Mark Yusko, Founder, CEO and Chief Investment Officer of Morgan Creek Capital Management, joined Yahoo Finance Live to discuss the SPAC boom and why he thinks its not a bubble.
ADAM SHAPIRO: So just in January and February, SPACs have generated more than $45 billion. Here's what Charlie Munger told our Julia La Roche just this week about SPACs.
CHARLIE MUNGER: Well, I don't participate at all. And I think the world would be better off without them I think this kind of crazy speculation in enterprise that's not even found or picked out yet is a sign of an irritating bubble.
ADAM SHAPIRO: Let's bring in somebody who understands and knows this market very well. That would be Mark Yusko. He's the founder and CEO, as well as chief investment officer, at Morgan Creek Capital Management. And I'm glad we have you here, not only to respond to Charlie Munger, who said, "The world would be better off without" SPACs, but many of us-- me included-- perhaps misunderstand the role that I'll call it the originator.
The example I'm thinking of his Churchill Capital right now, with their big SPAC that's about to do the deal with Lucid Motors. The perception we have is they make their money now, and then after the deal, they have no skin in the game and they're gone. Bring us up to speed accurately.
MARK YUSKO: Yeah. I mean, a couple things. One, it's probably never politically correct to disagree with Charlie Munger, given how successful he's been and how great a person he is. But I'm going to totally disagree. The world would definitely be less well-off if we didn't have the SPAC structure. The SPAC structure today is the IPO or the way to go public for high growth, innovative companies, and it's going to dominate the landscape going forward.
Last year-- and we call it the year of the SPAC-- raised the most money for SPACs, greatest number of SPACs, and one in four IPOs was a SPAC. So you look at January, two out of three IPOs was a SPAC. I don't think that trend will continue. But at some point, it could easily be more than half of the IPOs going forward.
On the point of not having skin in the game, again, nothing could be further from the truth. The sponsor retains a meaningful percentage of the ownership going forward in the combined entity. And the benefit that they get from an increase in price doesn't grow linearly, it grows exponentially because of the way the structure works in the SPAC merger itself.
So sponsor equity is very, very valuable. And the reason is because it's at risk. If you raise a SPAC and don't complete a deal, that equity disappears. It vanishes. So the return is very asymmetric, and the sponsors really only benefit if you pick a good company and the company turns into one of the companies of the future, as we like to call them.
SEANA SMITH: Mark, my question to you is about the pop that we're seeing in a lot of these stocks their first day that they're trading or the first couple of days, in some scenarios. How much of this craze do you think is a result of the retail trading frenzy? Because Bank of America was out and they were saying that, from their client flows, they show that retail investors represented 46% of trading volume in SPACs on their platform in January. So I'm curious just how much of that you attributed to the retail craze.
MARK YUSKO: Yeah, look, I mean, January is an anomaly that we're unlikely to see again. Kind of silly activity, not just in SPACs, but in everything. In IPOs, and traditional companies, in short squeezes, like GameStop. And if you look historically, there's very little IPO pop, particularly day-one IPO pop, in SPAC IPOs. Most SPACs trade around the $10 trust value for a meaningful period of time until the deal is announced.
You sometimes get a little pop on anticipation of the deal, if you hear a rumor on what someone's going to do. You saw that with a number of things around Airbnb before they decided to do a traditional IPO. But again, there are a few exceptions in these crazy periods, but they don't define the actual process, which is SPAC sponsor raises the SPAC. They put the money in trust. So the money sits in Treasuries.
And the great thing about it is it protects you on the downside. As a SPAC lender, you can get your money back, plus interest, at the end when the deal's announced.
ADAM SHAPIRO: But here's-- and this is, I'm sad to say, going to be our last question. But there was this study, "A Sober Look at SPACs," Stanford Law Professor Michael Klausner. And he wrote in that study-- it was published by Harvard-- quote, "SPAC investors that hold shares at the time of a SPAC merger see postmerger share prices drop, on average, by a third or more." Now, that's true also with IPOs, I think. But that would seem to me a red flag. Why not?
MARK YUSKO: Bad data. We're talking about a history-- SPACs have been around for 50 years, and the first 45 of them were really quite bad. It was like the NIT tournament of IPOs. You didn't want to go to the NIT tournament. You didn't want to do a SPAC, because that meant you were basically locked out of the IPO business.
Starting in 2015, when they changed the rules, relaxed rules on operating profits and history, allowed you to make forward-looking statements, you saw this general migration toward high growth, innovative companies choosing this as a superior structure. So past data on SPACs is pretty meaningless for what's happening going forward.
ADAM SHAPIRO: Appreciate your insight, because I know a lot of people see SPACs as a democratization, too, of the going public process.
MARK YUSKO: Yes.
ADAM SHAPIRO: Mark Yusko is founder, CEO, and chief investment officer of Morgan Creek Capital Management. All the best to--