Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the menu today: SPACs, Office Space, and Antique Bonds, plus some links from around the Web.

Special purpose acquisition companies (SPACs) are all the rage. 51 SPAC offerings have been completed in 2020 — a 145 percent increase from the same period in 2019. Electric-truck company Nikola and spaceflight company Virgin Galactic both went public this year via SPACs, and Bill Ackman — enjoying the limelight after a stunningly profitable short trade early in the COVID crisis — has launched his own “unicorn mating dance,” his term for the process of finding a large tech company to take public with $4 billion in newly raised funds.

A SPAC represents a “blank check” for a sponsor, who raises capital in the public equity markets and uses it to merge with a private company. SPACs facilitate back-door IPOs, through which firms hoping to go public can avoid the paperwork and marketing involved in the traditional IPO process. Investors in these “blank-check” companies have the option either to approve the transaction and become shareholders of the newly public SPAC target or redeem their original investment, which offers attractive downside protection.

Theories abound as to why SPACs have become so popular. Some see it as a way to avoid in-person IPO roadshows in quarantine, while others argue that it’s an easy way to go public quickly as the traditional IPO process has grown more time-consuming.

Byrne Hobart falls into the latter camp, arguing that SPACs are a way to cash in on hype:

This pattern means that SPACs tend to be very adversely selected. The companies that go public via SPAC are not usually the ones that planned an IPO for a long time but the ones that suddenly had an opportunity and really wanted to take it. The SPAC is the Vegas wedding chapel of liquidity events; it seems like an urgently good idea at the time, but it doesn’t always turn out that way.

But in another sense, SPACs are a return to normal. The IPO process isn’t broken because it’s too expensive but because it takes so long. And SPACs are a faster alternative.

For SPAC targets, another benefit is that they can include forward-looking financial statements in marketing materials, which are not allowed in the S-1 form for traditional IPOs. For early-stage companies with little past performance to speak of, projecting growth can make a big difference in their valuations. Moreover, whereas the typical IPO raises new capital equal to roughly 20-25 percent of the company’s value, SPACs have no constraints on the amount of capital invested in the target company. It therefore allows firms to sell more of their equity in IPOs.

While the success of Nikola, Virgin Galactic, and sports-betting company Draft Kings has generated lots of buzz, investors should be wary of these “unicorn mating dances,” say Goldman Sachs researchers.

The researchers find that while SPACs tend to outperform the S&P 500 Indez in the first three months after the transaction is completed, they underperform in the long run. And while some SPAC IPOs see marvelous returns, many are complete flops: “The performance distribution is extremely wide, with the 75th percentile SPAC outperforming the S&P 500 by 22 pp while the 25th percentile transaction lagged by 69 pp.”

These returns aren’t so different from those of traditional IPOs, which see similar dispersion. So perhaps SPACs are just more of the same.

— D.T. 

Office Space
As I have noted before, my guess continues to be that COVID-19 will lead to less lasting change in the way we work than we currently think. Offices exist for a reason, and while technology has made it easier (for some) to work remotely, my guess (again) is that such systems can do the trick for a while, but only, in a sense, to keep a business ticking over.

For now, however, no one seems in a hurry to revert to the old office routine, even when they can.

Recent (July 24) data from the Manhattan Chamber of Commerce does not make pretty reading.

Foot traffic in the city increased only 4.1% last week despite entering the fourth (and final) phase of reopening. Overall, foot traffic remains down 46% in the city as compared to before the Covid crisis began.

If people do not start going back to their offices soon, the knock-on effects on the local economy, the local tax base and, of course, landlords (and not just large landlords) are likely to prove catastrophic.

And workers who think that they can preserve their wage rate while taking the cheaper option (for them) of working from home are also, I suspect, in for a bitter disappointment in due course. It’s easy enough to sketch out a dystopian future of employees effectively operating as pieceworkers from their basements, but that is a gloomy topic for another day.

— A.S. 

Around the Web
As noted above, I still think that COVID-19 will offer less in the way of lasting change to the way we work than we currently think. However, as we have suggested before, what the pandemic may well do is speed up the pace of existing change, not least when it comes to automation.

A case study from fast-food restaurants:

The fast food industry has been turning to technology more in recent years. Customers can now place an order at a kiosk instead of with a cashier. Miso already has a robot called Flippy making hamburgers for the fast food chain CaliBurger in California.

Martin Ford, author of “Rise of the Robots,” says “dealing with humans now carries a risk.” He sees more companies adopting this type of technology because robots can’t spread coronavirus and it can cut down on worker costs. “Definitely what’s happening with the coronavirus pandemic is going to speed things up,” he says.

One change that the pandemic has left in its wake, however, is that people appear to be redefining what it means to be well off, or even wealthy:

In mid-January, Charles Schwab surveyed 1,000 Americans aged 21 to 75 about their financial health and perspectives on money for its annual Modern Wealth report. The survey respondents said it takes an average net worth of $934,000 to be financially comfortable and an average net worth of $2.6 million to be wealthy.

When Schwab surveyed Americans again between June 25 and July 2, it found they’d drastically lowered their markers of financial success, saying it takes a net worth of $655,000 to be comfortable and a net worth of $2 million to be wealthy, on average.

Gold may be on a tear; diamonds, not so much:

Anglo American Plc was forced to rely on profit from iron ore and copper as its fabled De Beers unit reported its weakest earnings since Anglo took control of the business almost a decade ago.

While the world’s biggest mining companies have so far been comparatively unscathed by the global pandemic as demand from China holds up and many of the most important mines continue to operate, it’s been a different story for diamonds. Sales plunged in the U.S. — the most important market — and trading hub India has also been hit hard.

Random Walk
As I remember it, scripophily (the collection of old stock and bond certificates) became a thing at some point in the 1970s, possibly, at least in part, as people looked for collectible assets in a time of rising inflation. These certificates, it was argued, would be “the next stamps” (there was a speculative bubble in the price of old postage stamps at the same time) and, of course, unlike stamps, they looked good on the wall.

And there were always those who hoped (and speculated) that one day the countries in default might make good on those ancient unpaid debts. Indeed, after the collapse of the Soviet Union, Russia did come to a series of settlements with holders of old Czarist bonds, if never on very generous terms.

From a 2001 Washington Post report:

For nearly a century, Gabriel Leylavergne’s family kept a stack of ornately designed Russian bonds stashed in a suitcase at the back of a wardrobe.

Like thousands in France, Leylavergne grew up hearing the story of how his hardworking grandparents lost their life savings and died impoverished after the 1917 Russian Revolution wiped out the value of their bonds [Russian bonds had been heavily marketed to retail investors in France]. But through three generations, the family never gave up hope that Russia would someday repay the debt.

“My father always told me, ‘Never throw them out, because maybe one day Russia will pay us back,’ ” said Leylavergne, now 68, a retired postman from the southern French village of Eguilles.

Under a deal struck with France in 1997, Russia has finally paid up, but not nearly as generously as he hoped.

Leylavergne’s payout of 6,900 francs, or about $985, is roughly a month’s rent on a Paris apartment. But in 1906, the 10,000 francs his grandparents paid for their 20 bonds was a fortune. Just half that sum was enough for them to buy a small patch of French countryside and build a three-bedroom home on it.

Could it be China’s turn now?

From last week’s Financial Times:

When the People’s Republic of China was founded in 1949, its leaders broke with the tradition of maintaining the debt obligations of previous regimes. But they never formally de-recognised the debt. The bonds instead went into default, taking on mainly antique value.

Mitu Gulati, a professor of law at Duke University who has been studying the bonds, believes a legal argument could be made to revive some of the claims. Some of the old obligations include legal clauses that suggest new Chinese debt cannot be issued until old debt has been dealt with.

The 1912 and 1913 issues continued to trade speculatively on the London Stock Exchange until 1987, when some investor bets appeared to pay off. The UK government under Margaret Thatcher managed to negotiate a final settlement that raised £20m for British holders of the bonds at a time when China wanted to enter the London capital markets and there were active negotiations over the return of Hong Kong to China.

Prof Gulati argues that in the right diplomatic context, American holders of old Chinese debt could argue for a debt swap or “set off” against existing US Treasury debt. Tennessee-based Jonna Bianco heads the American Bondholders Foundation, which says it represents $1.6tn in claims. A Trump supporter, Ms Bianco says recent events have strengthened her hand. The legal merit of the claims is clearly debatable but speculators are taking interest. The value of historical bonds traded on eBay and among specialist dealers has been rising. George LaBarre, a specialist vintage financial paper dealer, says the price of the 1911 Hukuang bond has gone from $75-100 to about $450.

I’m not convinced that this is going to work out.

— A.S.

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