Chris De Muth Jr. (00:03:20):
Upside kicker, you get cash and trust, downside production, and you get some dude who’s looking for a deal. You try to pick a good dude, somebody you know typically, somebody that you have confidence in their history and skills as somebody to find a deal. But you have this structure that was uniquely interesting to me, and that’s why I got involved.

Trey Lockerbie (00:03:40):
So, as I understand it, speaking to getting your money out, I’m under the impression that that happens fairly quickly after you discover what company that’s back is going to merge with. Is that the case? Meaning, is there a limited period of time you can get your money back after you’ve now know what the merger looks like and if you approve or not of the deal?

Chris De Muth Jr. (00:04:00):
Yes, so it’s a fairly typical SEC review process that’s actually been slowed down massively this past year, because with a lot of SPACs, the SEC has been swarmed with things to do. So, it’s now a matter of months between the deal gets announced and then you have to get the definitive proxy approved. So, sometimes you have a few preliminary proxies. They go back and forth, approve it, 20 business days, vote, redemption deadline. So, you have a little time to analyze it. Typically, the sponsors have a lot of incentive to do a full IPO style press of advisors, putting out information, press conferences, and so forth. So, there’s a decent amount to hear from.

Chris De Muth Jr. (00:04:44):
Now, from the founder’s side, that brevity is a virtue, because you don’t have a lot of flux in terms of employees and other problems where it’s actually shorter than the whole IPO process. So, it can be an advantage to flip it fairly quickly and have a little sense of urgency from the company side, but you have a few months to think about what you want. It’s getting market tested. You can either do a lot of deep, pensive, thoughtful work on the company, or you can just glance at the stock price. If the stock price goes from 10 to 50, you probably don’t want to redeem and get the 10 bucks back.

Chris De Muth Jr. (00:05:20):
If you hate the deal and the market loves it, you can simply sell it in the open market. If you love the deal and the market hates it, you can hang on. If you both hate it, you just get your 10 bucks back. So, if there was one thing I would say, it’s that it has taken a little longer so you have several months typically. And then the second thing I would say, a strategy out there that is not mine that’s fairly new with these very, very low riskless rates of return, where huge hedge funds with big calls on, tens of billions of dollars that are well-situated to use tons of leverage are now doing a form of SPAC arbitrage where they’re simply buying the equity side at fairly tight spreads but shorting out short duration debt against it at even tighter spreads.

Chris De Muth Jr. (00:06:01):
So, that keeps the downside even before the redemption date typically to $9.70. So, a 30 cent spread is the lowest quality, trashiest SPAC given almost no credit for an equity upside, typically is held to that $9.70. There’s this huge amount of liquidity. So, most shares, you lower penny by penny. Sometimes it affects the price. I mean, these will just get hoovered up at any scale. You could sell tens of millions of dollars at a print when you hit a yield that some hedge fund wants to set up for a SPAC yield arbitrage. Different strategy than mine, but it gives you a lot of liquidity, the period and the downside even before the redemption date.

Trey Lockerbie (00:06:44):
You’ve mentioned the opportunity potential of a $10 SPACs stock price shooting up to something like $50 to $60. That actually happened recently in the SPAC that became lucid, which I know you invested in and went from 10 all the way up to 60, but then it crashed back down again to mid-20s. It’s again since climbed a little bit, but that volatility is a little disconcerting to the average investor. Does that play into the speculativeness of this asset class, if you will?

Chris De Muth Jr. (00:07:15):
Yeah, it’s a weird phenomenon that I’m in the middle of this. That was the biggest investment I ever had in anything ever. Actually, the one that you mentioned earlier this year, disclosure, we can do at the end or now. I still own Lucid, but the phenomenon is we bought a large stake of the predecessor SPAC at a discount to trust value. We actually weren’t in the original IPO. We actually came in later and simply bought in the secondary market. Almost all of our investments are in the primary market, either via SPAC, IPOs, or PIPEs. We do very, very little in the stock market. Although this was one that we were able to buy a huge stake at a discount to trust. It was pretty clear to us that they were going to do this deal.

Chris De Muth Jr. (00:07:57):
There was an overlapping Chairman of Lucid was an Operating Officer at the SPAC. At the same time, they put out a ton of job listings for an SEC compliance investor relations analyst, investor relations director. So, this is a company that’s going to go public, probably buy us back probably via this one. We were able to buy it at much less than $10 a share. It’s $10 a unit actually even, share and warrants. The market had a very strong reaction, but your long volatility when you own SPAC units, right? Because you own the warrants. So, I want volatility to infinity. Because if I have a portfolio of 20 of these, put $10 million in 20 SPACs and half of them go to zero, redeem, and half of them go crazy. You own the equity of the warrant and you can sell for the market price.

Chris De Muth Jr. (00:08:55):
So, to give a description of where the volatility went, we could get back our cost basis writing at the market calls against just the equity for a single month of premium. That’s what the volatility did. So, volatility is great, both for the warrants and for when options trade, especially because of the strange interaction between retail-oriented trading apps. They create crazy arbitrages within the capital structure, because these apps tend to have certain securities but not others. So, if Robinhood loves options, likes equities, and doesn’t trade warrants, then the warrants get completely disconnected from the equity. Equity gets completely disconnected from the options, typically bottom to top in terms of market reaction.

Chris De Muth Jr. (00:09:52):
So, both on things that I quite like, like Lucid, and things that I don’t like at all like Nikola, QuantumScape, quite a few of these others, you have these just crazy disconnects in price where the price just breaks for a while. Typically, that leaves us writing calls, getting some equity call away, and being very, very long to warrants typically, but we’re indifferent. I have no principal at stake. I just like owning cheap stuff and I’m happy to be a service provider to sell expensive stuff if that’s what people want. And then on things that are frauds or things that are frenzies, you can do the opposite and leg into the short side of it similarly with these kind of arbitrages within the different securities. So, in any event, volatility is great and frenzies are great for value investors and SPACs weirdly.

Trey Lockerbie (00:10:41):
Talk a little bit more about that discount to trust value, because you mentioned that was after the IPO. Was that for a PIPE or some other kind of investment?

Chris De Muth Jr. (00:10:49):
No, that was a rare case for us that we just bought the units in the public market. So, units, there’s no magic to it being 10. It’s the industry norm. You can make it 20 or 25. You pick other prices, but call it 98% of these 10. So, you can typically glance at a SPAC if it’s trading at $20 or $30 or $40, the market like that. If it’s trading at $2 or $3 or $4, the market hated it after its dispatch. This was simply the unit had IPO-ed. The market had lost interest in it. It was trading at not a huge discount, because as I said, increasingly funds are keeping the price fairly efficient to the trust value, but it was less than $10 per unit. That was a function of COVID really. That was a function of just as the market tanked, we were able to take advantage of that.

Chris De Muth Jr. (00:11:41):
While the equity gets quite a buttress, the weird little securities tend not to. So, you have somewhat weird things like warrants. Those tend to be illiquid and trade irrationally. And then you have weirder things like REITs, which are only the kind of the seedy underbelly of the SPAC world. It’s basically a bribe to beg people to invest in otherwise on investable structures. Those get crazy. I mean, nobody really follows them that carefully and they’re not that institutionally owned. They don’t tend to have that much liquidity. Their price doesn’t make sense. There isn’t this aspect of tens of billions of dollars in weight to keep the price almost to the penny rational.

Trey Lockerbie (00:12:22):
So, I would guesstimate that a large majority of retail investors are more familiar with options than they are warrants.

Chris De Muth Jr. (00:12:29):
Yeah.

Trey Lockerbie (00:12:29):
So maybe talk a little bit about the retail investing experience. If you went on to your brokerage account and you bought a SPAC, where does that warrant live in your account? Are you just given that automatically and it populates in your portfolio?

Chris De Muth Jr. (00:12:43):
If you are on some of the online trading apps, you can’t trade the warrants. So, the warrants get orphaned. Secondly, you frequently don’t have a lot of corporate actions. I mean, I feel like my brokers hound me on corporate actions just as an excuse to have a lot of interaction. I don’t think I’ve ever in 20 years missed a corporate action. I always vote, but sometimes, something trading in the public market at $25 and you have a vote on whether or not you want to approve the deal. That if it was voted down and collapsed would be liquidated at 10 and they have to delay, because they can’t get a majority because people just don’t vote for these things.

Chris De Muth Jr. (00:13:21):
So, we do podcasts like this. We blog and we write and we interact with a breadth of investors. One of the things we do is… We don’t say, “Please vote for your shares.” Frequently, I’ll get a note. Somebody says, “How do you vote? I’ve never done corporate action before.” So corporate actions are sometimes a hard fit for new investors on phone-based trading apps and then warrants frequently are as well.

Trey Lockerbie (00:13:50):
So, with risk assets at all-time highs and inflation now hitting 30-year highs, there’s been a lot of discussion around where to park cash. I’m intrigued by this concept of utilizing maybe a basket even of SPACs as somewhere to park cash, because it seems to have, as you’re alluding to and talking about earlier, this downside protection and the upside is unlimited. Maybe talk to us about what a portfolio SPACs might look like or what goes into picking that.

Chris De Muth Jr. (00:14:20):
Sure. I mean, I love stuff that is a Swiss Army knife of investing where you have the cash-like aspect on the downside or treasury-like aspect on the downside and equity-like aspect on the upside. So, in my personal account, I love mutual deposits where I have kickers on options participate in equity offerings. I have a big portfolio of refundable deposits and all sorts of zany stuff that can catch bids when people are really very time sensitive, one, an OEM, planes, trains, automobiles. They sometimes get equity off offerings too. It’s that we’re going to have recently.

Chris De Muth Jr. (00:15:00):
Professionally, I love SPACs for the same purpose. So, I can tell you how we do it. Different people can certainly structure things different ways. We typically come in at some significant percentage of a SPAC IPO. So, sometimes five or more, frequently 10% of an offering. This is something that it’s very sensitive to us, because it’s only opportunity cost. I mean, all the risk is opportunity costs, but we like to go in with teams that we like and respect. So, we have a hierarchy. You can call it a negotiation, but at the low end, it really isn’t negotiation. At the middle end, it’s a little more balanced. At the high end, it’s more like begging an invitation. But we have teams that have demonstrable history of successes of finding really good deals.

Chris De Muth Jr. (00:15:50):
We try to be very flexible capitals. So, we have a lot of available capitals to come in later, to do a PIPE later, to do other types of things. So, that when we show up with $1, I’m really thinking about $10 in the back of my mind of different ways that we might want to be involved. We sometimes also have risk capital. So, we sometimes are also on the SPAC sponsor side as well. We sometimes come in when they find a deal. Then you sign an NDA and you have [inaudible 00:16:19], so you can’t trade, but I don’t do that much in the stock market anyways. So, that’s not a constraint. It doesn’t really change my life that much. But that’s where I can actually look at the deal and that’s a lot more fun. I mean, analyzing a shell company is pretty boring.

Chris De Muth Jr. (00:16:35):
I like reading SEC filings, but that even stretches my entertainment value of reading about. That’s somebody you know and a structure that you negotiate or do have a back and forth and say, “Hey, I would like to invest, but this is what I need to make it make sense for me.” That’s why they always have minutely different structure. So, in terms of how much cash is in trust, because more recently, when the market was hot, you had the advantage of you got these big pops. So, we had a big investment in Liberty as corporate SPAC. I don’t recall exactly, but I think that was trading up like %20 or 30% above trust almost immediately.

Chris De Muth Jr. (00:17:10):
So, yay, you got to make all this money in these pops, but the flip side is when it gets really cold, they do things like overfund the trust. So, you put in $10 and you don’t get $10 back. You get $10 or $20 back. So, you actually get a bit of a yield, a little bit lame, but by the standards of two-year paper, not bad. It’s better yield than the treasuries. So, you have one advantage or the other. So, we have all of those different ways that we approach it.

Chris De Muth Jr. (00:17:37):
And then we find a team that we really like. Ideally, because we do a lot of due diligence, there’s a lot of research involved in each of these deals. There’s a lot more to look at once they actually find something and you decide if you want to do the PIPE and invest in the company for longer term. But ideally, you find a team you really like. So, instead of doing a lot of background on that person, you can do it once and then do four or five deals. So, we’ve had a couple opportunities with our biggest PIPE investments or our biggest SPAC investments where we can do that.

Trey Lockerbie (00:18:03):
We’ve mentioned PIPEs a couple of times and I’d like to dig in on those a little bit more, because it stands for Private Investment and Public Equity, which to your average retail investor, I think that deserves a head scratch. You’re like, “Wait a second, what? You’re getting a private investment and a public offering essentially.” How does that work? Why is it available to only seemingly institutional type of investors?

Chris De Muth Jr. (00:18:27):
Sure. So, it’s a contract. You negotiate it back and forth. It’s a creature of the parties to it. So, it’s more like buying a house than buying a stock, right? So, it doesn’t scale down just like buying a house. So, it scaled down that much. So, it’s typically, a small one’s millions of dollars or tens of millions of dollars per investor typically. I guess you could do smaller. I’ve never really done one that wasn’t a pretty substantial amount of capital that they were raising. I can’t talk about any of the current ones because you sign NDAs on the ones you’re working on. You can talk about past ones and that situation. So, something like AerSale is one that we took a significant stake in their IPO. And then they found a deal that we really liked. Disclosure, we’re very invested in it.

Chris De Muth Jr. (00:19:19):
And then when they find the deal, deal certainty really matters to the target. One of the things I try to provide, I always try to be the most sponsor friendly, outside minority, passive investor. The typical way to get good allocations is just to trade a ton of Wall Street. So, if my broker is like, “Hey, I do $100 million of fees that you get every year, give me this allocation,” you do it just as a payola for fees. We’re not active traders. We’re a research shop. We’re not really a trading shop. So, if I can’t get close to Wall Street because Wall Street doesn’t have any particular reason to care about me because I’m the worst client. I have tons of corporate actions and complexity.

Chris De Muth Jr. (00:20:02):
I probably have the greatest ratio of complexity to fees of any investor in the world. So, we’re doing a lot of complicated stuff, but we’re not really doing a lot of trading that really benefits Wall Street that much. So, if I want to be relevant, I have to be helpful to the sponsors. One of the ways we do that is we’re very flexible. So, a typical demand for somebody who’s an outsider investing in risk capital would be I don’t want to be senior. Whatever you find, you can’t negotiate my equity. I always tell them opposite. Negotiate my equity, have it paired pursue with the actual sponsor inside ours. The reason is I want the pie to be really, really, really big. Even if that constrains precisely how I’m set up, yeah, you’re negotiating the same thing for yourself.

Chris De Muth Jr. (00:20:49):
The problem is I’m very inflexible and you have to be ultra-flexible with your own economics. So, what I mean by that is you find a company, founder, and you’re negotiating with them, and I have this chunk of your equity. He has to deal with that. So, if you want to switch it to an earnout or if you want to switch around how that equity is treated, you’re trying to encourage him to roll over his equity, I created this problem. So, it’s like short term greedy, long term stupid in a way that I really tried to say, “No, I want to be a good partner.” So, that’s how we get into the best deals at a smaller scale than most of our peers went, just trying to think like a SPAC sponsor to get really good deals. The problem with really good deals is they have pushy founders, because they have a lot of inbound interest.

Chris De Muth Jr. (00:21:41):
So, PIPE in negotiate, you come in, you get to see the deal. So, it’s much more fun due diligence. You can’t trade at the time or talk about it the time clearly. And then the economics vary, right? So, sometimes, in a difficult situation, a difficult market, you’re also getting a combination of securities and terms that might actually be at a big discount. So, where an IPO might be $10, you might be coming in at $8 or you might have protection down to eight or some other virtues and how it’s structured.

Chris De Muth Jr. (00:22:13):
The cool thing about that investment is it also protects your earlier investment. If you’re already pop committed, you can come in and make something to push over the finish line. So, if you own a lot of warrants, you come in with the PIPE investment, you can push those way into the money.

Trey Lockerbie (00:22:28):
Now, PIPEs and SPACs, do they go hand in hand? Can you have a PIPE and just an IPO of any company without a SPAC, or vice versa, they always tie together or not so much?

Chris De Muth Jr. (00:22:40):
They don’t have to be tied together. The reason why they are often thought of in conjunction with a SPAC is that SPAC has raised some peculiar finite amount of money, then you find some target. There’s no particular reason for why, if it was my SPAC in your company and you want to combine with my SPAC, why should your company be worth the precise amount of cash that I have in my trust? Now, one of the ways you can tweak that is how much of your equity you rollover, so the predecessor will own some of the equity. The SPAC sponsor wanted some. The SPAC equity holders wanted some, but the PIPE is the flux. I mean, it accomplishes two things really. One, it then lets you scale to hit the right size of the consideration for that company.

Chris De Muth Jr. (00:23:34):
The other thing it does is it backstops getting the deal done, because if you don’t know for sure if a SPAC sponsor is trying to negotiate with founders and say, “Hey, I have…” Whatever it is, typically something like $300 million in trust. I’ll pay the $300 million, except if people want it back, right? So, there’s that strange aspect to negotiation, where strong hands with the sponsor can make the negotiation go a lot better. So, if you have the top tier, top performing, experienced SPAC, one way to glance at it is if there’s a Roman numeral in it. If there’s a Roman numeral in the name, that’s probably the dumb guy on the board whose dad gave him the job. But if there’s a Roman numeral in a SPAC, it’s probably an experienced sponsor, because they’ve done something before.

Chris De Muth Jr. (00:24:24):
I’ve always thought it was funny. You could always just name your SPAC ABC SPAC seven or something like that. There’s not a law against putting a number at the end of it, but I guess the market would find that out. Having some history makes the difference. But a PIPE says, “Hey, we have the money. We have private investors coming in. These deals can get done.” So, you can perhaps get a better deal or pay a little less than if it was in flux where there’s the cheesier deals that have a minimum cash requirement and that cash requirement is not covered. It’s dicey until the last minute and not clear why a really high quality company would put up with that.

Trey Lockerbie (00:25:00):
Very interesting. So, yeah, if I’m comparing it to your real estate example from earlier, it’s like this escrow of these two escrow accounts. One is a very secure potential buyer, right, the PIPE. That’s locked in capital. With a SPAC, it has more capital, but it’s a little bit more risky for lack of a better word.

Chris De Muth Jr. (00:25:19):
The story you want to be telling and really, anybody that I would want to put a lot of my own money with is this deal’s going to get done. We’re going to be helpful and relevant to you. We have people with public market experience, which you might be a genius business founder with some spectacular technology, who’s never even thought about public markets before. So, we’ve just put five of these through a PIPE that has investor relations and public relations and a public ready CFO, because those are the regulatory functions. A grown up finance person is the function that even a spectacular multibillion dollar tech startup might not really thought of that much. I mean, especially if your growth has been meteoric, you might have been in a startup fairly recently.

Chris De Muth Jr. (00:26:04):
So, the world of dealing with the SEC is new. Well, a SPAC sponsor, an experienced one might have done it five times. So, you’re definitely getting the cash and then there’s some other good news is the one you want to be involved and you might get the cash or not and then there’s some other bad news, because we’re a mess on our side. This SPAC, as it exploded, it has a lot of both. We’ve had an era as recently as the first quarter where everything was trading hot, and then an era in the summer, where everything was trading cold.

Chris De Muth Jr. (00:26:35):
Now, it’s gotten to be meritocratic, where the market’s starting to pick out winners and losers and it’s doing so in a way that makes a lot of sense to me. I think it’s really healthy. It’s serving well the ones that I’m in and like. It’s starting to sort out some of the irritants of people who have no business touching this much money and are going to do wacky deals and distorting prices and so on.

Trey Lockerbie (00:27:02):
Well, speaking of experienced sponsors, one in particular I’d like to talk about a little bit more today, DMY Technology, who has done a number of SPACs. I think you’ve participated in maybe all of them, it sounds like.

Chris De Muth Jr. (00:27:14):
Yeah, they’ve been my favorite for a long time. My interest really in them is not the thing that’s coincided subsequently, which is my interest is really on the technology and business side. They are very thoughtful, and they’re very long-term oriented. If I’m stuck in something, because how we get set up in these were yes, we’re getting in at a very advantageous time and a very advantageous way, but we’re going to own these from the beginning to the end. We frequently have more and more of our capital come in through different means through the IPO, through the PIPE, and elsewhere, and often in risk capital. These are the guys we want to be in for the long term.

Chris De Muth Jr. (00:28:03):
Niccolo de Masi is… I don’t know that you need a separate disclosure for saying he’s a friend, but he’s a friend and somebody I quite admire. He’s very savvy on tech. My focus has always been on finance. I am not a tech specialist in some of the areas that we’ve gotten through big investments in, but he’s somebody who I’ve always liked his judgment, trusted him on higher tech deals. But he’s had a really good record, Glu Mobile, professionally, the CEO. The deals he’s found, we just like them all. Rush Street Interactive was the first DMY deal that was trading now over $20. They’ve taken out the warrants.

Chris De Muth Jr. (00:28:46):
So, it’s much better than a double, because you had warrants that came with it, but just equity paid $10 and you got other stuff with it. It’s been more than a double. That was fairly recently. Their second one is Genius Sports. I think it’s 14 bucks, something like that. And then you got warrants, too. So, those both were quite good. IonQ, their third one, and that point was the one we were by far most involved with, over 25. And then the next one is a Planet DMYQ. Disclosure, these are investments of ours, but Niccolo is the most successful SPAC sponsor based on the SPAC equities value.

Chris De Muth Jr. (00:29:30):
So, not based on short-term trading on your SPAC, but once you’re past the trust, so once you beyond the arbitrage gains, press value in the society, you’re just looking at what’s the equity actually worth is the most successful ever. There’s more famous ones, Chamath and Ackman and Richard Branson, but in terms of outside minority passive investors making money, Niccolo’s the best SPAC sponsor in history and I think by far. I mean, I think there’s others, maybe one off-ones, but just these have all worked. They’ve all worked really well. I coincided in things that happened to things that got good market reactions. I didn’t really expect it. That wasn’t why I was here. And then some of these are very by their nature, long-term.

Chris De Muth Jr. (00:30:24):
IonQ’s the first public freestanding quantum computing company. It’s an extremely important company. There’s two modalities of how quantum might work in the years ahead. There are huge companies that are working on this, like Google and Amazon. But in terms of standalone investable companies, there’s only a couple. In terms of the IAM capture technology, one of the two ways as opposed to superconducting, which is the other modality, it’s IonQ. What’s that worth? As a value investor, I’m a lot more comfortable buying something at a discount to book value and that’s not this thing. But it could be a spectacular investment. I think it’s spectacularly important as a company. We’re really, really happy with that one.

Chris De Muth Jr. (00:31:12):
That’s just the last one in the litany of success that he’s had. I think that quantum has an incredible market opportunity. Just this past year, Google for this first time was able to do something with quantum computing that would take 10,000 years within a traditional computer. We’re at a point in quantum that if you look at the physical spaces, if you look at the spaces these guys are working in, it looks like something from the 1940s, 1950s, geniuses in these crowded rooms with all these wires and so forth. Actually, separating the scientific challenge, the physical engineering challenge of getting these computers set up is quite a brainer. So, you’re inventing almost every step of the way.

Chris De Muth Jr. (00:32:00):
I mean, there’s years ahead of challenges. But if you start at the end and work back and say, “Who’s going to have an important role in solving these?”, there is currently one, and eventually, one other pure play quantum computing opportunity. And then the rest of it is a very small part of Google, a very small part of Amazon, and Honeywell actually, and some much bigger companies. But IonQ, if you look at the IP, if you look at the engineering talent, it just has a lot of the smart people who are going to figure this stuff out. So, it’s an important company. It was a company ready to go public and a company that I think is just going to have a lot of market interest.

Chris De Muth Jr. (00:32:45):
If you look at the mechanics of how these things work, as soon as the market sees the deal, because you have the normal SEC process of going from a deal announcement to shareholder vote, redemption, and close. As soon as you find something in the market that gets a positive market check, there’s a lot of M&A. A banker from Goldman can just leak something through the Wall Street Journal and then see for a few days, “Hey, they like it or not,” and then dump it if they don’t, do it if they do, but this is just an overt market check. One thing nice about IonQ is in an overt market check, people were really interested. People wanted to invest in this. People were convinced by this idea as an investment.

Chris De Muth Jr. (00:33:33):
So, by the time you get to redemption deadline, you get almost no redemption. So, you actually get for the company, not only your own capital put into it, which is great, because I wanted my capital in this, but I also wanted them to have the runway associated with a successful SPAC combination. I always want to get a phone number for the people. It’s the people who go to Berkshire and vote against Warren Buffett for his board seat. I was saying in the phone to everyone, “Just tell me why. Who are these people?” There always is somebody who redeems for $10 even when it’s trading at a big multiple event. So, I think like, “Geez, $12 is more than $10.” But once you start trading really well, it has a little bit of a self-fulfilling aspect to it in that the vote goes through.

Chris De Muth Jr. (00:34:29):
One change by the way in the decades since I started this is the vote used to be tethered to redemption. You can actually vote for the deal and still redeem. So, you have no particular reason ever to vote against the deal. I mean, the votes almost always go through. They didn’t in that case. There was almost no redemptions. And then as a public company, it shouldn’t really change that much because it should be discounted that it’s probably going to happen. But it goes from the old ticker related to the SPAC to its own ticker, it is literally the name and the ticker is IonQ. You have sell side coverage for the first time.

Chris De Muth Jr. (00:35:12):
And then some long only mutual funds in different investment institutions actually don’t have a mandate that allows them to invest as a SPAC and they can’t invest as a public company. So, sometimes that makes a difference in supply and demand. I know in the case of AerSale, we think it’s reasonably likely that they’re going to get added to the JETS ETF and then there’s actually a new leveraged ETF that could get added to that. So, there’s some just market supply and demand dynamics that are affected by the deal actually getting done. But when IonQ got done, it’s done extremely well. I don’t follow these things every day.

Chris De Muth Jr. (00:35:54):
Well, since we’re talking about it, traded up from 10 bucks to 28. The warrants are typically five-year warrants, the $11.50 strike price. Their warrants are at $16.41 right now. So, that’s pretty dramatically good so far and I think a bit of a market check in what is happening in stocks and also what’s happening in quantum computer.

Trey Lockerbie (00:36:24):
Well, DMY has a fourth SPAC now. The ticker is DMYQ, and they are set to merge with a company called Planet. I got to say, this company might just be the most interesting or exciting company I’ve come across in a long time. I just had Josh Wolfe on the show from Lux Capital, who’s an early investor in Planet. We talked a little bit about it, and I’m now more intrigued by the company. So, I want to talk and dig in a little bit on that company in particular. I’d like to hear your overview of the company and the prospects and what it’s done today.

Chris De Muth Jr. (00:36:59):
So, Josh is going to be much smarter than I on the technology. I hid it from having been involved on the SPAC side from day one or even before day one. I was involved in this from the beginning, outside minority passive investor, but concentrated position in this. One that I came in with risk capital, invested from the beginning and have a big stake in this at this point, assuming a deal goes through, which I think it’s highly likely. Shareholder vote on December 3rd, should be public shortly thereafter ticker PL. I guess this is an obvious and redundant disclosure, but I’m an investor in the company. It’s just a vintage Niccolo de Masi deal, the thing he looks for, the reason I invest alongside him.

Chris De Muth Jr. (00:37:48):
It is actually a couple overlapping networks of fairly low orbit mini satellites. I mean, tiny little cheap satellites with unbelievable fidelity, Earth imaging, and daily. So, organizations that had to wait a year are now getting a daily imagery. I would say the company’s product is A+ and a huge competitive advantage. I don’t know if anybody’s ever going to keep up. I think they’re going to be the ones to disrupt themselves. I think they’re way, way, way ahead in this product. I think their sales efforts have been good. But if their product is A+, their sales efforts have been D+ because they have just raced ahead in what they have and if we build it, they will come, I don’t know what it’s good for.

Chris De Muth Jr. (00:38:40):
I can say as a future customer, I can think of a half dozen things that I’m going to use it for, that they’ve never pitched me on. I suspect every industry has their eye on something. Everybody’s going to be a Planet Lab’s customer. My priority as a market participant, if you were looking at a retail opportunity say, you can be a customer, you can be a data scientist that uses real time data to know things, or you can get out of the markets, or you can get destroyed if you’re coming up on an earnings report and you’re guessing on some hunch and the Planet customers they already know. I mean, they know.

Chris De Muth Jr. (00:39:21):
If you have credit card data and parking lot data and you’re looking at a commodity business, you just say, “Well, others have just tracked how many trucks have left the factory every day.” I mean, you get arrested for trespassing if you were doing it on the ground but you just know. So, I don’t really know what else there is to do besides being good at analyzing data like that, but it’s an incredible data set. So, as an investor, I can’t wait to get my hands on all of it. I think I had four requests into Planet so far today. I mean, it’s an amazing succession, but think about this is something historically, it’s the thing that Superpowers had. It was pretty much the US and the Soviet Union could go back and forth looking at things like this, but now, it’s going to be everybody.

Chris De Muth Jr. (00:40:18):
I mean, now you have any intelligence organization, any civil government, I mean, insurance after a hurricane, trying to figure out who’s defrauding you and who’s a legitimate claim, you’ll just look in that day. So, the difference between getting to have overflight and seeing what’s getting the changes, especially because computers are really good at saying, “Oh, I’m looking at a million different data points, but here’s where a road was cut legally or illegally. Here’s where a roof was damaged, or it wasn’t. These are two claims.” I mean, this is the thing that you’re going to have imaging and analytics for. I don’t know what else you do if you don’t have that, but you don’t want to be the guy guessing, competing with somebody who has it.

Chris De Muth Jr. (00:41:10):
So, everybody’s going to have to be accustomed and then they’ll figure out what to do with that. But you can’t bet against somebody. I mean, you’re playing Texas Hold’em with your cards that the other person can see. I mean, it’s going to be impossible almost immediately. So, every industry will figure out what the ramifications are of that. I can figure out what the ramifications are as a hedge fund manager, thinking about finance, thinking about insurance, thinking about financial products, but there are certainly human rights equivalent. People debating whether or not there is a labor camp in rural China, they have the picture now. People debating whether asbestos is being illegally dumped by a river, it wasn’t there yesterday and it is today.

Chris De Muth Jr. (00:42:00):
I mean, so many things that used to be Sherlock Holmes sleuthing is just handed to people in almost every scenario you can think of. So, it’s spectacular. The infrastructure itself is pretty cheap. Individual satellites, these were bought from Google. Google’s a huge investor. They were the early investor and they’re major in the PIPE. They sold a Google business to Planet Labs. There’s a lot of Google people back and forth. So, you can mistake this for a Google subsidiary. If Google ever wanted to buy it, if that current owner ever wanted access, you can imagine it would go to Google someday. But they’re happy as a separate company. It doesn’t really need to be that either.

Chris De Muth Jr. (00:42:45):
I think it’s just going to be hugely important. I mean, I think it’s going to be one of the most important companies out there. It’s going to be just one of the datasets that the customers will start to define what it’s for. They don’t have any explicit program for customers bringing in other customers, but I think it’s just going to go like a wildfire through agriculture. You can look through clouds. Because they go so frequently, they can pull out all the clouds and just show you the soil, show you the crops, and there’s just some answer. That used to be something a farmer would have to sweat. Now, it’s just no.

Chris De Muth Jr. (00:43:32):
The good news is there’s going to be so many interesting things to think about in terms of how to use this. The bad news is I’m sure there are a lot of people whose judgment created a pre-Moneyball career and identity for guessing things where the value of guesses are going to have no market value anymore.

Trey Lockerbie (00:43:52):
Yeah. Just for some further context for this company, I mean, $100 million in revenue already, I believe, just as of January of 2021, 600 customers, over 65 countries. They have between 400 to 500 satellites in orbit, low Earth orbit right now. Just for some further context, I heard Will, the CEO, talking about how it took them six years to get this up and running. They’ve got a huge leg up. I guess, my question, as it stands today, they look almost like a monopoly or a duopoly if you add SpaceX to the equation, because SpaceX has its own fleet now of satellites.

Trey Lockerbie (00:44:31):
I guess my question is, are they at risk? They’ve got to put the satellites up every three years, because they fall back to Earth. I think they’re using SpaceX more or less to get them up there. Is SpaceX a competitor waiting in the wings for this company that could eat the lunch of something like this? I’m sure people have thought of that way ahead of me, but I’m curious to hear your answer on that.

Chris De Muth Jr. (00:44:52):
My answer is that people should talk about being a monopoly or pricing power and the general counsel of every company should take a little seminar for all the salespeople and say, “Don’t talk about pricing power. Don’t talk about being a monopoly.” So, it’s not something I would focus on, even if I thought it had a monopoly like characteristics. I think the speed at which they’ve gotten this far is a big advantage. I think there are more ways to get into space than there are networks like this in space already. I also think that there are data aspects to how they are able to optimize and use their imagery that makes it very, very sticky.

Chris De Muth Jr. (00:45:39):
I think that you’re going to see a spectacular growth in revenue and in the number of customers, but I think, boy, I just don’t think you’re going to see anybody leave. Planet is Bloomberg for Earth imagery. The second best is going to be too little, too late. For the scale of decisions you’re making that are affected by it, you don’t really care too much, because the costs are going to be… How it works is for a lot of the data that we need, it’s just the regular salaries.

Chris De Muth Jr. (00:46:17):
They have ones that are optimized for specific sites, but just the regular slices, it’s like an apple peel that goes around and actually uses the rotation there. So, it’s actually just going around and taking these images. I think the customers are going to be very, very sticky. If there’s competition, great, but I think and this is a falsifiable claim that in the next two, three, four years, I think you’re going to see spectacular growth and I think it’s going to essentially all stay.

Trey Lockerbie (00:46:47):
Yeah, well, again, that TAM being almost unlimited is pretty promising. When you mentioned the competition though, the fact that it’s a very powerful tool, and especially for as you mentioned earlier, around governments and defense, there’s a whole application for this data, that it raises this question around, will the US step in and try to claim rights to the data and exclude other countries? Would that set off a number of other competitors and other countries launching their own stream of satellites to get their own data? You see where I’m going with this. Is there an incentive structure in here that some exclusion could kick off or ignite?

Chris De Muth Jr. (00:47:28):
A lot of the customer base is going to be civil and going to be industry and going to be NGO organization, not security sensitive. I think as the need for this becomes almost ubiquitous, I think there could be growing pains in the national security side, but I think it’s ultimately more fraught for the national security efforts than it is for the company sale. When GPS first came out, they tried to scramble GPS so that it wasn’t highly accurate. You can always use words about national security to justify anything and you can imagine. You can say allegorically, it makes sense that private citizens shouldn’t have their GPS. It was annoying if you’re a sailor, because having very accurate GPS is helpful for individual rocks and shoals and so forth.

Chris De Muth Jr. (00:48:23):
They were actually really crude on how they scrambled it and I figured out a way to unscramble it. But they tried it for a while and they gave up. I think, trying to limit Earth imagery, it might be like that. I would bet on the market against the government every time in this case. It is going to be ubiquitous to have access to this, and it’s going to be necessary. I think that as the customer base builds up, it would put the country more in peril than the market to try to stand in the way. I just think it’s going to be very, very hard. On the edges, we don’t want terrorists to use this or something. Sure, but I think that the vast majority of customers will be indifferent to national security. On the edges, will there be some issues? Sure.

Trey Lockerbie (00:49:14):
You mentioned Google being an investor. It’s interesting that this company is choosing to go public. I almost wonder if it were wrapped up into Google, it might be worth $50+ billion on its own already, just living in that ecosystem. Is it just that they have their sights set on being the next trillion dollar company and they’ve held out and they’re going this route, or are there other reasons to go public for a company like this?

Chris De Muth Jr. (00:49:39):
Well, it’s the best of all worlds, because when Planet needs capital, they get capital. So, back to, “What’s the point of a PIPE?”, you can top off the needs, right? So, Google owns whatever it is, 10% or something. They have the capital that the smaller company needs. The bigger company has access. You have personnel that you can get data off of like LinkedIn. It’s all public, but that are meshed back and forth. You need things they now have. You need grown up finance people, SEC compliance, public company ready. Even just IR functions, PR functions, they’re 100% set for that.

Chris De Muth Jr. (00:50:23):
That’s one of the advantages of the fact that it’s called DMY for a reason and the fact that Niccolo who’s going to be on the board and is a fairly young guy for being very seasoned as a public company CEO, who had an entry and an exit, who has had multiple of these before, it has all the upsides of being adult supervision. But if you’re a young, hot engineer doing something cool, it’s cool to have a big stake in the thing you’re actually working. It’s cool that a lot of Google stock too. But if this thing really explodes, I think there’ll be a little more public awareness. I think the breadth of the type of customers and you’ll have people like me, who’s going to be an investor customer. I think you’ll have a lot of people in that category. So, I think there’s some more awareness.

Chris De Muth Jr. (00:51:14):
I mean, imagine if Google wants to, Google can put a link of this on their homepage. I mean, they can do with this whatever they want in terms of the upside. I should also say, you asked about regulators. There might be some higher level of comfort with an independent company making decisions on the basis of this product than being more integrated. There’s going to be sensitive data in terms of not just imaging, but how the images can be used. If you’re a subscriber, what are you using that for?

Chris De Muth Jr. (00:51:45):
I think that there might be a higher level of comfort for people who are aware that that data is just in this one silo and not being shared with other functions at a bigger company. I’m not a conspiracy theorist about that. If Google buys them some day, I would still be a customer, but there might be some preference to have it somewhat silent.

Trey Lockerbie (00:52:09):
All right. So, let’s talk a little bit about the deal structure, the capital structure of this. If you’re a retail investor and you’re buying into the SPAC, it’s a trust, it’s got about 350 million. There’s another pipe on the sidelines for I think of 250 million at this point. The valuation post-merger is estimated to be around 2.8 billion. So, if I’m a SPAC holder and I hold one of those shares, what am I really getting at the end of the day as far as a real piece of this company?

Chris De Muth Jr. (00:52:38):
The IPO proceeds 345 million. The deal size, you have two and a quarter billion, but the deal size is also predicated on that we will have essentially no redemptions. So, one of the things about this sponsor and this team and this structure is it’s highly likely that we’re going to be dealing with close to no redemptions. But the other thing that I always look for or hope for is there are a ton of SPACs right now. This worry that what you’re dealing with is an exit for the people who are smart about it and a disaster for the people who are coming in. I won’t say which one, but there is a very popular SPAC sponsor with one that’s been a train wreck of a public company so far. I talked to the people who were involved in the bidding war for the company that he bought.

Chris De Muth Jr. (00:53:47):
The second highest bid was 30% lower, that was not a SPAC. That was a much more typical market check for that. So, he was bidding significantly above what anybody else wanted for a story for a SPAC, and the people who sold used a lot of the proceeds to cash out. So, that is not what’s happening here. It’s combining, but the current equity holders are going to be equity holders in the public company. So, they’re going to be here for a long time. So, the specific percentages will get tweaked once you get through the votes, but this is a combination, where type holders wanted some, current equity holders wanted some, and the public company hold ourselves up.

Chris De Muth Jr. (00:54:33):
And then we also have to deal with the warrants, which is complicating the structure a little bit further. I joked that one of the shorthands for SPAC experience is just check the Roman numerals. The other one is look at what is nominally a generous structure to an outside investor can also be a bad sign. If you look for somebody who is inexperienced, somebody who doesn’t have a track record, somebody who shouldn’t really be sponsoring a SPAC, they have to bribe the investors. So, you’ll over fund the trust. You’ll put in 25 instead of 10. You’ll have maybe a full warrant, maybe REITs. How REITs tend to work is every 10 REITs, you get another share if the deal’s getting them.

Chris De Muth Jr. (00:55:15):
As Niccolo’s history has been so good, as his DSPAC equities perform extremely well, somebody like me is happy to go along for the ride and doesn’t have a lot of negotiating room to say, “Hey, I’m demanding this, that, and the other thing.” So, every time he doesn’t won, you get less and less and less warrants. So, it’ll be interesting to see after this, I think it was a third than a quarter and this was a fifth, but the warrant is a big part of the cap structure. It’s a five-year warrant. It’s reasonably likely at some point in the near future, that there’ll be a redemption deadline. If they redeem, you literally have to redeem for a penny, so you don’t ever let them redeem. You exercise your warrants. That people will then exercise their warrants at $11.50.

Chris De Muth Jr. (00:56:04):
So, you’ll have built the warrant holders a significant amount too. Rule of thumb, fiduciary duty is always to the equity holders. So, assume they’re not your friend in terms of how you’re treated as a warrant holder. Everything other than equity is a creature of contract, not fiduciary duty in the same way. So, you’ll get whatever the bare minimum deal you could imagine getting. But that’ll be dealt with in the near term. So, those are different silos, but it’s a very good thing that the old guys will end up owning a significant amount. That’s how you can turn $345 million trust into a two and a quarter billion dollar deal size. So, yeah, they’ll lay that out a little bit more once that comes out.

Chris De Muth Jr. (00:56:52):
The other aspect of it and this is an interesting one, once you get towards the end of a deal, but is the at-risk capital. The at-risk capital is if you are an outsider, you put in 10. At worst, if things collapse, you get back 10. But if you’re an insider, $345 million in trust, the insiders put in, in this case, $8.9 million at risk cap. So, people have exposure that they don’t get back. That’s the decision makers. That money goes away if you get to liquidation. So, that’s the lay of the land there. They actually have number six. They don’t have number five. They have number six, and that hasn’t found a deal yet. But those are the [inaudible 00:57:45] ideals.

Trey Lockerbie (00:57:46):
So just for first time SPAC investors, when you hear that it’s going to be a two and a quarter billion dollar valuation post-merger, essentially, what you’re saying is that the market cap essentially of the SPAC is $345 million, right? The same valuation of the cash sitting in the trust. Whereas when it merges, it’s going to become the market cap of the valuation at hand, and then it’ll be priced accordingly, correct, at the merger.

Chris De Muth Jr. (00:58:14):
All correct. The equity value goes to $2.8 billion when you look at all told the committed PIPE-

Trey Lockerbie (00:58:23):
The post-money, yeah.

Chris De Muth Jr. (00:58:23):
Yeah. So, the PIPE in this case was 200 million. That was BlackRock, Koch Strategic Platform, Marc Benioff, and then Google topped up. Google is already big and they got bigger. Oh, the other thing I always like to see is I always like to see some industry participation in PIPE. A PIPE can be very good investment. People like me invest in PIPEs, but it’s also important to see partner type roles in PIPEs. So, it’s like nobody knows this better than Google does. They had a big investment. They saw this and are like, “Yeah, we want a bigger investment.” That can be a good data point for just the health of a deal. That makes sense. 77% of the company will be the existing owners.

Chris De Muth Jr. (00:59:13):
So, this will be the inverse of that, which you don’t know the whole thing, but you have the data point of the insiders were buying, but they’re not really selling. We’re just combining and becoming public.

Trey Lockerbie (00:59:25):
Very cool. Well, this has been a really interesting discussion, Chris. This opportunity to Planet especially is very intriguing. I’d love to do more of this. I’m really interested in the SPACs, especially a portfolio of them. As I mentioned earlier, just very interesting stuff. Thank you for providing a little bit more of the more optimistic side of SPACs today. I think the investors will learn a ton and we’d love to have you back to do it again sometime soon.

Chris De Muth Jr. (00:59:51):
Thank you. Yeah, we can do the pessimistic side. I have a bunch of these. There’s a lot of good short opportunities in the SPAC world. The other two things is the dumpster diving on broken SPACs. When they go from 10 to 2 or 3, there’s some good dumpster diving, GPS, and then the future of public quantum companies. So, those are the three things that are on my mind for some other time, but meanwhile, I really appreciate you having me on. Thanks, Trey. I really enjoyed the conversation.

Trey Lockerbie (01:00:22):
Well, before I do let you go, I do want to mention that you write quite a bit about this. I want to give you the opportunity to hand off to the audience where they can learn more about you and find your writings and follow along with what you’re up to.

Chris De Muth Jr. (01:00:32):
So, if you’re interested, I write on Seeking Alpha. I wrote as recently as today on Planet, so you can look me up, Chris De Muth Jr. on Seeking Alpha and welcome to [inaudible 01:00:48] making there. And then I also have a community of long term value investors called Sifting the World. Sifting the World, it was from a Charlie Munger quote. That is people specifically interested in event, special sets, quirky, weird value investments, stuff that I like. You can sign up for that if you’re interested. If you’re really interested, Seeking Alpha. So, thanks for asking.

Trey Lockerbie (01:01:13):
Chris, really enjoyed it. Thanks again.

Chris De Muth Jr. (01:01:16):
Thanks, Trey. I enjoyed it.

Trey Lockerbie (01:01:17):
All right. Everybody, thank you so much for listening. If you’re loving the show, please go ahead and follow us on your favorite podcast app. Don’t be shy. Please reach out to us on Twitter, @TreyLockerbie, or go to asktheinvestors.com to record a question that could be played on the show. Lastly, if you haven’t already done so, please google TIP Finance to find all the resources we built for you there. With that, we’ll see you again next time.

Outro (01:01:39):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.