How to invest in SPACs, and the VC model comes to MLB
How to invest in SPACs, and the VC model comes to MLB
Welcome to “Not Pretty, Not Rich,” a newsletter about money and the economy.
It’s Friday, February 26, 2021, and here’s this week’s rundown:
In the news: Employers can’t find workers
Trends: Investing in professional athletes?
Feature: How to buy SPAC shares
Numbers and links
Employers can’t find workers
10 million more Americans were employed a year ago than they are now. But some employers say they simply can’t find workers.
What’s happening: A recent story from NPR chronicles the attempts of a Mr. Bill Martin, who runs a plastics manufacturing company in Georgia. Mr. Martin has run into an issue: He can’t find people to employ.
He needs workers. He just can’t find any. And apparently, he’s not alone.
Mr. Martin tells NPR he’s tried everything, including offering higher wages. The problem, the story says, is that job-seekers are looking for remote work. And a lot, if not most of the 6.6 million open jobs out there aren’t remote-friendly.
Go deeper: This isn’t really a new phenomenon. You can find similar headlines going back months. And I remember reading about this same issue in the years following the Great Recession. Of course, back then, there were other factors at play — a lot of it had to do with companies trying to hire people at relatively low pay levels, trying to continuously cash-in on workers’ desperation long after the economy had recovered.
But as of 2021, it’s a different situation.
There are employers that need workers, and there are people out there who aren’t working, and who would like to be. We can get an idea of just how many people by looking at a metric like the labor force participation rate.
Here’s a look at the labor force participation rate over the past year:
As we can see, the pandemic caused a steep drop-off. It improved a bit during the summer last year, but since then, has flatlined and even started to fall again. Here’s how it looks when we zoom out to a five-year window:
Clearly, there is a gaping chasm between where we were in January 2020 and right now in terms of the number of people working. Keep in mind, though, that this metric can be a little tricky — we wouldn’t want or expect 100% of the labor force to participate, because some people are retired, are students, etc.
Again, people need jobs, and employers need workers. So, there’s a mismatch somewhere. The question is this: How does this ultimately play out? While not all jobs can be done remotely, many can be — will employers need to go all-in on remote work for the positions that allow for it?
And for the jobs that don’t — what can be done? Obviously, if you offer workers enough money, they’ll come. Is that what needs to happen? Or if economic conditions continue to worsen for the unemployed, will people eventually accept a job that they previously weren’t interested in?
We’ll see. But right now, there’s an interesting mismatch in the labor market that’s in need of a solution.
The takeaway: If you need a job, it seems like there are employers that are in need of workers. For both employers and workers, though, it looks like some sort of compromise is needed to make everybody happy.
Investing in professional athletes?
Income-sharing agreements pay off for some investors as a monster MLB contract comes to fruition.
What’s happening: Fernando Tatís Jr., a 22-year-old shortstop and Major League Baseball player, recently signed a monster contract with the San Diego Padres: 14 years, $340 million. It’s the third-highest total in MLB history.
The Padres are making a big investment in Tatís — they see him as the future of the franchise. Rightfully so, too, he’s breathed new life into the team that missed the playoffs for 13 straight years until 2020. They were bad (but not Seattle Mariners bad!).
But there’s another interesting riffle to the story as reported by The Wall Street Journal: Tatís owes around $30 million of his $340 million fortune to another company, Big League Advance.
Going deep: Big League Advance makes investments in athletes, if you want to think of it that way. They find young, promising talent, and enter into income-sharing agreements with them (many schools do the same — it’s an alternative to student loans, where you effectively pay your tuition after you get a job by forking over a percentage of your earnings).
From the WSJ:
Big League Advance uses a proprietary algorithm to project the performance and earning potential of players, in order to establish a set amount it would be willing to pay a player in exchange for each percentage point of future MLB earnings that player is willing to give up.
For instance, if Big League Advance offers a minor-leaguer $100,000 up front for 1% of his earnings, that player can then decide to accept $500,000 in exchange for 5% or $1 million for 10%. A player valued as highly as Tatís could receive a couple million dollars from Big League Advance. In his first two seasons with the Padres, Tatís earned less than $800,000 in salary.
The Big League Advance payouts aren’t loans. If the player never reaches the majors, he doesn’t have to reimburse the money, and Big League Advance loses its stake. When a player turns into a MLB star like Tatís, Big League Advance receives a huge payout. In effect, Tatís is now funding a bunch of minor-leaguers who will never make it. It’s similar to a venture capital fund that backs lots of startups that fail, in return for a gigantic payday from getting in early on a company like Facebook or Uber.
The takeaway: It seems like we’re always finding new ways to make bets with big potential payoffs. Big League Advance is adopting the venture capital model for professional athletes — a risky model, for sure, but one that has big potential payoffs, like we just saw with Tatís.
It goes to show that almost anything and everything can be seen as an investment. Maybe that’s not necessarily a good thing, but it’s an apparent trend. The question is, what will we be betting on next?
Get in on the SPACtion
SPACs are the hot new way for companies to go public. Here’s how to get in on it.
You may have heard of “SPACs” lately, as they’re kind of the big new thing on Wall Street — despite not being all that new. “SPAC” is an acronym, and it stands for “special purpose acquisition company.” And they’re being used by some big companies to go public, or to get their stocks listed on the exchanges so that you and I can buy them.
More about SPACs: Companies are using SPACs to go public rather than use the traditional IPO process because it’s generally a quicker and easier way to reach their end goal.
And as for how they work? It’s basically like a reverse-merger IPO.
Basically, a group of investors creates a SPAC, which is a company that doesn’t actually do anything or has any assets. It’s like a scarecrow — an empty husk. Then, they raise money by selling shares of the SPAC (usually for around $10 each). The SPAC then picks a target (a company it wants to take public), and acquires, or merges with the target.
Since the SPAC is already publicly traded, the target company becomes publicly traded as well by merging with it.
This has become an incredibly popular method for companies to go public over the past couple of years:
Image and data: SPACInsider
Why would you buy shares of a SPAC? Because it can be a way to get in early on a potentially hot investment. There are some big companies that look primed to go public via a SPAC transaction in the near future (like SoFi, for example), and it can be enticing to think you could invest in a company like that before its stock hits the markets, right?
How do you buy SPAC shares?: Buying SPAC stocks is more or less the same as buying any other stock — you can probably buy shares through your brokerage account.
SPACs go through their own IPO process and go public. So, if you do your homework and know which SPAC is targeting which company to merge with, you can look up the SPACs ticker and buy the shares. Again, assuming that the SPAC itself has already gone public.
We’ll stick to SoFi as an example (and this isn’t necessarily a recommendation). SoFi looks like it’ll go public via a SPAC transaction with a SPAC called “Social Capital Hedosophia Corp V.” It’s ticker is IPOE^.
Look up that ticker, and you should be able to buy shares.
Voila, you’re a SPAC investor.
Things to keep in mind: There’s a lot going on in the SPAC space, and things could change quickly.
There’s a considerable amount of risk when investing in SPACs, which should probably be the first thing on the minds of us average people, and a SPACs success or failure may completely depend on the reputation and competence of its management team.
So, if I go out and start a SPAC tomorrow, and tell everybody that I plan to take Koch Industries public via a SPAC merger, it’d probably be a really bad idea for you or anyone else to invest in my SPAC. Because I’m probably going to fail to bring that vision to fruition.
Also, as a “normie” retail investor, you and I are actually taking on risk so that the institutions don’t have to. A lot of people are making a lot of money from SPACs, in other words, pushing all of the risk onto small investors and raking in big bucks. It’s almost like….magic.
A quick hit from Bloomberg’s Matt Levine:
Real-money investors who buy SPACs as a way to invest in an IPO-to-be-named-later are subsidizing hedge funds who buy SPACs for free money.
Read his whole piece to get the gist. But yes, SPACs are sort of a free-for-all for wealthy investors right now, and they simply may not be worth the risk for average investors.
That’s not to say that SPACs are a bad investment, per see. But it’s not like there’s a shortage of other things to invest in.
Numbers and links
$36,990: The new price of a Tesla Model 3, a $1,000 drop. The Model Y is getting cheaper, too. (Reuters)
82%: The percentage of CEOs that expect economic conditions to improve over the next six months. (Axios)
77.8: The life expectancy of the average American in 2020 — down from 78.8 in 2019. (NPR)
$28 billion: The additional amount Texans paid for residential electricity compared to other states since 2004. (Wall Street Journal)
The Psychology Behind the Boom in Collectibles — a good read to follow up NPNR from a couple of weeks back. (A Wealth of Common Sense)
Hockey has big problems: Big goalies. (The Atlantic)
“Not Pretty, Not Rich” is a newsletter about money, finance, and the economy, written by Sam Becker. You can connect with me through my website, Twitter, LinkedIn, or send me an email at sammbecker@gmail.com. Also, if you enjoy this newsletter, I’d really appreciate it if you would share or forward it to others.
And remember, the contents of this newsletter are not meant to be taken as advice. It’s informational and entertainment only.