The Capital Note

The Capital Note: A SPAC Fund & Palantir’s Public Listing

The logo of U.S. software company Palantir Technologies in Davos, Switzerland, January 22, 2020 (Arnd Wiegmann/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: a new SPAC fund, Palantir goes public, and conflicts of interest in economics.

SPAC Fund
I’ve no view on this particular venture — it may succeed, it may fail — but some will see it as a symptom of irrational exuberance (or desperation: where else to invest?) in the current stock market.

Bloomberg:

A team of blank-check company dealmakers is seeking to raise $100 million for a fund that will invest exclusively in special purpose acquisition companies.

Boston-area investment firm Easterly Alternatives plans a fund that will invest in as many as 15 SPACs, according to documents reviewed by Bloomberg. The firm and its partners say they’ve been involved in more than 50 SPAC initial public offerings in the past five years and say the fund will be the first of its kind.

The fund will primarily target new-issue blank-check companies that are repeat SPAC issuers and have “former public company executives on the sponsorship team,” according to the documents. Easterly is targeting gross returns of 12% to 15% annually and the minimum investment will be $5 million.

Blank-check companies are having a record-breaking year, raising more than $41 billion as of Sept. 24 — more than the last 10 years combined, data compiled by Bloomberg show. Many well-known names, including hedge fund billionaire Bill Ackman, have started SPACs, which list on stock exchanges to raise money for the purpose of acquiring other companies. Intense investor interest has attracted scrutiny from the U.S. Securities and Exchange Commission, which said it’s reviewing the market.

We’ve talked about SPACs before on the Capital Note, but here’s a useful summary from Simon Moore, writing for Forbes:

The alternative name blank-check company is a useful summary of how SPACs work. Deal-makers raise money based on their credentials and expertise. They then specify plans for the area they want to invest in, such as U.S. fintech companies, for example.

Once the SPAC is funded, they have a war chest established and hunt for an attractive acquisition target. Despite the term blank check, investors in SPACs do have some protections. Once the deal is announced, if investors don’t like it they can typically redeem their shares, and if a deal doesn’t occur within a specified time frame, investors can get the remaining cash out. Also, investors typically hold both shares and warrants in the SPAC. The warrants enable the investor to increase their holding at a fixed price should the deal ultimately perform well.

For companies, SPACs can offer a quicker and less complex route to market than a full IPO process…

That last point should not be overlooked. Indeed, SEC Chairman Jay Clayton has commented (the Wall Street Journal reported last week) that SPACs can be a healthy alternative to a traditional IPO, and that the competition they offer to traditional stock offerings is probably a good thing. The Journal also noted that “fallout from the coronavirus pandemic has created more opportunities for blank-check companies to find acquisition targets.”

Nevertheless, it must be said that the IPO process, arduous as it can be, does serve a purpose in the level of public scrutiny to which it subjects a company getting ready to go public.

Clayton also commented that the regulator was looking at certain aspects of SPACs. That triggered a brief sell-off in blank-check companies and their sponsors. It was later clarified, the Journal explained, that:

Mr. Clayton’s comments were intended to communicate that regulators are closely reviewing SPAC written disclosures, a person familiar with the matter said. The SEC staff reviews thousands of public-company disclosures every year and offers written comments about them, with an eye toward enhancing disclosure for investors. Mr. Clayton’s remarks weren’t intended to signal the existence or possibility of enforcement action, the person said.

A fund to invest in SPACs and, judging by the report, “primarily new-issue blank-check companies” is, in a sense, a blank-check company to invest in other blank-check companies, albeit with the qualitative guidelines set out in the Bloomberg report.

Inevitably (and however unjustly), reading about SPACs and their kin conjures up thoughts, at least to anyone who studied English history, of the South Sea Bubble, something to which Forbes’ Mr. Moore alludes.

And as always when bubbles are mentioned, not least that one, I turn to my well-worn copy of Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay’s epic 1841 study of dangerous enthusiasms.

In his chapter on the South Sea Bubble, Mackay describes “the most absurd and preposterous of all” that era’s flotations — a tough field — as “a company for carrying on an undertaking of great advantage, but nobody to know what it is.”

Set up by an “unknown adventurer,” argued Mackay, it “shewed, more completely than any other, the utter madness of the people”:

Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project. The man of genius who essayed this bold and successful inroad upon public credulity, merely stated in his prospectus that the required capital was half a million, in five thousand shares of £100 each, deposit £2 per share. Each subscriber, paying his deposit, would be entitled to £100 per annum per share. How this immense profit was to be obtained, he did not condescend to inform them at that time, but promised that in a month full particulars should be duly announced, and a call made for the remaining £98. of the subscription. Next morning, at nine o’clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o’clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of £2000. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.

A harsh and unfair comparison, of course, but any excuse to quote Mackay is welcome.

And so is the chance to remind people of the malinvestment that ultra-low (let alone negative) interest rates can generate, but that will be a topic for many other days.

— A.S.

Palantir IPO
Technology has grown increasingly central to national defense, a reality to which the Pentagon has responded by beefing up initiatives in artificial intelligence, broadband, and quantum computing. But the tech industry and the defense establishment have a complicated relationship. Talented engineers rarely work for the government, in large part because the private sector is spearheading most innovation, but also for cultural reasons (coders like smoking pot).

In 2018, Google famously pulled out of the Pentagon’s Project Maven, an initiative to develop artificial-intelligence tools for military use, citing employees’ squeamishness about working with the military. Meanwhile, major defense contractors have proven incapable of keeping up with the pace of technological change.

Enter Palantir, a tech startup co-founded by Peter Thiel in 2003. The company, which took its name from the “seeing stone” in The Lord of the Rings series, gathers and sifts through data to create, in its words, a “single source of truth.” Palantir got its start developing data-analytics tools for the military, backed by an initial investment from In-Q-Tel, but now sells its software to private companies as well as a number of government agencies.

Palantir is slated to list its shares on Wednesday at a valuation of $22 billion. The long road to its direct listing has included years of massive losses and a continuous string of controversies regarding alleged privacy violations and work with government agencies such as ICE. But Palantir’s public listing shows that entrepreneurs have an alternative to the monoculture of Silicon Valley.

For one, it is primarily a defense contractor, and the defense space has been exceedingly harsh to new entrants. The contracting process favor incumbents such as Boeing and Lockheed Martin, a bias which cuts the Pentagon off from cutting-edge technologies. Palantir is one of only three defense-related startups to achieve a $1 billion valuation in the past thirty years. Its success demonstrates that engineers can do more than develop ad-targeting algorithms.

Relatedly, at a time when public sentiment is turning against Big Tech, Palantir demonstrates the potential for tech companies to be national champions. It’s somewhat jarring to hear a CEO to say his “primary interest is a stronger West,” as Palantir’s Alex Karp has. It shouldn’t be.

— D.T.

Around the Web
Another reminder that prolonged, stringent lockdowns are not a risk-free strategy, but a choice of risk. And the better choice can change over time, something that those in charge of New York City seem remarkably reluctant to admit.

CNBC:

Bankruptcies in the New York City region have surged 40% during the coronavirus pandemic compared with the same time a year ago, according to Bloomberg.

The crisis has hit a number of industries across the United States, with retailers and restaurants among those hardest hit… but in New York City, which became the epicenter of the virus in March, the environment has been especially challenged. Tourism has plummeted, government officials have been more cautious about reopening the economy and many wealthy residents have fled to the suburbs.

From March 16 to Sept. 27, 610 businesses filed for bankruptcy in the Southern and Eastern Districts of New York, the publication reported Tuesday. The two districts include some counties in the city’s neighboring suburbs.

Owners of small businesses, which have struggled more during the pandemic, are less likely to file for bankruptcy. Instead, many are simply leaving the keys in the door. Yelp data shows that more than 4,000 New York City businesses have permanently closed since March.

Amazon crosses the Rubicon (or something) …

The New York Times:

Amazon has been one of the biggest winners in the pandemic as people in its most established markets — the United States, Germany and Britain — have flocked to it to buy everything from toilet paper to board games. What has been less noticed is that people in countries that had traditionally resisted the e-commerce giant are now also falling into its grasp after retail stores shut down for months because of the coronavirus.

The shift has been particularly pronounced in Italy, which was one of the first countries hard hit by the virus. Italians have traditionally preferred to shop in stores and pay cash. But after the government imposed Europe’s first nationwide virus lockdown, Italians began buying items online in record numbers.

Even now, as Italy has done better than most places to turn the tide on the virus and people return to stores, the behavioral shift toward e-commerce has not halted. People are using Amazon to buy staples like wine and ham, as well as web cameras, printer cartridges and fitness bands. At one point, orders of inflatable swimming pools through the site were so backlogged that some customers complained….

There have plenty of people calling for post-COVID resets, which for the most part involves using a bad disease to breathe new life into a bad idea.

But, this (via Quillette), on the other hand, would be more than worthwhile:

The COVID recession has caused tax revenues to plummet, forcing cities and states to make painful budget cuts. But as they struggle to fund schools, parks, public safety, and other essential services, there’s one simple and painless way for governments to save money: Rethink recycling. The goal should be to transform the practice from a virtuous-seeming exercise that drains funds from core public services, to one by which price signals assure taxpayers that diverted materials are actually recycled.

When recycling programs became common three decades ago, they were sold to taxpayers as a win-win, financially and environmentally: Cities expected to reap budget savings through the sale of recyclable materials, and conscientious taxpayers expected to reduce ecological destruction. Instead, the painful reality for enthusiastic, dutiful recyclers is that most recycling programs don’t make much environmental sense. Often, they don’t make economic sense, either…

Random Walk
In numerous fields of study, the line between academic and practitioner is fuzzy. Medical researchers, for example, often work for drug companies, and political scientists for campaigns or government agencies. So too in the field of economics, where professors and researchers often moonlight as policymakers or investors. Yet unlike the medical field, the economics profession has few standard procedures for minimizing conflicts of interest. A new paper out of the University of Chicago finds that conflicts of interest affect academic evaluations of monetary policy.

Central banks sometimes evaluate their own policies. To assess the inherent conflict of interest, we compare the research findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). We find that central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.

As the authors note, the World Bank’s chief economist recently resigned after the agency blocked the publication of a study questioning the efficacy of the Bank’s foreign-aid programs. One wonders how many similar stories have yet to come to light.

— D.T.

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