Gores SPAC veteran brushes aside recent market euphoria

Mark Stone ignores the feeding frenzy and focuses on getting the best possible deals to market.

On the heels of the largest SPAC deal in history, The Gores Group’s Mark Stone told PE Hub he expects a bifurcation of winners and losers to emerge in the market.

There’s bound to be disappointments amid the proliferation of the vehicle, the senior managing director said when asked about the historically poor returns delivered by SPACs: “The number of SPACs are larger than number of companies that deserve to go public.”

SPACs this month alone raised nearly $20 billion across 67 blank check companies – a tally and value surpassing all of 2019. The year 2020 finished with over $83 billion invested across 248 SPAC IPOs, according to SPAC Research.

Gores, however, pursued SPAC transactions long before it became popular. The firm, having formed nine publicly traded SPACs to date (including two that are co-sponsored), is not focused on the euphoria.

“We are focused on the deal that we bring to market,” Stone said.

In a record-breaking SPAC deal completed just a few days ago, Gores took United Wholesale Mortgage public on the NYSE at a $16 billion value. Shares of UWM closed down less than 2 percent Friday on their first day of trading.

Thirty five-year-old UWM is the largest wholesale mortgage lender by originations in the nation. With a 34 percent market share as of September 30, the Pontiac, Michigan, business produced revenue of approximately $3.5 billion and Adjusted EBITDA of approximately $2.2 billion over the trailing 12 month period, according to an S-1 filing.

“We look for companies that are leaders in their space with a strong management,” said Stone, who is based in Beverly Hills, calling UWM a “safe bet.” Gores, for its part, strays from sectors like energy that historically haven’t performed well in the public market, Stone noted.

2021’s SPAC frenzy has continued from last year, when the newly revived asset class made up about half of IPO funding. Investors have nonetheless questioned this boom. A recent research paper showed that SPACs that completed mergers between January 2019 and June 2020, on average, lost 12 percent of their value within the first six months, while the Nasdaq rose roughly 30 percent in the same period.

Many SPACs in the latest wave have combined with upstarts that can’t go public through a traditional IPO route, making UWM, an established nonbank mortgage underwriter for brokers, one of the outliers.

Consider the list of 11 electrical vehicle companies that are either waiting to combine or have recently gone public via SPAC, according to InsideEVs.

Among the most notable, electric-truck startup Nikola entered the cohort in June with no revenue through a $3.3 billion merger with VectoIQ Acquisition Corp. Shares of the rival to Tesla spiraled down after allegations of fraud by short-seller Hindenburg Research in September. Nikola denied the accusations and hired counsel but since then the company’s founder, Trevor Milton, gave up his position and shares have dropped over 50 percent.

The nature of companies going public through the SPAC route has differed in part because, unlike traditional IPOs, the process doesn’t involve the same level of SEC scrutiny. Companies during the SPAC process can put out their projections such that investors can better calculate how the company is going to grow – however, in an IPO, companies follow a quiet period.

Stone’s playbook also includes an auto startup. Driverless car startup Luminar Technologies merged with Gores Metropoulos I in a deal valued at $2.9 billion mid last year.

The investment firm is hunting for targets for three SPAC vehicles: $525 million Gores Holding V, $345 million Gores Holding VI and $450 million Gores Metropoulos II. Gores Holdings VII – its seventh blank check company – filed with the SEC last week with plans to raise up to $400 million in an IPO.

The sheer size of companies merging with SPACs – including mature assets like UWM – does instill investor confidence, but some cracks remain. UWM, which will use the capital primarily to grow its technology base, plans to announce a dividend shortly, Stone noted.

As Gores remains on the hunt for targets, another notable SPAC vehicle to keep an eye on is Bill Ackman’s Pershing Square Tontine Holdings, which represents the largest SPAC offering ever at $4 billion. In other recent SPAC IPOs of note, Thoma Bravo raised $900 million for Thoma Bravo Advantage to combine with a software business.

The flurry of SPAC issuances has been questioned by other industry players including Goldman Sachs CEO David Solomon.

“I think at some point, the market will naturally flush some of this excess out, but that doesn’t necessarily mean when the market flushes that excess out, that we have some sort of a market crisis,” Solomon said, speaking at the virtual Davos summit.

This week’s announcements have included the $1.3 billion merger of Sunlight Financial, a provider of loans to homeowners for solar panels, with Apollo Global Management‘s Spartan Acquisition Corp II. Elsewhere, Blackstone-backed Alight Solutions merged with Foley Trasimene Acquisition Corp at a valuation of $7.3 billion.