Blank-Check Companies: Good Value?


Barnett wonders what a conservative value investor is doing in high-risk

investments with no real assets:

Most curiously, the owner of 3 percent of Freedom is the investment management

firm Baupost Group. The Boston-based firm is run by Seth Klarman,

a noted value investor who is often compared to Warren Buffett for his calculated,

conservative approach to investing. Klarman wrote the highly sought after,

although currently out-of-print book "Margin of Safety: Risk-Averse Value

Investing for the Thoughtful Investor." Klarman is so conservative that

he currently keeps nearly half his holdings in cash.

Yet Klarman is also a SPAC enthusiast. At the end of March, Baupost’s equity

portfolio, which consisted of 39 different stocks, included no fewer than

18 SPACs.

So one of the most successful value investors has nearly half of his equity

portfolio in the same investments that one commentator had likened to a casino.

A SPAC is a special-purpose acquisition company, or, to put it more colloquially,

a blank check. It’s a pool of money, essentially, which sits around waiting

for an opportunity to be spent on an attractive acquisition. It has no earnings,

no cashflows, and no real way of making money. Hardly, as Barnett notes, the

kind of thing that the likes of Klarman would be expected to invest in. So what’s

he doing? Barnett speculates:

Investing in SPACs, as it turns out, can be a very promising way to not lose

money. If the company’s executives have not found an acquisition during the

first 18 to 24 months after their I.P.O., shareholders get their money back

(minus fees paid to bankers and lawyers, of course). The worst possible scenario

is that an investor will lose about 5 percent of his money in less than two


I don’t buy this. For one thing, the worst possible scenario is not that the

SPAC makes no investments: the worst possible scenario is that the SPAC makes

a bad investment, whose value declines. Instead, I have my own theory why someone

like Klarman would invest in SPACs rather than in a stock market he probably

considers overvalued. Klarman is looking for value, and value, increasingly,

is not found in public listed companies. Instead, it’s found in family-owned

private companies which might not be managing for maximized profits –

some of which might be looking to sell out. Since Klarman can’t invest in those

companies directly, he’s decided to invest in the companies which are looking

to buy them.

And of course investing in 18 SPACs is much more conservative than investing

in only one or two. Klarman’s strategy makes sense to me: he’s looking for value,

and he’s looking for diversificatin too.

Update: KnowHow notes in the comments that SPACs’ shareholders get to vote on any proposed acquisition — giving Klarman yet another layer of protection.

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