-- and there are a couple different SPAC ETFs out there-- is the structure of the product itself because, to your point, certainly within your SPAC ETF today, there is some moonshot winner that is going to be a $100 billion market cap company. But there are also many companies that are going to go to 0.

And I wonder, just as the manager of a product, what the challenges are. Because we kind of have a new structure-- new-ish structure in a SPAC, a new hot structure. It's not new, but I'm saying inside an ETF, which itself is somewhat novel in the market in terms of its popularity. And I'm curious what the challenges are for a manager and giving that product investors the returns that they're kind of hoping for in this outline that you just gave us.

MARK YUSKO: Well, to your point, I mean, it's really important to separate SPACs from post-merger combined entity. So if you want to own SPACs, again, as a fixed income substitute, you basically get your cash plus interest plus warrants. There is a structure for that. There's an ETF that only buys pre-merged combined entities. SPAC ETF, perfect. So if you want to buy these companies of the future, basically, it's liquid venture capital. And that's the way you should think about it. You should think about it in a long duration.

And to your point, in order to have 10 baggers, you must have zeros. We absolutely want to have that risk-reward profile. Because the way venture capital works, it operates not on everything's a winner, right? It's a power law. You're going to have most your returns come from a small number of big winners. But you actually have to hold the security over the long period of time. And you're going to have periods of weakness. You're going to have periods of strength. Unfortunately, we launched right into this period where a lot of people were buying these assets as speculators, not investors, right?

There's four types of market participants. There are investors-- people who buy based on fundamentals. There are traders-- people who buy and sell primarily based on price, but sometimes on fundamentals. There are speculators, who only participate because something's moving in price. They think it's going to go higher tomorrow, and they can sell to a greater fool. And then there's gamblers. And the gamblers, unfortunately, have taken a bigger role on the margin over the past year. And I think that will go away as the stimulus goes away.

BRIAN SOZZI: Mark, switching gears to crypto, why do you have a $250,000 price target on Bitcoin?

MARK YUSKO: Ah, simple. Look, Bitcoin is the largest computing network on the planet. It's the most important innovation probably of this century in terms of triple entry accounting and this migration to the trust net, where we no longer need the trusted middlemen to exchange value. Value over internet protocol using blockchain technology is maybe the most important advance this century. And so, Bitcoin is the first use case of blockchain technology. It is digital gold.

So if you think about the monetary value of gold, it's about $4 trillion. Total gold is about $8 trillion. The monetary value is about $4 trillion. If we get to that level of equivalence, which I think we will, see, gold is a perfectly good asset. It's been money for 5,000 years. It is a perfect money. It doesn't have a liability associated with it, unlike Fiat currencies, which all have government liabilities associated with it. And all Fiat currencies eventually go away over long periods of time. Gold has been money for 5,000 years. But it's not very divisible. It's not very portable. Bitcoin solves that. It is a digitally scarce asset and will play that role, I think, going forward.

So Bitcoin gold equivalents at $4 trillion makes it a $250,000 asset. I think over many, many years, it'll be multiples of that. But we won't talk about the price of Bitcoin in the future. We'll talk about Satoshis. In fact, that's why my Twitter handle is #2.1quadrillion. There are 2.1 quadrillion Satoshis, 100 billion Satoshis per Bitcoin. And that will be the unit of measure we talk about when crypto is the predominant means of exchanging value.

MYLES UDLAND: I'm glad you answered that question for us, Mark. We were talking this morning about why you had the hashtag on the end of your Twitter these days. Just to kind of finally wrap this up, thinking about yourself as an asset manager in this space, we're talking about SPACs, we're talking about Bitcoin, this is kind of buzzy stuff, shiny, new objects. I'm curious how you navigate an environment that, you know, as we were discussing with SPACs-- and crypto is obviously no exception-- it can be very challenging to tease out the real investment cases versus the punters versus the speculators versus the gamblers, and kind of just curious how you navigate that environment.

MARK YUSKO: Look, again, such an insightful question. My whole life, fortunately, been in the endowment world and then started Morgan Creek to bring the endowment model to other investors. The key to the endowment model-- and, you know-- God rest his soul-- David Swensen, the father of that, passed away this week. The reality is that it's always a focus on innovation as an asset class. And the cool thing about innovation as an asset class is you get to hang out with the smartest people on the planet. You get to invest in big ideas.

And innovation is all about new. That's the whole point, right? In fact, my pinned tweet on Twitter is the greatest wealth is created by investing in something that you believe in before other people even understand. And you'll be ridiculed and mocked, but it'll be worth it. So if you think about all the most innovative companies are migrating to SPAC IPOs, SPAC mergers. All of the great innovation around computing power is coming to this point. '54, we had the mainframe, '68, the microchip, '82, the personal computer, '96, the internet, 2010, the MobileNet, and 2024, which is still coming, is the TrustNet.

And that's where everything in the world, every stock, every bond, every currency, every commodity, every piece of real estate, every piece of art, every collectible car, every private business will be digital. It will all be digitally owned. It'll be trading on a borderless world, 24/7. It will all be done in tokenized form and using cryptocurrency as the gas. And that's why when you get in front of these big innovation waves, you can create incredible wealth, incredible opportunity. And so, yes, new is-- you know, people talk about it a lot, and they get scared of it. But if you constantly focus on innovation as an asset class, should be better off as an investor.

MYLES UDLAND: All right. Good stuff. Mark Yusko, CEO and CIO at Morgan Creek Capital Management. Mark, a lot of fun. Talk soon.

MARK YUSKO: Thanks, guys. Appreciate it. Take care.