Cliff Greenberg, Senior Vice President and Portfolio Manager at Baron Funds
SPACs can offer distinct advantages to institutional investors over traditional IPOs, including the ability to take a larger position early on at a reasonable price. That’s according to Cliff Greenberg, SVP and Portfolio Manager at Baron Funds, who participated in IPO Edge’s SPAC in Action! – a SPAC Roundtable Featuring Four Experts, available in full form here. Mr. Greenberg has invested in a number of recent SPAC companies including at-sea spa operator OneSpaWorld (ticker: OSW) and payments company Repay Holdings (ticker: RPAY). Baron has played an especially active role in SPAC deals, recently investing in a private placement alongside the SPAC transaction that took Repay Holdings public. Mr. Greenberg was supportive of the private placement because it helped the company reduce leverage and buy out a portion of the outstanding warrants, greatly reducing potential dilution. He notes that the amount of warrants attached to SPAC IPOs continues to fall as sponsors gain credibility and initial buyers don’t need as much incentive to invest.
Cliff Greenberg is the Portfolio Manager of Baron Small Cap Fund. He invests in small-sized U.S. companies with significant growth potential. Investments include fallen angels with strong long-term franchises that have disappointed investors, and special situations where lack of investor awareness creates opportunities. Mr. Greenberg has 35 years of investing experience, including 22 years at Baron Funds.
IPO Edge: Your fund was instrumental in the process of Repay going public through a SPAC, with Baron Funds participating in a private placement that helped extinguish 75{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of the warrants in the deal. How did you view that situation?
Mr. Greenberg: Repay had enough money to close the deal, but we advised them to take a little more to immediately buy the warrants. The warrants were dilutive and added confusion to the capital structure. We also preferred that they run with a little less leverage and have more capital to pursue accretive acquisitions.
IPO Edge: SPACs have been raising larger and larger amounts of money. What’s your view on investing in a SPAC at the time of IPO?
Mr. Greenberg: I don’t like to invest in blind pools. I invest in companies, so my approach is to wait until the SPAC identifies a target and then decide.
Sometimes, I’ll put more money in if they need it like I did with Repay. In other cases, I’ll just go out and buy SPAC shares in the market as we did with Clarivate.
IPO Edge: What do you like about SPACs compared with IPOs?
Mr. Greenberg: I can get size with a SPAC. In a regular IPO, I may get $5 million or $10 million in the allocation. But then the stock may jump, and I won’t want to buy any more since it’s too expensive. You’re often not able to establish a full position at a reasonable price.
A big advantage with a SPAC is that I can invest more capital upfront at what I believe is a reasonable price.
Another advantage is there is more disclosure and more time to do due diligence. You can learn more about a SPAC’s acquisition target, see projections, and communicate with management. I take advantage of the ability to meet these companies and get to know them well before investing.
IPO Edge: What’s contributed to the success of SPACs over time?
Mr. Greenberg: There has been an evolution. These used to be $20, $50, $100 million raises. They were acquiring flaky companies and there was a big risk that the deal wouldn’t get approved. Also excess compensation was going to sponsors who didn’t play a role in the acquired companies.
Now, you have $300, $400, $500 million raised. The sponsors are playing a very significant role in the future of the company and are more reasonably compensated for their role.
IPO Edge: Getting back to the Repay deal, what role do you think warrants will play going forward?
Mr. Greenberg: Warrants complicate financial structures and are dilutive. There used to be two warrants issued per share, then one. You’ve had deals done with less than one warrant and there are some in the market now with a quarter of a warrant, which is a favorable development for new long-term investors.
Investors aren’t demanding as many goodies upfront as they were in the past. Institutional buyers don’t need as much incentive.
It’s a positive that Repay was able to retire a good portion of the warrants that were issued upon approval of the deal. I believe this will be emulated going forward and is a major positive.
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