June 21, 2021 – On today’s podcast we welcome special guest Joe Tonnos, Principal at Meteora Capital. Meteora is an affiliate of Glazer Capital, which is a New York-based investment management firm specializing in investment strategies such as arbitrage and SPACs.
On today’s show, Joe discusses:
- What got him into SPAC investing
- An insider’s view of what goes into being a SPAC sponsor
- His experience with the Haymaker series of SPACs
- Meteora’s approach to thinking about SPAC investing, including IPOs, working with sponsors and participating in PIPE financings
- And more
Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.Accelerateshares.com
Julian Klymochko: Right, excited to announce that we have Joe on the podcast today, he’s a principal of Meteora Capital Partners, which is a subsidiary of Glazer Capital, one of the largest SPAC investors out there in the market. In addition, what’s unique about Joe here is that he has been involved in being the sponsor of SPACs. He’s part of the management of the Haymaker series. So, Haymaker I, II, and III. Special purpose acquisition companies, so we’re going to get quite the viewpoint with respect to SPAC investing both from the principal’s side and the sponsor side. So, Joe welcome to the show today. Why don’t we kick things off by having you tell our listeners a bit about your background and your story and what initially got you into the investing business?
Joe Tonnos: Thanks Julian, a pleasure to be here with you and Michael today. My background, I actually grew up in Toronto, in the suburbs and went to college in upstate New York an Ivy University. After graduating, I went back to Toronto and I joined the FX trading desk at CIBC Capital Markets, where I worked as an analyst and then pivoted to the investment banking side of the sell side and worked at both Lazard and Bank of America Merrill Lynch in New York city, across the consumer and retail groups. And through those experiences, I got to know the team over at a group called Mistral Equity Partners, which is a consumer and retail focused investment platform, middle-market buyouts and growth equity. I actually helped them work on a transaction when I was on the banking side. Ended up joining them a couple of years later and, during my pivot to the buy-side and in parallel to that, I co-founded a group called Ketch Ventures, which is more of a seed and Series A syndicated investment group, where we’ve done about a dozen investments on that platform over the last five years or so.
Through Mistral is really how I got involved at SPACs. One of the founders of Mistral, Andy Heyer, partnered with his brother Steven Heyer, who was a long-time fortune 500 C-Suite Operator, ran companies like Coca-Cola, Starwood Hotels, Turner Broadcasting, Young & Rubicam. They partnered together in 2017, to form Haymaker. Given my role at Mistral myself and one of my colleagues, Chris Bradley, got brought into the management team of Haymaker and we raised Haymaker I, which was a $330 million SPAC at the end of 2017. And that’s really what started our Haymaker franchise. So, we had a nice blend of Steve and Andy. Steve having a long tenured operating career and Andy having, you know, a 40 plus year Wall Street career was a really nice blend of the two skillsets.
And, so as I mentioned, we raised Haymaker one, which was $330 million in November of 2017. We announced a business combination in November of 2018, with [Inaudible 00:03:08] called OneSpaWorld, $850 million enterprise value. Operate spas and fitness facilities on cruise ships, net destination resorts around the world, and then we actually raised a pipe. We were the first SPAC to actually raise an institutional pipe. Prior to us all pipes as part of SPAC transaction came from affiliates at the sponsor and we raised an institutional pipe, $180 million, included Goldman Sachs Asset Management, Franklin Templeton, Neuberger Berman, Baron Capital, and Monashee. We were also the first SPAC to receive sell side research prior to the closing of the business combination. That success led us to raise Haymaker II in the summer of 2019, which was a $400 million SPAC.
And last year we completed a business combination with Arco Holdings, GPM Investments, which is the seventh largest operator of C-Stores in the United States. They operate under 17 different banners. It’s been a roll-up strategy over the last decade or so. And we also raised a pipe, as part of that transaction and earlier this year we raised Haymaker III, which was a $300 million SPAC. And shortly after the SPAC IPO, I left to join Glazer Capital. And help the Glazer team in building the Meteora Capital Partners platform, as you mentioned which is an affiliate and we’re really focused on the broader SPAC ecosystem, which I’m happy to talk in detail as we go on,
Julian Klymochko: Yeah, prior to getting into the principal side of the business, I wanted to focus on SPAC operations and process with respect to ultimately getting to a business combination. Obviously before that there’s, a ton of groundwork that you’ve got to cover sourcing deals, due diligence. So, I was wondering, you know, how do you source potential business combinations? What do you look for? What’s part of the due diligence process between initially coming across a potential target and then, you know, signing the business combination agreement?
Joe Tonnos: Yeah, certainly. And you wonder what the market’s changed quite a bit since we first started in 2017, just by nature of volume of number of SPACs, it’s become so much more competitive.
Julian Klymochko: Right.
Joe Tonnos: And the type of diligence that’s done and everything obviously has changed a little.
Julian Klymochko: like when you guys launched Haymaker I, how many SPACs were out there, like 20?
Joe Tonnos: Yeah, there was about 20, I don’t know the exact number, but I know it wasn’t more than 25, that much I’m certain of. It was somewhere in like that 21, 23 kinds of number when we launched Haymaker I and, you know, it was a small group and we spent interestingly enough, you want to talk about kind of some of the steps in the process. When we first started talking with, target candidates on Haymaker I, we usually spent the first meeting or bulk of the first meeting describing what a SPAC was and why a SPAC alternative made sense for that target and the target company shareholders. And obviously that’s no longer necessary, at least in probably 99% of situations, it’s not, but it was an education process. I remember we put together a deck at Haymaker I. Here’s what a SPAC is.
Here’s why a SPAC is good alternative, so on and so forth. Even once we got to Haymaker II, some of the early conversations we had still required a level of education. But certainly not necessarily the case anymore. We were fortunate, when I was part of the Haymaker team, Steve and Andy obviously had long tenured careers, as I mentioned, and had a very expansive network. So, we really leaned on those networks. Obviously, Mistral had been a long time, private equity sponsor. And so, we just had relationships all over the street with other private equity groups, venture groups, growth equity groups, corporates, family offices, you name it. We were very fortunate. So, we really kind of tapped those networks initially. We came up with a pretty extensive target list.
I think by about the 30-day mark of Haymaker I, we probably had over 200 target names, that were on our pipeline. And that continued to actually grow over time. We would do high-level diligence, in terms of just, you know, reviewing the opportunities, whether it fit our high-level criteria. And then we would leverage our networks to hopefully get meetings with the management teams and or the decision makers shareholders, whoever it might be with those target companies. And then from there, we really embarked on a private equity like due diligence processes, probably the best way that I would describe it. We would make a high-level presentation where we could review in 8 to 10 pages within our team, whether we wanted to move forward, do a proposal to the target shareholders and the target management team, where we’d run a full comp analysis, put together a valuation so on and so forth.
And then at that point is really where it starts to become more collaborative. I think one of my favorite things about being involved with the SPAC product is how collaborative the process is. It’s not like, you know, traditional M&A where there’s a buyer and a seller. You’re butting heads trying to get the best price. It really truly is, let’s join hands and figure it out. And as Andy Heyer likes to say, a SPAC is like a make your own sundae because you figure out what everybody, all the stakeholder’s kind of need and want, and you figure out the best structure to make that work and to get everyone the best outcome. And so, we would kind of get to that point, the head of an LOI, where we felt really comfortable about locking ourselves up. Obviously most LOI include exclusivity. At that point is usually when we dive deeper into a data room and do that private equity, like due diligence over a 30-to-60-day period, with that company and making sure that we were working through the definitive docs and all of those sorts of things in parallel, that all the Ts were crossed and all the I’s were dotted, to make sure that we were working towards a solid transaction. Because we didn’t want to put ourselves in a position where we were announcing something to the market that could potentially fall apart, or even just, you know, breaking a news story that the deal was potentially there, or whatever the case may be. We certainly didn’t want to tarnish any reputation. And the other thing that’s nice too, is there were situations where we spoke with targets, where we decided that it wasn’t right to submit an LOI or whatever. We did have maybe four or six meetings with that target. And the nice thing about a SPAC is, if everyone decides to go their separate ways, if you don’t get too far down the line, run into that risk of deal being leaked. It’s like a tree falling in the forest and everyone kind of goes their separate ways and figures it out from there
Julian Klymochko: And with respect to deals leaking. We see that very often these days. And in some instances, that’s called a trial balloon in M&A parlance where perhaps it’s a strategic leak to see what the market thinks of it. Like how often do you think it’s a sponsor testing the waters to see the market reaction to that potential business combination? And how often is that like, oh, no, I can’t believe this leak, where we’re screwed and puts the deal at risk.
Joe Tonnos: Yeah, I think it’s actually more commonly, where people are saying, oh no. And it puts the deal at risk. And the reason I say that is because in a SPAC instance, it can put a little bit of taint on either the sponsor and or the target in a sense of saying, oh, you were running all the way with this one company, it got leaked, what else happened? Why are you now coming to us? Are we your second choice? Whatever the case may be. And so, I actually think it’s, you know, more likely in the case where people don’t want the deal leaked. I think that there are certainly going to always be situations where a deal leak is a little bit strategic. But that’s, you know, we don’t necessarily view that as strength in most cases, you know, I think there’s definitely, if we look at 2020, there was probably a little bit more strategy to that.
But as the market’s kind of, settled back a little bit here in the second quarter of 2021, and it’s a little bit more of a traditional SPAC market. I don’t think a lot of these leaks are necessarily beneficial to the transactions the way that they were. Maybe last year when it was a little bit more of a rat race.
Michael Kesslering: Still for some of our listeners that maybe aren’t familiar with some of the big players within the SPAC space. Can you give a little bit of the background on Glazer Capital and their position within the SPAC ecosystem as an investor?
Joe Tonnos: Yeah, so Glazer Capital was founded in 1998 by Paul Glazer. Traditionally an event driven market neutral strategy. And since 2009 we’ve been involved in the SPAC market. SPAC portfolio is led by Vic Mittal, who is a PM partner, and has been with Glazer since 2005. As SPACs became more mainstream five, six years ago, Glazer has built a position, a leadership position as a SPAC investor and the largest investor globally as of March 31st, 13 F filings with approximately five and a half billion of SPAC investments. Through that, we’ve kind of built a strategy over the last number of years, investing across the entire SPAC ecosystem beyond just the public markets, whether that be traditional way IPOs or secondary trading. And that was really the Genesis for Meteora Capital Partners, which sits under the broader Glazer Capital Management umbrella.
So, 2016 was actually the first risk capital investment as a co-sponsor. We try to lean in, it had active dialogue with all of our sponsor teams so that we can help them in getting a successful outcome for the sponsor and for us obviously, too. And so, what does that mean? We’re really an end-to-end partner. We’ll come in, we’ll make an investment at the risk capital level and act as an extension of their team throughout the process, helping to review the funnel, the pipeline, go through structuring, helping review LOI before they’re submitted and everything else that kind of comes with the SPAC process. Some of the time we’re even meeting teams prior to them getting on board with underwriters and helping with underwriter selection in the super early days as well. And so ultimately like I said, we’re trying to drive a great outcome for everyone involved.
And so most frequently we have weekly or bi-weekly calls with our management teams. There are some situations where it’s a little bit less frequently than that. There’s a couple of situations where we lean in a little bit more hands-on and have an even more active dialogue than a weekly or biweekly touch base. Anyways this strategy was launched last year in 2020, to invest across the entire SPAC ecosystem in terms of risk capital, public freely tradable redeemable securities, and pipes and structured notes on the backend in selective situations, but really be a holistic partner to an investor across the SPAC ecosystem, as I mentioned a couple times. And so, as that strategy was launched, it became Meteora Capital Partners earlier this year with a little bit of a rebrand. Still, as I mentioned, under the Glazer umbrella, we now have a team of eight individuals focused on the broader SPAC ecosystem investing. Co sponsorships through the public and through pipes and structured notes on the back end.
I lead most of the illiquid and co-sponsorship efforts working with our sponsor teams and reviewing the pipe opportunities on the backend. As it relates to our risk capital investments, I would like to use a football reference and where I’m a little bit of either a quarterback or an offensive coordinator, depending on how high touch the situation is for us. And obviously having been through the gauntlet a couple of times, myself, on the execution side with the Haymaker Acquisition team. I’ve got some firsthand experience, hopefully adding significant value to these teams. Our partners with first first-time SPAC sponsors and we developed long-term relationships with other sponsors. We’ve got a couple of groups now who are serial sponsor teams and are on their fourth, fifth or sixth SPAC. And we’ve been a co-sponsor of theirs from day one. So ultimately as I mention, it creates an opportunity for us to be an end-to-end partner to the sponsors but also to participate as an investor and be there from start to finish.
Julian Klymochko: And in terms of being selective, both on the front end than on the pipe side of the investing mandate, what specifically do you look for first off in the sponsor team and then second off in the proforma entity?
Joe Tonnos: Yeah, certainly. So, I think, as it relates to the front end with the sponsors, we have a proprietary kind of diligence process, ranking process, where we meet with the sponsor, multiple times we’ll conduct some due diligence on their track record and what their experience has been prior to launching a SPAC. For us, it’s really about believing in the team and their ability to get a high-quality deal done. And that starts with our belief in those individuals and how they’ve been able to accomplish that in the past. We love to see teams that have a blend of operating and what we call deal experience. So similar to what I had at Haymaker with a Wall Street veteran and an Operating Veteran, and then, you know, being able to have a high level of confidence that there’s a real pipeline of opportunities. And obviously if there’s a skew towards proprietary opportunities, all the better, because everyone listening to this probably knows how competitive it’s gotten given how many SPACs are out there and getting in SPAC offs with five or seven, ten other SPACs.
And so, it’s really kind of driven off that level of confidence in the team’s ability to execute and get a deal done, have the right deal flow. And that leads into what we think is the most important piece of it, on the front end, which is actually providing sponsorship to the target company and the transaction. And I think that there’s a number of situations that we’ve seen where the sponsors, you know, they’re doing something outside of their domain of expertise, whether be the industry, or whatever the case is. You’re called a sponsor for a reason, and I think it’s because you need to bring sponsorship to the transaction and you need to be able to add value, post business combination closing. And I think that’s something that we put a lot of weight in when we’re selecting, who we want to partner with on the front end, are these the types of guys that are just doing a deal to do a deal? Or are these guys who, you know, want to be there, help the company grow or whatever the strategy might be post-business combination. And can be there as maybe the two primary folks on the sponsor team are their primary principles on the sponsor team are going to sit on the board of the combined company or whatever the case may be. So that that’s something that we like to put a lot of weight in, in that we see the opportunity for the sponsor team to add value post business combination, and not just walk away from the deal at that point.
Michael Kesslering: When you talk about really having the sponsorship team adding value on the backend, is that something when you’re looking at the investment banks that you’re going to partner with as well? You had mentioned earlier that you had the first sell side research for a SPAC, is that one of the criteria that perhaps you would look at on the backend for choosing the bank that you partner with as well?
Joe Tonnos: Yeah, I would definitely agree with you there. I think finding the right bank to partner with, especially when you’re in the sponsor seat. I think it comes down to their ability to bring value to the transaction. Obviously, a bank can provide support business combination by providing research. But I think also too, it’s critical that they have the expertise and in a related to that sector or whatever it is, you know, as it comes down to raising a pipe as an example, right? Or helping with some of the M&A, buy-side advisory word due diligence with the sponsor team. Most sponsors that we know at least, you know, the higher quality sponsors. Typically have relationships, investment banking relationships across the street.
And, you know, using us as an example, we were a consumer, in hospitality focus group at Haymaker, because of the relationships that Steve and Andy and our broader team had. We were able to lean on banks who had strong presence in consumer retail, hospitality, things of that nature. And I think that that is critical because they can help you through the process, but then more importantly, they can provide continued support, post-business combination, whether that be through equity research, whether that be through some type of lending or other financing type relationship with the company and being supportive throughout.
Julian Klymochko: I was wondering with respect to the ideal sponsor team say, you know, the best sponsor came along, what qualities would that include? You know, I’m talking about perhaps, access to principal capital, proprietary deal flow, domain expertise, a mixed between operating and so-called deal-making experience. You know, anything else that you look for on the sponsor side that would really make it a must do deal from your perspective?
Joe Tonnos: Yeah, I think those are kind of some of the critical buckets that you just mentioned there in terms of boxes to check. I think depending on what stage we get introduced to that sponsor to our partnership with them at Meteora. It might be a little bit dependent too, on who they’re partnering with as an underwriter. That can sometimes be beneficial, especially now as it’s gotten more competitive in harder to kind of sell the front end of SPACs. Being able to get out with a bulge bracket name and, you know, have a more holistic support platform surrounding your SPAC team, you know, I think that can be important as well. And I think too, we like to look for teams that we believe, especially if we’re meeting them for the first time and they’re actually going to do their first SPAC.
We love to focus on teams that we believe have the opportunity to build what we call SPAC franchise and do 2, 3, 4 or 5 SPACs, you know, there’s a lot of guys, I think that, you know, have gone on to raise one SPAC in the past and they’ve done one SPAC and don’t tend to do another. I think a lot of times the mainstream media paints SPACs to be pretty simple. You raised some money go and do a deal, and everyone walks away with a lot of money. The sausage making in the middle, there is a lot more work than most people, have gotten credit for. And being able to, you know, have a high level of confidence in the team to get through that the first time, but then also that they’re going to want to have the desire to do that again, I think is something that we look forward too. I mean, that’s not a must check on the box by any stretch, but we we’d love to partner with teams that we believe we can have a long-term relationship with that goes beyond one SPAC raise.
Julian Klymochko: Right, and so I wanted to touch on current market dynamics, the current market environment in Q4 of 2020, went through a bit of a frenzy into Q1 of this year, enhanced retail participation, you know, trading really to unprecedented levels market as [Inaudible 00:26:33], also went from red hot, a number of months ago to, you know, relatively subdued. I was wondering, what are your thoughts on the current market environment? And what’s your forecast with respect to the future?
Joe Tonnos: Yeah, everything you said is accurate. I think that right now we’re running into just a little bit of a buzzsaw in terms of how much supply there is in the market. And I think that we need to see some more deals get announced on the backend to really allow the front end to reopen. I forget what the exact number was. I think, I saw as of Friday, it was 403 SPACs that are actively seeking a target. And then there’s another 280 odd or so SPACs in queue, that have filed to do the front end. We’ve seen some green shoots. Actually, we were seeing a lot of green shoots in Europe right now, a lot of tests the water meetings that we’ve been approached by over the last couple of weeks have been European based, issuances, which I think is great because that market’s truly in its infancy. I kind of view that as like the 2016, 2017 where we were in the U.S. but I do think the pipe markets there, I think you’re starting to see a little bit of the disintermediation go away and you’re seeing more of a market equilibrium specifically around, value of deals getting announced. I think the competitiveness saw a lot of, you know, SPAC option and processes get bid up in price. And they went to raise a pipe or get announced to the public or whatever the case may be. There was a pushback on what that valuation was. And I think you’re starting to see that a little bit now prior to the deal actually being announced publicly, which is helpful. So, you’re seeing, you know, right price deals, getting announced of late, which I think is beneficial to the market.
I do think the pipe market is still there. I think it’s as robust as it was six months ago. We’re reviewing opportunities daily. I feel like there’s at least one or two pipe situations we’re reviewing every day. And so that the market is there, you know, our view generally is that once we see some more announcements happen, it’ll hopefully open the front end back up and allow the cue to start moving again. But look we view SPACs to be here to stay. We think it’s a great alternative to IPOs. Having been on the sponsor side myself, I can see some of those benefits, even more in depth than, you know, somebody kind of, who’s maybe just investing in SPACs, you know, whether it’s retailer, institutional, but really seeing it from that sponsor side.
I can speak to it myself. I think this SPAC market itself, what we’ve seen happen over the last 12 to 18 months really kind of just puts us at a third or fourth inning. And I think there’s a long, long runway. Do I see 2020 happening on a regular pace or Q1 of 2021? Probably not. But I don’t think we’d go back to a 2018 or 2019 environment where you’re maybe seeing 50 SPACs or something like that come out each year. And I think it’s really just, like I said, getting through some of these deals that we have now, or some of these SPACs that are searching right now, announcing a deal. We’ll start to create a positive for the environment, maybe again for folks once they see some of these deals get announced.
And I think the level of sophistication, is important as well. I think retail investors are getting smarter as it relates to SPACs and understanding that there’s a vote at the end, how they can participate and not get caught on the wrong side of the trade and so on and so forth. So, I think as people become more educated, the words SPAC is mainstream, but I don’t think the underlying mechanics of SPACs are necessarily all that mainstream yet. And so, as that starts to happen, I think it’s, you know, kind of revitalizes things a little bit. We have a positive outlook, our hope is that the back half of this year, you know, starts to look a little bit more like Q1, as opposed to Q2. I don’t think it will get quite back to that pace, but I think that we’re ready for a strong second half of the year. We should see a lot of deal announcements too.
Julian Klymochko: Alright, well a perfect place to wrap things up. Joe, I want to thank you for coming on The Absolute Return Podcast, sharing your unique insights, in the process of being part of the sponsor team and now different parts of the ecosystem in which participating as a principal investor. So, thanks so much, you know, wishing you all the best of luck.
Joe Tonnos: My pleasure guys, thanks for having me on. Look forward to continuing to work with you and having a solid year again in SPACs.
Julian Klymochko: All right, bye everybody.
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