June 13, 2022 – On today’s podcast we welcome special guest, Meteora Capital Founder and CIO Vik Mittal. Meteora Capital is an investment firm specializing in SPAC-related instruments in both public and private companies.

On the show, Vik discusses:

  • His path into the hedge fund world
  • The Twitter deal and his thoughts on merger arbitrage
  • What appeals to him about SPAC investing
  • Advice for those looking to break into the hedge fund industry
  • 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 accelerateshares.com.

Julian Klymochko: Super excited to have Vik from Meteora Capital on the show today. One of the biggest players in the SPAC market. So, this guy knows his stuff. Vik, how are you today?

Vik Mittal: Good. I really appreciate you guys having me on today.

Julian Klymochko: Yeah, super stoked to have you on. All the way from South Florida. Beautiful there, was there just a few weeks ago. It’s an awesome place to be. I figured we could kick things off.

Vik Mittal: I heard you were playing polo a few weeks ago.

Julian Klymochko: [Laugh]. I wish. I watched polo, that’s about it and try to do some entertaining, but it was good event at the Crypto Polo Cup.

Vik Mittal: That’s what it was. Crypto Polo Cup, nice.

Julian Klymochko: Yeah, it’s emerging of two worlds that you wouldn’t expect. Crypto and polo, but entertaining. Nonetheless, I’m always interested in hearing investors backstory specifically, you know, I know you started out in the investment banking industry in the TMT, Silicon Valley specifically. How did you break into Wall Street Financial Services? What’s your backstory?

Vik Mittal: Yeah, it’s, kind of the American dream sort of story, I guess, you know, child of immigrants you know, who came to this country. I was born here and went to state school, went to the University of Florida. So, I’ve actually relocated from New York after 20 years back to Florida. So happy to be back in South Florida. It got more traditional. I was very fortunate that Raymond James which is a Florida headquartered bank, they’ve really expanded by leaps and bounds, but they opened an office in Palo Alto. It was 2002 and you know, I was fortunate. I got a job offer there, some of the other regional banks. And I had the opportunity with Raymond James to get staffed in their west coast tech M&A Group that was a new initiative, new launch.

They hired three senior bankers, one from RBC, one from Goldman and one from Piper Jaffray and they had to build out the junior team. And it was right there on Sandhill Road, and it was, you know, a great experience. It was at the end of the.com bubble bursting. So, you know, we’re picking up the pieces of the rubble in that. And interestingly, we were focused on hardware companies and networking companies. So, a lot of companies raised a ton of capital at really, really high share prices, and they were burning tons and tons of cash. And some of them were even trading at negative enterprise values where they had more cash on their balance sheet than their market cap because you know, their burn rates were so high. So, I think it, you know, in some way prepared me for being in the SPAC game [laugh] as it’s today.

Julian Klymochko: Good point.

Vik Mittal: You know, we did a lot of difficult financings. I did that for three years, a lot of structured financings, a lot of M&A sales of small midcap stories. And then after that, having grown up on the east coast, wanted to get back to the east coast, loved my time in California, but wanted to come back to the east coast and wanted to be on the buy side. And so that was, you know, how the transition happened that I ended up in New York about seventeen years ago and went to B School at NYU and then got a job at a firm called Glazer Capital when it probably managed like 50 million and, you know, helped grow that business for the last fifteen, sixteen years as an analyst and then portfolio manager and you know, had responsibilities for SPAC investing along with merger arbitrage, and all the other market mutual strategies that, you know, well, Julian and you kind of cover and SPACs have kind of taken over my life the last few years.

Like it has for many folks, but it’s been an interesting run as a capital markets buy side person the last twenty years by and large, my career has been in the structured product market, neutral investing asset class. And you know, first started in merger arbitrage strictly then expanded into high yield distress cap structure. And then around 2009, got into SPACs and, you know, covered all of those strategies. And then it’s just been the last three or so years as the SPAC markets really exploded that I’ve spent more time on SPACs. You know, as you know, well, there’s this odd backwater product that you know, there a handful of SPAC raises a year, maybe ten to fifteen. There were some interesting deals that came out of it prior to 2019, but it wasn’t really something institutions or institutional allocators focused on.

And over the last two years, plus. I’d say it really started with Chamath and the Virgin Galactic deal.

Julian Klymochko: Yeah.

Vik Mittal: And it really opened the imagination of what types of companies and businesses could go public. And it, you know, became the Haven for late-stage VC growth type investing for that kind of bubbly period. I mean, I think it was a bubble in the entire market, not just SPACs and regular way, IPOs and companies going public at two hundred times, ARR and things like that. And it was really the blending of the public and private markets, which I think will continue to occur where those markets blur into one. And you see that with late-stage growth companies. And so, you know, I made a conscious decision to kind of go all in, on SPACs for this next phase of my career and left Glazer at the end of twenty-one and formed a new fund Meteora Capital.

Took a couple closed end funds that we managed that focused on the SPAC ecosystem on sponsor partnerships, investing in those risk pools you know, doing the public stuff, doing the pipes and all the other stuff and doing some late-stage growth VC investing. So, it’s really kind of like a bellwether crossover type fund. It’s still queues very closely to my background in structured product market, neutral investing. And we tangentially follow the merger ARB stuff. I still love it. I’ve done it for seven-teen years, but you know, the cap structure, we’re doing some in high yield, but the high yield we’re doing is around SPACs and it’s more around the financing for these deals. And there’s a lot of interesting, structured financing that you know, we can talk about in this, but that’s been the focus of what we’ve been up to the last year or two.

Julian Klymochko: That’s great to hear your story. And you made this transition from the sales side to the buy side, which we see often. You typically see you know, young capital markets professionals, people who want to break into the business, start out either on the investment banking side or equity research side and make that transition to the buy side after a handful of years now, did you always want to be an investor early on? Is this something that was like a dream of yours? What got you hooked on the investing business?

Vik Mittal: Yeah, that’s a good question. I mean, growing up, you know, being a, you know, an Indian kid, whatever, it seemed like all your friends’ parents were doctors or whatever. Because there was like a big wave in, and I’m sure you see that in Canada, like, you know, the immigration wave that they’re all doctors that are of Indian background. And I just was always naturally interested in finance, you know, watch CNBC as a kid. We had a subscription to investor business daily and I followed the canceling method. And probably the benefit was when I was like in college. We had like, you know, it was in college was the first time where I had high speed internet and, you know, I had dial up growing up. And if you remember back in the day, the E-Trades or whatever they were.

Julian Klymochko: [Laugh].

Vik Mittal: You’d get a free computer if you opened up an account with like five thousand dollars. So, I used to like open up a new account every month, get a computer, sell it for like a couple hundred bucks. And, you know, was trading stuff like Qualcomm and whatever, and was just making gobs of money. And I think that’s really, you know, a little bit like the frenzy that we saw the last couple years not as much on you know, the meme stuff, but you know, it was a frenetic trading environment in the late nineties. And that’s really what hooked me and spent a summer in New York my junior year working for a private wealth kind of guy, but it was really just a broker.

Julian Klymochko: Right.

Vik Mittal: And that really cemented that I wanted to be in the financial markets. And so, you know, when I graduated, got the job at Raymond James and investment banking, I did want to do investment banking. I think, you know, that equity research to your point are great starting points for people that want to be in the investment management industry. You learn the principles of valuation, financial modeling, a lot of those like basic skills that at least I didn’t get in college, you know. I’m sure kids now today there’s more in the resources today are just, you know, infinite it seems like. But that was really the goal. And I think that was the goal of a lot of people in my kind of position when I was, you know, in my late twenty or so, twenty, twenty-one, about to graduate colleges. If you go do investment banking or equity research, you put in your two, three years, it’s miserable, but you know, and then jump to the buy side or something like that. And so, it served me well, it was a great experience. The question about stocks, I’ve always had a native interest or not, you know, since I was a teenager kind of thing, a native interest in the stock market and investing.

Julian Klymochko: You made a really good point with respect to going to an investment bank for kids just out of school. Mike and I did that track as well, and they just provide phenomenal training that really helps you make that leap, or some people stick with it and make a career out of it, which you know, you can get compensated extremely well. Now you move to Glazer Capital, one of the biggest players in the arbitrage space amongst other strategies, what would you say some of the most important lessons that you learned there are?

Vik Mittal: Yeah, I mean, I was fortunate that I joined before the financial crisis, so, you know, got to see some different market environments. I don’t know if you saw Bill Gurley tweet this weekend about.

Julian Klymochko: Yeah.

Vik Mittal: Like everyone who’s been investing the last thirteen years has just been on a one way.

Julian Klymochko: [Laugh].

Vik Mittal: Tear bull market and they don’t understand like cash flows and these other things.

Julian Klymochko: Except for 2020, a brief period there when the world seemed to be ending but bounce back quickly.

Vik Mittal: Right, that’s true, yeah. During the pandemic, everyone was looking at asset value again. I think the thing I learned in that was when you do these market neutral arbitrage, investing, you know this well, you’re picking up pennies in front of a steam truck in many of these strategies in particular merger arbitrage. And so, risk management is, you know, the key determines of whether you’re going to be success, these tend to be levered strategies. I was very fortunate to have the opportunity to kind of get that level of preservation of capital you know, taking every dollar of LP Capital as if it’s the last dollar someone’s going to trust with you and, you know, have a very conservative view to what you’re doing. And, you know, you see this, I follow you on Twitter and you’re tweeting about these deals and stuff.

You get it, it’s a very much risk management driven strategy. You need to be right ninety-eight percent of the time kind of thing. And so, it was an interesting way to grow up in the business versus, you know, you started some long, short growth fund and you’re trying to, you know, hit home runs. Here, we’re trying to, you know, get hit by a pitch, walks, bunch, singles.

Julian Klymochko: [Laugh].

Vik Mittal: And it kind of add up. And it was an interesting way to start my career on the buy side and, you know, built out a little bit into high yield and distress where you can see that risk reward paradigm in a different light than if you came from a traditional long equity perspective.

Michael Kesslering: Absolutely. And so, we’ll get back to this SPAC side in a moment, but on the merger ARB side, how has merger ARB investing changed since you got started on the buy side in the industry?

Vik Mittal: Yeah. It’s, you know, I think it’s like the CFA Institute, like ten years ago, put a study out about how deals get more efficient and I’m sure you guys have seen this. It’s like, I remember when I first started, you know, these deals were trade at ridiculous spreads, first thing in the morning, pre-market. It’s like no one understood it. Merger agreements, you know, back in the day, Bear Stearns would deliver letters of intent on financings for leverage buyouts, right. It wasn’t binding committed financing you know, reverse term fees, specific performance material, adverse carve outs did not occur until after 9/11, really in any meaningful way, like Ibp Tyson, things like that. So, I think the practitioners have created a more efficient product and it’s really turned it into like a true risk arbitrage where you have to get paid for the risk, you’re taking on an antitrust basis or, you know, financing failure and things of that sort.

And so, the market’s gotten much more efficient and I think it’s the type of strategy that it’s a great strategy for people to do. And then, you know, as long as you can understand the contracts, you can get through a three-hundred-page merger agreement in fifteen minutes and get through the key conditions to close and understand the material adverse effect clause and what the remedies are for breach. It’s a great strategy if you’re good at it, you can’t be wrong at it. You got to be right every time. And it’s one of those you know, just working man strategies where you got to do the work and do the analysis. And you’ll probably be right because it’s like, we used to always say, like, if you interview ten merger ARB managers and you ask them to take a basket of a hundred deals and bucket them in ten different distinct buckets of the lowest risk deals to the highest risk deals, those ten different buckets will look largely similar. So, the difference in whether one of managers successful versus the next is making the decision, which bucket to stay in at which point in the market environment and which cycle. And so that’s really kind of the key part, I think, to being successful in the merger ARB strategy in particular,

Julian Klymochko: Plus, in addition, the amount of leverage put on those strategies, because as you indicated these tend to be levered strategies, but really good point with respect to earning a risk premium, because that’s typically how, you know, all these different strategies and asset classes work. Now from a risk arbitrages perspective and I saw you tweeting about this. Any of our listeners definitely give Vik a follow-on Twitter. You did have some tweets regarding Twitter, Elon, which is one of the most topical things to discuss these days. And in terms of risk premium, missing [Inaudible 00:16:22] spades because it is the largest leverage buyout of all time and just an insane amount of money for an individual person to come up with.

Vik Mittal: Right.

Julian Klymochko: forty-four billion with a twenty-one billion equity check. I’m sure he doesn’t have that just sitting in a checking account at Citi, but what are your thoughts on this situation? How do you just, you know, you distill it down into a case? What are your thoughts?

Vik Mittal: It’s fascinating. I mean, so my Meteora funds were focused on SPAC investing, so we don’t have a position in it. So just for full transparency, merely, I have the popcorn on the sideline, but I’ve read the merger agreement and I’ve probably read everything about this [Inaudible 00:17:02] sorry about that. And you know, it’s a great deal, but I’m also glad I have no exposure to it.

Julian Klymochko: [Laugh].

Vik Mittal: Because you walk in on whatever day it was, the deal was announced. It trading like its fifty-two.

Julian Klymochko: Yeah.

Vik Mittal: One fifty-four, twenty deal. And the press release read from, you know, the CEO and the board of Twitter, that this is a rock-solid deal. We have certainty on financing, it’s going to close like, all these things you’re not supposed to be putting in a press release. If the merger agreement read the way it actually read when you saw it a few days later [laugh], and I don’t know why they did that, but it’s, and then it, you know, subsequently traded off from fifty-two to forty-eight, which is just a massive move.

Julian Klymochko: Yeah.

Vik Mittal: On a gross basis for a merger ARB deal. It has everything from even, you know, the political angle, right. The Elizabeth Warren, Senate hearings, house hearings, Elon Musk, you know, is there a CFIUS angle because he’s South African by birth. Does he have to go through that review? He controls SpaceX. So, he probably doesn’t, you know, just those basic blocking and tackling things. Is there an antitrust question? I think most people here would say there’s no credible antitrust case, but if you know, Facebook and Giphy got blocked by the European Commission who God knows what’s going to come out of this, you’ve got the issues of free speech. You’ve got the issues of all these other things. And that actually doesn’t touch into any of like the parts that are probably really what’s going to make a difference, whether this closes or not. I’ve seen, you’ve tweeted out about like, this is a binding agreement between the parties. This isn’t just like, you know, a proposal, this isn’t funding secure.

Julian Klymochko: [Laugh].

Vik Mittal: This is a binding agreement between the parties with specific performance. There are, yes, provisions. If there’s a financing failure, there’s a billion-dollar reverse termination fee. And then that delves into the rabbit hole of this margin loan and financing. And when he makes stock sales, like the eight and a half billion he sold, is there taxes that he has to pay on that? Or is that relative to the option exercise or just, you know, other stock that he may be taking a loss on? Does he then replace the stock he sold with now unencumbered shares against the margin loan? And you know, I’ve seen theories that in theory, if he sold all of the shares that back the margin loan, then therefore he cannot be forced to fund the margin loan. And then there’s, you know, the notion that he’s doing this for tax reason or he’s doing this to sell his Tesla stock at a high.

Julian Klymochko: Yeah.

Vik Mittal: And then it’s just paying a billion dollars. So, he doesn’t spook the market. Is he selling Tesla? He has a reason to sell it. And then six months later he’ll sell it or six months later he’ll walk away from the Twitter deal somehow and claim a financing failure if Tesla stocks lower. You know, it’s fascinating all around. And then this weekend, the Wall Street Journal ran a fairly in-depth story on his relationship with Jack Dorsey and how this apparently has been a discussion they’ve been having. This is something he’s been discussing with Peter Feigin among others. And you know, so I kind of shake out, unless we get into a financial armageddon and Tesla, stock is off thirty, forty percent, which it very well could be obviously. But I think he has every intent of closing the deal and he’s doing it for idealistic reasons and whatever happens, you know, we’ll all find out together, but I’d like to believe optimistically that he’s doing this for the right reasons. And because he has a real vision for Twitter being the community, you know, center or the square for all to kind of have free speech, but we’ll. Not one as a merger ARB, you want to be in [laugh]. I’d rather be an Active Vision, Microsoft or something else. Heck, I’d rather be back in AT&T time, Warner something, you know, like, I don’t know how analyzable some of these things are. And I have no idea why Twitter’s board did not insist on their traditional seven to ten percent of deal value, reverse termination fee.

Julian Klymochko: Right.

Vik Mittal: Which should have been three to five billion instead of a one-billion-dollar fee. And you tweeted it. He doesn’t have any clear walk away, rights. It’s not like he can just wake up tomorrow and say, I changed my mind. I’ll pay you a billion dollars.

Julian Klymochko: Yeah.

Vik Mittal: It doesn’t work that way. There’s this full specific performance, the benefit of the bargain, the conditions to close have been met and the financing is available. He has to close the deal. So, you know, it’s weird. You’re short of put-on Tesla being long, the Twitter spread. And I don’t know how you necessarily, other than maybe buying puts on Tesla, which is an odd thing to do to hedge yourself on a cash deal.

Julian Klymochko: Yeah.

Vik Mittal: But you know, it’s an interesting trade in just having covered these types of situations over the last seventeen years. You’re never going to get to the right answer and you’re never going to get to a ninety-nine confidence as an investor. You’re going to have to go with a gut feel. You’re going to go with an expected value. You know, the downside’s probably twenty-five to thirty, if this thing falls apart and you kind of know what your upside is. I don’t think a topping bid coming in, tell Bravo or whoever else. I don’t think anyone’s going to step in. So, you’re looking at a trade that’s like, you know, five bucks up and twenty-five down kinds of thing, one up five down. I don’t love those. Just looking at an expected value basis when you’ve got something this complex you typically like to see him one up two down, like where Active Vision is or Active Vision probably one up in half down or one down. Not making a fundamental call, but I think I like what Buffet’s doing there better than what people are doing on Twitter today.

Julian Klymochko: Yeah, and speaking of Buffet, and he’s been an arbitrage practitioner for many, many decades, basically since, you know, the 1950s, he always said, you know, you wait for the fat pitch. You don’t have to take a swing on every single one. And if you look at the arbitrage market, I mean, there’s basically like hundred risk arbitrage trades in North American. You know, literally like many, many hundreds of SPAC arbitrages trade out there. And as you indicated, this one specifically is not explicitly correlated to Tesla shares, but you know, implicitly it is. And I like that analogy to being short, a Tesla put because certainly the financing is reliant on Tesla shares not crashing. Now with respect to the SPAC market. I did want to transition too focusing on that to start out. If you could tell us what the founding thesis behind Meteora Capital? What you’re looking to accomplish? You previously indicated this massive growth in the SPAC market. What made you want to focus there?

Vik Mittal: Yeah, it was kind of like, I guess, most things in life, it was born out of like organic experiences and, you know, what interested me at this point in my life and career and you know, it actually was born in 2016 in some way. The name Meteora came from one of my SPAC partners, a sponsor, a Greek individual, and he was based out Greece and he was raising a SPAC and I was investing in the risk pool personally and I Google searched Greek rock, famous rock formations, and Peloponnese and Meteora were like the top two searches. Peloponnese, I’m probably not even pronouncing right.

Julian Klymochko: [Laugh].

Vik Mittal: It’s way too long. And so, I settled on Meteora. And so, if you look in Delaware, there’s an SPV, it’s called Meteora SPAC SPV. And so that was kind of the Genesis, and this was back, you know, a number of years ago. And so, yeah, I kind of had the vision that at some point, like, you know, if I go start my own gig and start my own fund. It’ll be around the SPAC ecosystem. I’ve really enjoyed getting to know sponsors. Working alongside them as a co-partner by investing in their risk pools and serving as a sub-advisor and helping them, you know, source their deals, structure their deals and get that stuff done. I love the public trade too. It’s a great trade as well. And, you know, you understand it better than anybody. It’s a great call option that you’re long with T-Bill downside risk. It’s a great fixed income alternative that has real equity upside. If you partner it with the right sponsors and they do credible deals, and you can have a year like 2020, where, you know, a lot of stuff, you know, you capture real equity upside and things like that.

And so, when I formed Meteora that goal was to be a holistic end to end sponsor partner. So, we, you know, built a great organization with six investment professionals that are focused on every aspect of the SPAC cap table, you know, from the sponsor investment to the public investment, to the pipes and late-stage growth investing. So, we cover kind of all aspects of the SPAC market. We’ve got thirty years of collective experience in SPACs. I’ve been at it now like fifteen years. Almost eight years sponsoring SPACs. My associate PM, Joe Tonnos, who I thinks done your podcast before.

Julian Klymochko: Yep. Yep. We had Joe on the show as well.

Vik Mittal: Yeah, he’s, you know, he’s an old head in this game. He’s been around since 2016 with the Haymaker franchise, you know, has a proud pedigree in the SPAC market. You know, OneSpaWorld, they took public a hundred million of EBITDA stock, I think is still around ten. Their second deal was with ARKO GPM, seventh largest convenient store operator in North America, two hundred million plus EBITDA, like doing real deals, right. And when I hired Joe, his old boss, Andy Arie was taking ARKO GPM public. And, you know, he made this joke. I don’t think he mind me saying it. He’s like, I’d have a hell of a lot more hair right now if I was just taking some flying taxi public instead of a real company and he is bald. So, it’s like, you know, and so I wanted to build an organization around individuals that had a depth of experience in pedigree in the SPAC market.

And so, I think that’s what we’ve done. You know, I’ve got a lot of experience on the public side and the structured product trade and things like that. And so, you know, banker’s, lawyers, everybody turns to us for advice. So, we’re involved in a lot of interesting processes and that’s what we’ve done is, just try to build an organization that is around the SPAC asset class. And it really is an asset class. It’s, you know, two hundred billion afloat, six hundred plus SPACs. There’s a lot going on from the regulatory side. There’s a lot going on from the capital markets side. And, you know, I felt that there was a generational investment opportunity to be an expert, you know, to be focused on one thing, to not do merger ARB, to do not do these other things that dilute your time and attention. And I felt like I could do my best work being laser focused on the SPAC asset class.

Julian Klymochko: That’s really good point. It’s an asset class that has really grown tenfold over the past few years and really emerged into I’d say like, you know, 2020 and 2021 was perhaps the year of the SPAC. It just got so much attention. And now a lot of that attention is negative bias from the media just due to poor de-SPAC performance. Now at Meteora, you guys are involved in basically every stage of the SPAC, whether it’s you know, the IPO, risk capital, co-sponsoring, SPACs, pipes, things of that nature. How does your approach differ from some of your peers out there?

Vik Mittal: Yeah, I mean, it differs in some sense that I’ve found just, you know, having worked at larger organizations that being a SPAC specialist is kind of an odd thing, right. It’s not like, you know, capital markets bankers can be considered, like the ECM guys that do the IPOs and work on the deals can be SPAC specialists. But in general, there aren’t a lot of SPAC specialists out there and having insight into the private market and not just the public trade. And that’s really where I thought our differentiated edge would come from is that we understand the plumbing of the market, you know, how these deals get done. Whereas when you’re focused on the public SPAC trade or the public SPAC arbitrage trade as your kind of sole focus, there’s that Chinese wall, you’re beating against it, and you really don’t know what’s going on the other side and what the plumbing of the market is. And so, we’ve tried to make a concerted effort, and I’ve tried to hire people that have an insight into that side of the equation, that what makes this puzzle work. And I think back to Neil Shaw, who used to run SPAC capital markets at Citi for the better part of a decade, and now runs SPAC ECM and maybe has a wider role at Evercore. And, you know, he describes SPACs as, it’s like 3d chess. You know, you’ve got all these moving pieces, you’ve got a blind pool blank check entity, and you’re trying to get a deal done. It’s like impossible. It’s literally, it’s an impossible product to deal with. Like, who’s kidding who, and its hard work. And, you know, I have the utmost respect for the sponsors that do it the right way and get great deals done. The bankers that are in this ecosystem that have been doing this for decades with David Battalions at Cantor Fitzgerald, Neuron, Eric Hackle, these guys who really have been at it Pavan, you know, they’re just very talented, Tina, Jeffries.

Like these are some of, I think our generation’s greatest deal makers, you know, from the sell side that are working in this product. And they’re going to earn their keep the next couple years, because it’s a lot of hard work to get, you know, a lot of deals done when six hundred, some odds SPACs were raised in 2021. And it’s just fun. You know, it’s a fun asset class. If you like deal making, if you like putting puzzles together, it’s an interesting product and you know, the backend solutions are just going to be, you know, they’re so interesting. The bells and whistles that are coming on these converts with ratchets, penny warrants and all these other things, it’s a great product for the structured product event driven oriented investor. And there’s something for everybody to do. There’s the arbitrage trade, there’s the, you know, the backend trade, there’s the sponsor trade that many do in some shape or form and yeah, there’s plenty to keep us busy. There’s no question.

Julian Klymochko: In addition to the de-SPAC short selling, I did see a short report come out today. On a recent de-SPAC, but.

Vik Mittal: Which one was it? I saw it yesterday. The person tweeted. I forget which group. It’s like one of the biggest VC pump and dumps or something.

Julian Klymochko: [Laugh] yeah, it was IonQ, which we did have on this show recent.

Vik Mittal: Oh my God, Nico De Masi and Harry You.

Julian Klymochko: [Laugh] Yeah.

Vik Mittal: I’m a little surprised. Quantum computing and Nico, I haven’t read the report obviously, but Nico is, you know, he is like a Stanford PhD in like electrical mechanical engineering. I’m curious to see what the report says, but I know his depth in knowledge of quantum computing is unrivaled.

Julian Klymochko: For sure.

Vik Mittal: But it’s also an emerging, you know, it’s an emerging, I don’t know what do you call it? Emerging technology.

Julian Klymochko: Oh, definitely. Yeah, we’ve had Niccolo on the podcast as well. We had IonQ on the podcast and the thing about these stocks is they’re not going to play out until like five, ten years later. So, I mean, putting out a short report, it’s not really fair because they’re making all these claims, oh, you know, the technology, it’s a joke. It doesn’t work. I mean, I certainly couldn’t tell that. I don’t think anyone can tell at this point for the most part, will we be able to tell in five, ten years? Yes. But at this point, it’s extremely speculative on both long and short side. So, volatility is something that you can expect there, but we have seen other short reports. I mean the Nikola Motor was a good one. In any event you did mention this game of 3d chess, perhaps these days more so 4d chess. Lot of bearishness with respect to potential liquidations. I mean, there’s so much product out there. Over six hundred SPACs seeking for a deal, pretty short timeframes on those ones. What’s your view on this prospect? Widespread liquidations.

Vik Mittal: Yeah, that’s a great question. I guess the way we think about it, I guess I should say is, if you rewind the clock to September of last year, the average pre-deal warrant was like sixty to seventy cents.

Julian Klymochko: Yep.

Vik Mittal: And the average postal warrant was like the dollar to one-eighty plus. Now it’s like sixty, seventy cents for the post deal and thirty-three cents, I think I saw last.

Julian Klymochko: Yeah.

Vik Mittal: For the pre deals. So, the market’s factoring in like forty to fifty liquidations.

Julian Klymochko: Yeah.

Vik Mittal: There’s five hundred and seventy-five I think spec searching for a deal. There’s this Q1 of twenty-three maturity wall is, going to be quite onerous. There’s a race to the bottom in many respects in terms of, you know, getting something done. The sec proposed rules seem to limit the timeframe to not be considered an investment company act to twenty-four months, announce a deal in eighteen, closing in twenty-four. So, they’re generally trying to, it seems eliminate the ability to have extensions, which has been a great solve for these SPAC to like, you know, you can extend your life for years to find a deal. I don’t know necessarily why that’s a bad thing and why the sec is trying to shorten their life to a hard twenty-four months, because I think it’s going to force sponsors to do, you know, things they shouldn’t be doing to rush a deal out and not liquidate. So, but I guess that’s one of the unintended consequences of some of these proposed rules that we’ll all learn together, what happens. But to your question, I mean, I remember Betsy Cohen, she spoke at some Bloomberg summit three or four months ago and said she expected thirty percent of sponsors to liquidate. I think that’s a good number and I still think that numbers reasonable.

I mean, you still see a great pace of deal activity. There’s like ten or eleven deals announced in April, maybe more. There’s enough to kind of clear the backlog with some extensions. You will see folks liquidate for different reasons; I think, has been generally discussed in the market. We are aware of like some blue-chip growth equity funds, that raise SPACs that have effectively said, you know, we put ten million into this thing. We’re not going to do like a grab altimeter situation where, you know, we write another a hundred, two hundred-million-dollar check and the thing trades off fifty percent and we’ve just lost our LPs a ton of money. For them, it’s like, you know, it’s writing a series de cheque and they’ll let the ten million go to zero. They’re sponsors we know that are resolute.

They will not do deals that are reputationally damaging in any respect. They won’t do deals outside of their core vertical. So, you’re going to see liquidations, I think from parties that you did not expect to liquidate because they’re very credible, talented, operators and sponsors and private equity and VC folks. But for them, you know, they wrote a cheque out of a multi-billion-dollar fund, a ten-million-dollar cheque to raise a SPAC. And if they can’t find the right deal or the market’s not cooperative, I’ll go write the cheque in the private market. And I think you’ll see a lot of that. So, I’m just going to stick with a thirty percent liquidation. I think, unfortunately you’re going to see a lot of these like PowerPoint business plan type deals get done and you know, like how many Bitcoins, mining, EV concept plays, you know, I think there was one yesterday. The day before that some random like Chinese based CH-Auto.

Julian Klymochko: Yep.

Vik Mittal: A billion valuation.

Julian Klymochko: One point three billion enterprise value.

Vik Mittal: Yeah, I know nothing about it and look at the deck. It’s unfortunate. Like if there was a way to like segment out what’s a SPAC from something else, you know, like SPACs become a four-letter word again and gotten a bad name and reputation and for many right reasons on some level, right. And if there’s a way to kind of clean up that aspect of it, I think you get to a healthier product. I do think we actually get there. I think the sec proposed rules, many of them are a step in the right direction. I don’t think anyone’s complaining about better disclosures. I don’t think anyone’s really complaining about, you know, the use of projections in a sane way. I don’t, you know, I don’t know how appropriate it is to have zero revenue companies with 2027 models.

Julian Klymochko: Right.

Vik Mittal: You know, and deals being sold off that. I’m a little torn because, you know, from the little VC investing we do, like you see that a lot in the private markets. So, what’s so wrong about putting in the public markets, if it’s all disclosed and you know, conceptually like, you know, you and I, we look at these models and we hear cut them by ninety percent. And we kind of understand, I do think the outright fraud stuff, there needs to be a better way to regulate that where like, you know, you’re claiming a backlog or an order book. That’s just not real, like, right. It’s like, you know, these indicated orders, you’ve got a thousand trucks from X, Y, Z, or you’re a lighter company, and you’ve got a partnership with a major auto OEM, but that auto OEM and you have not had a significant conversation of any sort in years, but they happen to make a two-million-dollar investment in you in your seed round.

And now you’re claiming that their a strategic partner, that you’re going to be in their vehicles in 2025, there’s got to be a way to kind of stamp that out and get better diligence. So, I do like the transferring or a clear defined liability on the sponsor, but the sponsor better go do the due diligence and ensure that these numbers that they’re putting their SPACs name behind and that they have, that their board has liability for has been thoroughly vetted. Fraud, always occurs, right. You’re not going to uncover everything, but a lot of the stuff, the excesses that you saw over the last two years could easily be been prevented if the sponsor, if the banks did significant due diligence that, you know, they would’ve done otherwise on a regular way IPO. So, you know, I applied you know, chairman Gensler for, you know, some of the stuff. There is some of the stuff in there that’s like a three-hundred-page document that’s going to go through this comment period that it’s going to have unintended consequences. I think there’s aspects of it that are unfair to SPACs that seem to advantage regular way IPOs. We all know that like, you know, favored hedge funds, get an inside, look into the CFO’s model. And like it’s no secret why Rivian everyone, had the same financial model for Rivian and same production targets as the company has, you know, like it’s, so there’s elements of that where SPACs kind of democratize the information flow and you get like a four-to-six-month window to say, this is credible, or this is not credible. And if you think it’s not credible, you can take your ten dollars back. So, you know, it’s, I don’t know, it’s a long-winded way of saying that [laugh], there’s a lot going on, but I think that creates a lot of opportunity for those that are able to, you know, have a differentiated view on this asset class.

Julian Klymochko: Perhaps we’re moving past the PowerPoint business going public vice SPAC. But nonetheless, I mean, if you look at the current market that Trump media DWAC is the most successful one and not much more there, aside from a PowerPoint, but I digress one other interesting.

Vik Mittal: I would say, on that point, for full disclosure, we have some sponsor shares. We did the anchor deal, in that deal.

Julian Klymochko: Good for you [laugh].

Vik Mittal: Yeah, I don’t have any specific like information on the transaction otherwise, and obviously it seems like you know, just from an outsider’s perspective, there’s some challenges to getting it over the finish line. They haven’t even filed a perspective [Inaudible 00:42:36], and it’s been six plus months.

Julian Klymochko: Yeah.

Vik Mittal: So, we’ll see. I have no idea why that hasn’t occurred, but like Clubhouse raised money at a four-billion-dollar valuation, right?

Julian Klymochko: Right.

Vik Mittal: I mean, I just, I wonder regularly, like Chamath, as much as he’s a lightning rod tweeted out, you know, the regular way IPO performance versus SPAC from April of 21 to April of 22 and the charts had a correlation of one, you know? And so, I think we were in a period of the market where everything, you know, there was these growth hypey stories traded off dramatically. SPACs for whatever reason or the easy target, because they took less mature companies public.

Julian Klymochko: Yeah.

Vik Mittal: But you know, you had plenty of, you know, frauds across the ecosystem and not just SPACs , you know, shame on the sponsors who didn’t do proper due diligence, but you look at Rivian, it was a regular way IPO or Peloton or, you know, any of these companies, Allbirds, you know, any of these growth stories, they’re all off sixty to eighty percent from IPO.

Julian Klymochko: Yeah, how about Luckin Coffee that Chinese coffee company.

Vik Mittal: Exactly right.

Julian Klymochko: A complete fraud. And it went public via IPO.

Vik Mittal: Right, exactly. Right away IPO with blue chip banks on the cover and all this other stuff. So, I think, you know, SPACs for whatever reason have gotten the brunt of the bad reputation where, you know, there are elements of SPACs that can be cleaned up. And I think the sec is doing their best to try to clean those up. But by and large, most sponsors are trying to do the right thing. Like they’re trying to do something reputationally enhancing, not damaging. These are people who, long careers by and large. Yes, there were some excesses over the last couple years, but you know, as you see going forward, you need to be a really credible individual and organization to do these deals. And so, you know, I think that’s the one thing that’s coming out of this quote unquote SPAC crash is that as we come out of the ashes, it’s going to be a stronger product, a more sustainable durable product.

If we average, I think it’s twelve SPAC IPOs per month over the next twelve months, by the end of 2023, there’ll be about two hundred and fifty SPACs outstanding. If you assume a fifteen-month duration. So that’s great, right. I think that’s a much more sustainable level than the six hundred today. And then the bar raises SPAC has gone up, as you know, the overfunded trust is a great mechanism to like, you know, you’ve got to put up on a two hundred million raise, you got to put in an extra twenty cents. You got to come up with another four million bucks as a sponsor. It’s not a free call option. I know a lot of people like to point to the fact that sponsors get these quote unquote free founder shares at a penny. It’s simply not true.

Julian Klymochko: Yeah.

Vik Mittal: I mean, there’s a real risk pool. And you know, I’ve seen sponsors that, you know, they’ve lost a good chunk of their liquid net worth, right, you know, at least two to four million dollars because a typical two hundred million raise today costs about twelve million dollars If you think about a ten, twenty trust deal and you’ve got to fund then extensions, if it comes to that. And so, there’s a real risk there. And I can tell you, most sponsors are not making 10X their money. They’re making like a multiple or two of capital invested when all said and done.

Julian Klymochko: Plus, in the current market environment, it appears that underwriters have taken a step back. And I think going forward, having more discipline from the underwriter’s standpoint and perhaps on the sponsor side, if we could see more performance oriented promote, that would certainly increase the viability of the product there. Such that it’s not a free lunch, of course it’s never really is, for the sponsor. And on top of that, you’ve been having all this regulatory pressure, a number of proposed changes from the sec and you’re talking about sponsors, not wanting to do crappy deal and not risk their reputation. Now one that is a prime candidate for that would be Pershing Square. I mean, they don’t really have the standard promote. And then they’re battling the sec for that spark structure, trying to create some innovation in the SPAC space. Now what are your thoughts on where we go from here and the future regulatory environment?

Vik Mittal: Yeah, the Pershing Square, I’ll come back to that at the end. Because it’s so fascinating to me, Bill Ackman just an incredibly fascinating individual and just like a random side tangent. I had the opportunity to do a road show meeting with him when he raised it. And he was like in his Hamptons house or something and he was just like meeting with institutions. And I was like, Bill, where did you come up with this idea to do this SPAC with the [Inaudibe 00:47:21] structure and all this other stuff. He said, when I was two years old [laugh]. He’s been thinking about it for a while.

Julian Klymochko: Right.

Vik Mittal: And when he brought the Universal music deal, it was a very complicated, you know, reverse Morris’s trust type situation.

Julian Klymochko: Yeah.

Vik Mittal: And then the spark with the rights and all this other stuff.

Julian Klymochko: Side note on that, I did try to have him on the podcast when they announced the UMG deal, but I couldn’t get him. So, Vik, if you have his ear, feel free to.

Vik Mittal: No, I don’t have his ear. He was trying to raise, what? four billion at the time of the IPO. So, he talked to anybody that could write a cheque at that point.

Julian Klymochko: Right.

Vik Mittal: [Laugh], so, but yeah, it appears the sec and then the nyc or however it’s going to work is not going to approve this spark anytime soon.

Julian Klymochko: Right.

Vik Mittal: So, he is going to the OTC press release, which is disappointing. Because I actually think it’s an interesting innovation and it creates a healthier, as you think about SPAC 2.0, 3.0 as we continue to evolve. I think heading to the spark structure is actually where the product is headed, where you don’t have to put up the capital. If you like the deal, you have a right struck at ten or whatever, you know, the trust value is. And you can exercise that right at the time of the business combination, and you don’t have to tie up your money and it’ll hopefully bring more fundamental investors in that believe in the sponsor, believe in the management team of the target and want to own the asset versus guys playing for a yield. And I think that’s ultimately where the SPAC market needs to go. And, you know, to your point, the sec proposed rules. They slowed down the IPO issuance tremendously. We’ve got a sixty-day comment period. It’ll probably be extended. I mean, a lot of organizations and trade groups and associations have said that, you know, sixty-days, not even just for SPACs, for the private equity stuff, crypto other stuff. Thy said these thirty, sixty, ninety-day comment periods are just not substantive enough for broad sweeping changes over how things have been done.

So, I think we’re in a three-to-six-month lull. Some of the banks are starting to gear up their underwriting. A couple of the bulge bracket banks, instead of the two percent front end and three and a half deferred. They’re now doing two percent on the front end and zero deferred because they don’t know where the underwriter’s liability’s going to shake out. I think that’s a great innovation in that if you’ve got a two hundred million raises, so then you’ve got a seven million deferred underwriting fee, even if a hundred percent of the shares redeem on a two hundred million trust.

Julian Klymochko: Yeah.

Vik Mittal: Now that seven million of real cash.

Julian Klymochko: Yeah.

Vik Mittal: That is not escaping for somebody underwriting T-Bill risk. So, you know, from that perspective, we’re in as a sponsor, I should say, sponsors are in for a, you know, rough six to nine months. And it happens to coincide with the maturity wall that’s coming, you know, in Q1 of twenty-three. But I think ultimately the product’s going to come out stronger as we get into the back half of twenty-three.

Michael Kesslering: Something that you mentioned earlier was SPAC sponsors that have done it the right way. What in your mind makes a great SPAC sponsor?

Vik Mittal: So, you know, the one thing we say when we kind of underwrite investing in these risk pools and backing sponsor management teams that are in these boards and management teams, is that the first time that you’re the CEO or a lead audit committee director or board member of a public company should not be when you raise a SPAC. So, [laugh], that’s the first thing, right. You’re supposed to be taking a billion plus company public. Helping mentor shepherd, grow them into the public markets. And so, you know, that’s one thing that I think the banks got loose with on their standards is, that the person sitting on the other side of the table, do they have the right pedigree to help shepherd and mentor and develop a company into the public markets? I think then the institutional investor has to hold the sponsor accountable that the deal they do, like, you know, if you’re taking a media company public, you better have been a media company CEO or senior executive for the last twenty years.

Julian Klymochko: Right.

Vik Mittal: Or, you know, and had a credible Rolodex and experience and can help that company through the struggles that they will have going forward in a credible way. You used to see when SPACs, prior to 2019, three to four of a SPAC board would come sit on the public company’s board and have an ongoing role. Now it’s, you know, it’s maybe one guy sits on the board and the other one goes on to SPAC three, four, five, kind of thing. Like, you know, it’s truly just a shell where they’re providing a structure to go public. And it’s a very dilutive structure.

Julian Klymochko: Yeah.

Vik Mittal: So, you’ve got to add real value. It’ll take time. It’s like anything in finance, right. You know, these products, financial innovations, they go through ten different iterations and then, you know, they figure it out. And I think, you know, the SPAC market itself is still an emerging asset class and that, you know, creates a lot of the opportunity. There’s a regulatory arbitrage, there’s a structure arbitrage. There’s a relative immature product arbitrage to the broader investor community. So those things will mature over time. And, you know, I think we do this podcast a year from now. It’s going to be a very different conversation about what the asset class looks like, but I firmly believe it’s here to stay. It’s a valuable tool in the toolbox for capital markets, you know, activity. It serves a purpose for a lot of companies that aren’t able to access a traditional IPO where it’s a better fit for companies that, then a traditional IPO for private equity or founder back companies, it’s a better path to a future liquidity event than, you know, a strategic sale or other things. It’s just, a lot of this has been lost in the noise, the last you know, two years. And we’re getting there. I mean, I think the market, [Inaudible 00:54:01] Julian, the market kind of crashed before these sec proposal rules anyways.

Julian Klymochko: Yeah, the market fixed itself for the most part [laugh.

Vik Mittal: Right, the market itself. Exactly, right. The excesses of 2020 post the pandemic and 21 are really kind of out of the market. And you know, I don’t blame the regulators in any respect. They can’t move as quickly as these markets move. And so, you know, the current administration only gotten into place probably what, a year and a half ago. So, it’s not like Gensler had a lot of time, but I think the market’s kind of self-corrected on its own. And you know, we’re kind of setting ourselves up for a better long term sustainable product.

Julian Klymochko: Yeah, will be interesting to see how things shake out, say in a year or so. And Vik, I think you’ve got yourself wedded to another Absolute Return Podcast show.

Vik Mittal: Nice, nice.

Julian Klymochko: In 2023. But prior to letting you go today, certainly took up quite a bit of your time. I did want to get one more insight specifically for those looking to break into the industry or those kind of brand new to the capital markets Wall Street, what sort of advice would you give them as a two decade veteran?

Vik Mittal: Yeah, I mean, I’ll tell them how I did because I didn’t, you know, come through the traditional routes, went to state school and things like that. I think today the advantages and the amount of information out there is just incredible. Like I love going on Twitter. I was one of those anonymous accounts for like the last three, four years. And now I finally like put a public account out with my name on it, but I love following like, you know, folks like you and others, that just, there’s just a wealth of information, that a wealth of resources that are on the internet and you know, I don’t go on Reddit as much, but on the Fenwick community is fantastic. You know, I think reading Buffet letter, Bezos old letters, Howard Marks, you know, Joel Greenblatt stuff.

I can tell you, my success or what motivates me to do this like sixteen, eighteen hours a day, seven days a week is just being passionate about it, right. And so, I think being in the financial markets is something you have to be passionate about. You have to really enjoy it. It’s grind, you know, you’re up at six-thirty and you’re usually not turning your Bloomberg off till seven-thirty kind of thing if you’re doing it right. And it’s a very competitive market, a lot of Wharton grads, you know, doing this and you got to be on your [A] game. And I think it’s like anything else in life would be my advice for people that want to get into the financial markets is you just, you got to outwork your competition a little bit and you know, read as much as you can possibly get your hands on. Network as much as you can.

You know, that’s why I mentioned Twitter on some level, you know, I respond to direct messages all the time and people ask me stuff if I’m able to. And you know, and I ask questions of, I tweet at you, you know, and you respond to me sometimes, right. And you know, I think there’s a lot of resources out there if you’re looking to break into the industry. You know, I took the CFA twenty years ago. I don’t necessarily recommend that for anybody [laugh]. It was a painful experience, and I don’t know how directly applicable it was to the real world. I don’t necessarily even know if an MBA was that applicable to the real world or to investing in the marketplace. And I think it’s just getting out there and making mistakes in your portfolio and learning from your mistakes, right.

Like, you know, you do your homework, you do your research, you talk to whoever you can talk to, and you invest in a stock or a company, and you’re going to make a lot of mistakes. You’re going to lose some money. So, keep the position small as you grow and, you know, you’ll get there. And in particular, I think breaking the buy side, those are like the traditional avenues. I can tell you from like the interns, we’ve brought on and a couple of them have turned into full-time hires. Someone hits me on LinkedIn, and you know, it’s like, they give a pitch on something that’s interesting. That’s, you know, relevant to what we’re doing. Say, hey, I want to intern for you during the school year. And if we have a need, I think, you know, I’ve generally found in my career, I’ve been fortunate that people have been willing to be mentors and, you know, be you know, give me twenty, thirty minutes of their time. So hopefully, you know, I’m doing the same, you know, and paying it back. And I think that’s a great way to kind of learn more about the industry and expand yourself. But you got to have the passion, you got to have the passion. If you don’t have the passion, this isn’t the industry for you.

Julian Klymochko: Yeah, no doubt. That passion drives the hard work that’s required.

Vik Mittal: Right.

Julian Klymochko: Along with quite a bit of luck of course, to be successful in this business. And certainly, working hard. I should mention you co-sponsored GSRM which is an active SPAC in the market.

Vik Mittal: Yes.

Julian Klymochko: These days. And so, listeners should be aware about that. And Vik, thanks so much for coming on the show. Would love to have you back and wishing you the best of success at Meteora and the SPAC you got out in the market and all your other endeavors.

Vik Mittal: I’ll see you on Twitter. I appreciate the time. Nice to meet Mike.

Julian Klymochko: Cheers. Take care.

Vik Mittal: Have a good afternoon, bye.

Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.


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