Family offices are targeting 800% returns with SPAC economics

[LONDON] The Pritzkers built an empire spanning hotels to manufacturing before agreeing two decades ago to split up their fortune among 11 descendants.

Karen Pritzker, one of the heirs, has parlayed that wealth into venture capital, backing firms such as Snap Inc and Spotify Technology. Now she's joined the wave of investors turning to blank-cheque firms.

The Pritzker Vlock Family Office is the anchor investor for Thimble Point Acquisition Corp, a special purpose acquisition company (SPAC) that raised almost US$300 million in an initial public offering (IPO) in February. Executives from the family office, named after Ms Pritzker and her late husband Michael Vlock, are leading the venture, which will focus on software and technology.

"It allows us to be able to take companies public and kind of complete the full life cycle," said Elon Boms, 40, Thimble Point's chief executive officer and managing director of the family office, which committed US$50 million to the SPAC ahead of its IPO.

GROWING FORCE

The SPAC boom has attracted financiers, former politicians, athletes and celebrities willing to use their fame to attract retail and institutional investment. About 600 blank-cheque companies have raised more than US$182 billion since the beginning of 2020, according to data compiled by Bloomberg.

But family offices - the discrete, sometimes secretive firms that manage the affairs of the ultra-rich - have been one of the biggest driving forces.

While large family offices have long been investors in private equity and real estate, the recent flurry of SPAC bets show how they're becoming a growing force in public markets. This comes at a time when some critics are pushing for more regulation of the investment firms following the implosion of Bill Hwang's Archegos Capital Management, which has inflicted billions of dollars of losses from banks. Family offices are largely exempt from registering with the US Securities and Exchange Commission, but SPACs have to file with the regulator, providing insight into how billionaires are managing their money.

Family offices and firms linked to them have launched - or sponsored - at least a dozen SPACs that have raised about US$4.5 billion in the past year with a further US$1 billion in pending offerings, according to data compiled by Bloomberg.

Former hedge-fund manager Dan Och has been particularly active through his Willoughby Capital. The New York-based firm has invested in a blank-cheque company targeting China's consumer industry and also holds a stake in Thimble Point, according to a person familiar with the deal. An SPAC he's sponsored, Ajax I, is merging with UK-based used-car platform Cazoo in a deal valued at about US$7 billion.

Barry Sternlicht's family office is affiliated with the creation of six SPACs. Meanwhile, a blank-cheque firm set up by a co-founder of Michael Dell's family office raised almost US$600 million in its IPO last month.

Most SPACs have been created in the US, but the trend has gone global. Black Spade Capital, the Hong Kong-based family office of casino mogul Lawrence Ho, has got in on the action. London-based billionaire Mohamed Mansour's Man Capital invested in Grab Holdings, South-east Asia's most valuable startup, before it announced a US$40 billion tie-up on Tuesday.

Rich families are even joining forces. NNS Group, the family office of Egypt's Nassef Sawiris, teamed with an investment firm for the Frere and Desmarais families to launch Avanti Acquisition Corp, which is targeting European businesses after raising US$600 million through its US offering.

VERY ACTIVE

"Sophisticated family offices have been very active," said Luigi Pigorini, head of Europe, the Middle East and Africa at Citi Global Wealth. "They have incredible connections, knowledge and investment capabilities - all of these are important characteristics."

The SPAC mania is showing signs of wear and tear with clogged deal pipelines, heightened regulatory scrutiny and concerns over the quality of the deals that have been done.

Real estate titan Mr Sternlicht joked that a member of his domestic staff - his "very talented house manager" - probably could pull off an SPAC. He told CNBC last month that "if you can walk, you can do a SPAC", and pointed out that many of the people behind blank-cheque firms are failed money managers or executives.

"Three days due diligence means you check the letterhead and find out if the company exists," Mr Sternlicht told CNBC. "It's a little out of control. No, it's a lot out of control."

But Mr Sternlicht is convinced he's got the secret sauce. His Jaws Spitfire Acquisition Corp is merging with Velo3D, a maker of 3D metal printers, valuing the company at US$1.6 billion. Jaws Acquisition Corp, another SPAC he's backed, is merging with healthcare provider Cano in a deal valued at US$4.4 billion.

BOLSTER RETURNS

Even if SPACs flounder, it won't necessarily hurt the family offices that have already launched blank-cheque companies. SPAC sponsors typically buy shares in firms they create at a fraction of the standard US$10 price offered to IPO investors. They usually own about 20 per cent of the blank-cheque firm's equity after it goes public and can bolster their returns further through debt or equity financing and stock options.

The family office of payments-processing entrepreneur Ed Freedman, for example, is linked to the sponsor of Stable Road Acquisition Corp, which agreed in October to merge with space-transportation company Momentus. The blank-cheque firm, which has until next month to complete the deal, is seeking shareholder approval to extend the deadline.

If they fully vest, a group of shares the sponsor acquired for about US$5 million will be worth more than nine times that amount - an 800 per cent gain - even if the company's stock price remains at US$10, according to data compiled by Bloomberg. Mr Freedman's family office has also loaned the SPAC US$300,000 and agreed to invest an additional US$3 million at a price of US$10 per share, filings show. Stable Road closed on Thursday at US$10.56 a share.

A Stable Road spokesperson declined to comment.

SPACs typically have as long as two years to find a company to acquire. If they fail to do so, they have to return cash plus interest to investors, while the sponsor forfeits their original investment.

Thimble Point's Mr Boms said he began considering an SPAC about a year ago after trying to take companies public through reverse mergers. He said he's had more than 100 meetings with prospective acquisitions since the company's IPO. Of the roughly 600 SPACs that have listed since the start of last year, less than a third have announced deals and about 30 have completed them, according data compiled by Bloomberg.

"We have a very, very solid hit list," Mr Boms said. "We are talking to people right now."

BLOOMBERG