October 5, 2020- Facebook Co-Founder Takes Asana Public With Direct Listing While Secretive U.S. Data Analytics Firm Palantir Lists Stock, Skipping a Traditional IPO. Why Did They Choose Direct Listings?

Direct-to-Consumer Startup HIMS to Go Public Through a Blank Check Reverse Merger. Should Investors be Buying?

Playboy Returning to Public Markets Through SPAC Deal. What Does the Market Think of This Transaction?

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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: Welcome ladies and gents to episode 90 of The Absolute Return Podcast. I’m Julian Klymochko. 

Michael Kesslering: And I’m Mike Kesslering. 

Julian Klymochko: Today is Friday, October 2nd, 2020. We’re talking today about direct listings and other companies going public or announced going public transactions. What’s interesting is that there were two direct listings this week taking the total tally over the last few years to only four, so what happened this week was. 

    • Asana, which was co-founded by Dustin Moskovitz, which was actually a Facebook co-founder. He took that company public through a direct listing in which they don’t raise a traditional IPO round. They go straight and list on the public markets. In addition, we had another company going direct. We chatted about this from before on the podcast, and this is us data analytics from Palantir. They also skip the traditional IPO, said no to SPAC and went straight to the direct listing. Why did they choose this instead of the other alternatives, your traditional IPO and the SPAC, which is super-hot? 
    • And obviously we got to talk about the hot SPAC deals happening this week, hot or not so hot, perhaps. The first one was Oaktree doing a deal with direct to consumer HIMS. They’re going public, HIMS is one of these Silicon Valley backed high growth entities. I view this as more of like a venture capital series D slash E type transaction, but now they’re giving public retail investors and others access to this. We’re going to chat about, should investors be thinking about buying this sock? 
    • We also want to chat about the Playboy deal. They are returning to the public markets through a SPAC. What does the market think of this transaction?


Julian Klymochko: But let’s start off with this news of two direct listings in one week, which is odd because previous to this week, we only had two other direct listings, basically in the history of markets. And when we’re talking about direct listing for, we’re talking about large-cap companies going public. Now Asana, which is lost making, obviously a lot of these start-ups still printing the red ink. However, they were valued at about $4 billion dollars once their shares were up enlisted in the public markets, closing at 25 bucks in change in terms of their share price. Now, this is important because when a company pursues a direct listing, they’ll have, what’s called a so-called reference price, which the stock exchange comes out with a sort of valuation benchmark in which they take to investors and say, you know, this is perhaps a fair price. And the reference price on Asana deal was 21 bucks per share. It started out the week as high as 28-29, even ended that week at around 25. So basically, when it first started trading, that was the top and only declined throughout the week.

So, a lot of hype behind these. Now this $4 billion dollar evaluation compares favourably to the 1.5 billion valuation they had in their last funding round in 2018, where they secured more than $200 million dollar in venture financing. Most of which happened in 2018, but they also raised cumulatively since 2009. Now contrast that to Palantir deal, we discussed this company on the podcast previously. 17-year-old, been out there for a while, still losing tons and tons of money over half a billion dollars of red ink on $743 million of revenue last year, projecting revenue above 1 billion. Now this company Palantir had a reference level indicated by the New York stock exchange of $7 dollars and 25 cents, ultimately trading well above that started out the week North of 10.50, closing around 9.20. Also, this one peaked right when it started open. Open and then declined about 20% peak to where it is.

Now one interesting dynamic and something to consider when looking at private companies are is direct listings going to be something that are going to gain in popularity? We saw quite a bit of a head fake back in 2018. Spotify went public via direct listing. Everyone thought, oh, you know, this is the new thing, others are going to pursue that. But no, we only saw one since then. And that was Slack in 2019. Both of those companies have had variable performance. Spotify up roughly 64% since their April, 2018 listing and Slack declining about 28% since their July, 2019 listing. So, bit of a mixed track record with respect to direct listings. But now we have two more examples of these Mike, what are your thoughts on direct listings? Think we’ll see more, especially in an environment where SPACs is so hot in terms of private companies going public and even the traditional IPO space. I believe we saw news that Airbnb, perhaps the hottest start-up out there is going to pursue a traditional IPO as opposed to a direct list.

Michael Kesslering: Yeah, there are certainly going to become more and more popular, especially for large consumer brands that are very well known. Get into the backend and some of the kind of technical details of these direct listings today. This was a very big day for the NYSE, the New York Stock Exchange, as they had never dealt with two direct listings on the same day. Obviously, there was just two prior to this and so what you see with direct listings as they typically start trading a lot later than a traditional IPO, a traditional IPO with the IPO positioning window will end up trading between 11 and noon eastern standard time. In this case Asana started trading at 12:30 and then Palantir about an hour later. And that’s kind of interesting just because there was actually an issue with this direct listing, Palantir in particular. And that was not an issue from the NYSE as there is quite a bit of risk with this sort of dynamic where you’re trying to match the buyers and sellers. And there’s a lot of risk for technical glitches, but you actually had a glitch with the software provided by Morgan Stanley. That’s their Shareworks software where employees use that with their compensation plans to sell into the market on a direct listing. But there is actually an issue where there were technical errors and employees of Palantir weren’t able to sell their shares in the afternoon of the listing. And since there’s no share offering here a secondary offering, if the supply of sellers is reduced for whatever reason, technical glitch or otherwise, or perhaps just a seller not wanting to sell. The price is just going to go up. That’s just supply and demand dynamics.

Julian Klymochko: Right.

Michael Kesslering: And so, you can really see this in the tick data where the Shareworks platform started back working at about three 3:30 Eastern time, about a half-hour before market close. And there, you see the price dip down from nine 9.90, right down to 9.11 within five minutes.

Julian Klymochko: Just a flood of sellers ploughing down the bid. 

Michael Kesslering: Exactly just really, wanting to get in there and sell some shares as this was a liquidity event for them for a number of employees. But you know, Palantir really understands the dynamics of the supply and demand quite well in limiting their public float. 

Julian Klymochko: They had some lockups, right? 

Michael Kesslering: Yeah, they had lockups where existing shareholders only able to sell 20% of their shares until early 2021. And then as well, it’s something that we brought up with a number of IPOs or other listings is the concept of a dual-class share structure. Unfortunately, Palantir, once again had one of these where they ended up very complex dual-class structure where it was not transparent at all. And there was a flurry of filings before this listing, but one of the main highlights was that founders would be able to keep voting control even after they sold down their economic ownership stake below 6%. And it’s just the sort of thing where you don’t like to see from a corporate governance perspective. And we’ve talked about it many times on the podcast before. We are not a fan of this sort of scenario where we really prefer if you have the economic ownership that you should, as a shareholder, you should also get that same voting power. 

Julian Klymochko: And just one of the questions, why did these two firms specifically choose the direct listing and why have four done it in the history of the capital markets? Well, it’s a unique scenario that these Asana and Palantir in addition to Slack and Spotify were in, is that they had a ton of cash and they did not need to raise financing. So, a traditional IPO,

Initial public offering you’re offering stocks into the market, raising capital. Now a direct listing isn’t for an entity that needs to raise capital. Direct listing, there’s no equity offering, so they can choose to go direct and it provides instant liquidity. In most cases, aside from having these unique lockup structures on the Palantir deal. The other difference is that, you know, IPO, they go through a marketing period. SPAC obviously these are marketed very well, but a direct listing. They just kind of throw it out there and these companies are really relying on their brand in the market, already to make that a success. So that’s something to keep in mind if you’re a firm considering going public while direct listing is really only for the more mature start-ups that already have a significant amount of cash on hand, and aren’t seeking to raise additional proceeds. 


Julian Klymochko: But onto some SPAC deals of which there are quite a few this week, I counted four spec mergers announced going to talk about a few on the podcast today, first off, a special purpose acquisition company, Oaktree acquisition backed by famed investor Howard Marks. They announced a $1.6 billion dollar merger with telemedicine start-up HIMS. So, the target HIMS, they’re best known as an online seller of treatments for erectile dysfunction and hair loss. So typically, man stuff, that’s why they call it HIMS, I assume. As found at just three years ago, so fairly new company. Had 89 million in revenue in 2019, now this transaction, as we see in typical SPAC transaction, they are raising growth capital as much as $280 million dollars for HIMS, which includes 205 million bucks from the blank check Oaktree acquisition, which they raised in their own IPO. In addition, this one’s coming with a $75 million dollar pipe financing. So private investment into public equity of which we’ve seen many accompany SPAC going public transactions. What’s interesting about this deal in contrast to others, for example, the Playboy deal that we’re going to talk about. So, this is a very high growth entity. Three-year revenue compound annual growth rate of North of a hundred percent. High margin, 71% gross margins. However, they are still lost making. This deal values HIMS at 8.9 times sales, forecast sales for next year. Pretty huge valuation on this one, $1.6 billion dollar company. However, in contrast to, you know, traditional IPO liquidity event, they are using this capital raise for growth capital. HIMS is going to enter other categories of treatment, including diabetes, cholesterol, hypertension, sleep, fertility, et cetera, trying to be a more kind of fulsome healthcare telemedicine provider. I’ve got a quote here from the CEO on what they plan on doing after this deal closes. He indicated, “this capital allows us to accelerate our ability to invest in growth and invest in condition expansion, helping millions of more people get access to affordable high-quality healthcare”. As for what the market thought of this deal. Easiest way to measure this as looking at Oaktree stock. This deal is rumoured back in August. So, it’s kind of been out in the market for quite a while. And since then, Oaktree stock up about 4.3% since these rumours were leaked into the market in August. So not a super-hot deal, perhaps the market’s cooling down a little from some of the craziness that we’ve seen, however it is up, which is positive. I don’t know Mike, what are your thoughts? Should investors be buying HIMS slash Oaktree at this point?

Michael Kesslering: Yeah, it’s been an interesting deal to look at. I mean, they do have an expansion into HIMS. They do have HIMS and HERS

Julian Klymochko: Clever.

Michael Kesslering: So that’s been launched in recent years. But right now, looking at their revenue streams. Sexual health represents about 57% of their current revenue and that’s been the foundation of what they’ve grown like as you had mentioned HIMS in addition to some of the verticals that you mentioned in other spaces within telehealthcare, they also launched verticals in mental health and dermatology, which they believe are going to be their largest addressable markets. So that’s kind of where they’re seeing a lot of their future growth coming from and potentially higher margin. Interesting to note that this is one of the traditional SaaS businesses. Well, I guess not technically, it’s not an enterprise SaaS business, but a more consumer focus, but they do have SaaS margins where they have 71% gross margins which have grown in recent years from 29% in 2018 to the current rate of, as I mentioned, 71%. Peter Thiel is in the cap table as well. So, he was also a cofounder of Palantir. So, it’s been a pretty big week for him.

Julian Klymochko: And Facebook too. 

Michael Kesslering: Yeah. 

Julian Klymochko: The first backer at Facebook.

Michael Kesslering: Exactly and as well, a little Canadian flare, CPPIB is also an investor. I would like to note that they do have a very slick investor presentation just from a visual perspective. I thought their presentation was quite strong in comparison to, as Julian mentioned, we’ll be talking about the Playboy acquisition with Mountain Crest. But I also do like that they provided a decent breakdown of their unit economics, typically in any of these sort of SaaS businesses that go public through a SPAC, there really isn’t much granular detail on their unit economics, that’s a typical complaint of mine. You still could ask for a little bit more, but this is one of the more comprehensive that I’ve seen for SPAC targets, which I did like to see that sort of disclosure and sort of cohort analysis. But yeah, that’s certainly my thoughts on the HIMS acquisition. It’s interesting to follow a little bit of a pop.

Julian Klymochko: But not much of a pop. I mean, it will increase stock up 4.3% on the deal as we’ve discussed in the past, what is back investors like to see electric vehicle deals and anything related, whether it’s battery power things of that type of EV related technology fits like hand to glove. EV tech and the SPAC structure, this is not a spec. This is not an EV SPAC deal. 

Michael Kesslering: Ideally, no revenue, yeah. 

Julian Klymochko: Yeah, exactly. So, SPAC investors like to see this real early stage EV stuff of which this is not one, so you wouldn’t necessarily expect a large pop on that. And should investors be buying? You look at historical post SPAC performance, and basically all the alpha comes on the announcement and post SPAC performance tends to do quite poor. And so I’d advise investors to perhaps stay away from this one, but, you know, that’s all I really got to say about that. 


Julian Klymochko: Contrast the HIMS-Oaktree deal to this Playboy deal, which is something super interesting because you have something completely different in which Playboy, which is famed for its formerly popular gentleman’s magazine of which everyone knows that’s kind of completely gone away, not completely, but almost completely. Now it’s more of a turnaround story. They’re trying to get a new lease on life. They’re turning into more of a diversified media and surprisingly a men’s health company. So they announced that the returning to the public markets after being private executing on this turnaround strategy over the past nine years away from the public markets, and obviously without their famed founder backing them I guess he’s pretty old anyway, and probably mostly just enjoying the mansion and all the ancillary benefits of founding Playboy, but nonetheless Playboy coming back to the public markets through a merger with a special purpose acquisition company called Mountain Crest Acquisition. This deal values Playboy at $413 million dollars inclusive of debt in terms of financial performance, they did about 78 million in revenue in 2019. Forecasting, some pretty significant growth for 2020, 131 million this year of which licensing revenue will hit 57 million.

And over 70% of revenue for next year is expected to be locked in. Some more visibility, pursuing this licensing type business model EBITDA, roughly 24 million this year. So, this is quads I profitable company, perhaps not and net income basis, but they are profitable on an adjusted EBITDA basis. And obviousl,y as we spoke about it, time and time again on these SPAC deals, investors really like very early stage stuff where they’re negative EBITDA or perhaps even pre-revenue. Now Playboy, obviously a very established mature company and was declining now, perhaps trying to get some growth back into the company. It’s interesting because with the proceeds from this transaction, they’re getting roughly 15 million from SPAC Mountain Crest. I believe they have a pipe attached to it as well. They’re trying to run an acquisition strategy across what they call the pleasure lifestyle consumer category, which you can only imagine what that’s all about.

Nonetheless, interesting deal in contrast to, you know, these early stage EV transactions of which SPAC investors just go bananas over. This is more of a turnaround type established brand, breathing new life into it. And as you can get guess, market not keen on it, stock effectively flat in terms of Mountain Crest trading slightly above net asset value at this point. So, their head is above water, expect this deal to complete late Q4 or early Q1 in which it will trade under the symbol PLBY. Got to disclose that we are long units of Mountain Crest Acquisition, bought those a while ago. Bought these pre deal at a discount to net asset value. And I should note the interesting structure on Mountain Crest Acquisition, this SPAC, because your typical SPAC comes in units, which are made up of shares and a fraction of a warrant. Mountain Crest was different such that they, each unit was shares and a fraction of a share purchase, right. So, I wanted to clarify this most SPACs are fairly typical. Although each one tends to have a certain quirk to it. Mike, what are your thoughts on this Playboy deal? You think it could be successful? Clearly the market is kind of lukewarm on it.

Michael Kesslering: Yeah, lukewarm, and I think it’s kind of fair. I mean, they have a goal to build a hundred million dollars of EBITDA by 2025. So, I guess it’s good to have goals, you know, it’s a turnaround strategy. So, I don’t really have any insight into, you know, what the probability is that they reached those goals. Just that turnarounds are quite difficult by nature. Market also agrees with that with the common trading just below NAV still. But when looking at the deal here, I mean, just initially when you look at the press release, one of the first number financial metrics that I saw in the press release was, they were touting the $180 million dollars’ worth of (NOL), net operating losses that can be used for tax purposes. That’s not really a positive sign when that’s something that you’re highly touting in the press release.

Julian Klymochko: Yes, it doesn’t really scream high growth entity.

Michael Kesslering: No, it certainly doesn’t. As you had mentioned the structure of Mountain Crest with the rights and lack of warrants made them a favourable partner for Playboy as it’s a little less dilutive for current shareholders. As well, there was the deal for Playboy purchasing $700,000 dollars’ worth of the founder’s shares at a price below the deal price. I believe it was 6.35 a share.

Julian Klymochko: That is an interesting structure. 

Michael Kesslering: Yeah, it’s basically just a renegotiation of the founder’s shares, which is.

Julian Klymochko: So, called promote, which, you know, a lot of people criticize because they say, oh, the SPAC founders are getting 20% of the pre deal company. But, you know, by and large, that’s generally not the case because there are these side deals where they either forfeit or sell off a bunch of those seed shares.

Michael Kesslering: Exactly, there is a one-year lockup for existing Playboy shareholders with a partial release in six months, if the stock trades above 14, that would obviously be a very favourable outcome. Trading above 14, given where it’s trading right now. But the background to this deal as well, I guess partially why it’s being taken public is that Playboy was originally taken private by Hugh Hefner and raise private equity company Rizvi Travers in 2011. And then Traverse bought Hafner 35% stake for $35 million in 2018 after his death from his family. 

Julian Klymochko: Did they get the mansion as well? 

Michael Kesslering: I would assume that would come with it. But yeah, they still had been rumoured as you’d mentioned for about a month. And really didn’t get the share price pop that they’re looking for. But as a sponsor, they were still able to complete a deal, ensure that there is some value to their warrants as well as their founder shares. So, at this point, I mean for a SPAC sponsor, no deal is better than, sorry. A deal is better than no deal. 

Julian Klymochko: For sure. 

Michael Kesslering: It’s the name of the game, so I guess it’s a favourable outcome. I mean, I’m not holding my breath on the future prospects of Playboy. 

Julian Klymochko: Yes, you indicated a deal is better than no deal. Obviously, this Playboy deal, somewhat of a turnaround story, a pretty tired brand. If you ask me, it’s certainly a company that I don’t believe could pursue a traditional IPO just given its stage in its life cycle and what they’re trying to accomplish here. I should note a couple things. If we contrast this one to Chamath at Social Capital, he did that open door deal last month. And he did exceptional marketing. His PR was just tremendous behind that, got the stock up nicely, which is really necessary to make a SPAC deal successful because the reason they need these SPAC price to be well above the net asset value, because if it isn’t all the hedge funds involved, they have to redeem for NAV, because that’s how they maximize value. So, it’s really important that these shares get marketed effectively, such that that stock does pop. You get that retail interest

and the shares transition from hedge funds to retail holders who have much lower propensity to redeem the shares, such that the proforma entity has as much cash as they can get. And you know, it doesn’t sort of throw sand in the gears of the deal. So, marketing’s certainly very, very important as you indicated, Mike, this HIMS deal had pretty good marketing, slick presentation, etc. the Playboy deal, not so much. The investor deck, not super excitement-driving for the retail investor. You know, you didn’t really have super effective marketing behind the stock, but I will note that post-deal SPACs are exceptionally volatile. So, this one’s trading around net asset value, could go either way. I mean, perhaps they could get good marketing behind it. And in terms of post SPAC performance, they’ve really been mixed as of late. If you look at Nikola, which has sort of crashed and burned, mired in controversy and really, really bad news coming out of that one, but something like DraftKings, which is, you know, skyrocketed. Now I believe North of 50 or $60 per share from a $10 dollar SPAC price. So certainly, a mix of track record in post deal SPACs as of late, but certainly this Playboy one, as you indicated, a deal is better than no deal. And they certainly got a deal here. Is it a hot one? Not at this point, but we’ll see. 

Michael Kesslering: And Julian, just for some positive news in the SPAC world, there was a number of IPOs today in the SPAC world today, how much was raised today? I believe it was over $3 billion dollars.

Julian Klymochko: Yeah, so on the initial public offering of special purpose acquisition vehicles, it’s just been absolutely off the charts seemingly every day, we’re saying three on average S-1 filings. Now S-1 is the prospectus such that they can conduct a future IPO, as you indicated today and yesterday, the first and 2nd of October, we had 11 SPAC IPOs, which is an all-time record. 

Michael Kesslering: It’s absolutely unprecedented. 

Julian Klymochko: I believe we had seven today and four yesterday. Throughout those two days, the first two days of October that raised cumulative $4.5 billion dollars. Now searching for targets, add 11 more SPACs, which takes a tally to nearly 200 SPACs out there in the market. And I’m going to speculate in October, I think we’ll break the July record of $10 billion dollars raised in SPACs. Two days in, we’re almost 50% there. So decent chance, not necessarily going out on a limb with that call. But we’ll see, we’re seeing huge IPOs and the smallest one over the past two days was $200 million dollars, the largest, nearly a billion. So that’s something to watch is that there’s a ton of these. And what’s also interesting is some commentary on how these things are trading. Of these 11 SPAC IPOs, all but three of them are trading at or below net asset value, which is indicative that perhaps the street has been flooded with SPACs. There’s too much supply, not enough demand. And the only ones these days that we’re seeing trade at a premium, they’re one of two sponsors. Number one, biotech. Typically, the biotech deals are quite small in the 100 to $200 million range because they’re looking for these early-stage targets that are typically, say, half a billion or so. The second SPAC sponsor that can get investors excited in their IPO: venture capital. So, we’re seeing venture-capital-backed SPACs come out of the gates with a nice premium, sometimes as high as 10 to 25%.

So, keep that in mind, if you’re looking to trade new SPAC issues, they’re typically structured as units, meaning common shares and warrants, and they typically split 52 days after they IPO. So, there’s some trading colour and knowledge for you. If you do want to take a look at these new SPAC IPOs, but that’s about it on this week’s episode of The Absolute Return Podcast, hope you enjoyed it, where we chatted about direct listings, got some SPAC deals in there as well that market’s hotter than ever seeing just an absolutely insane number of IPOs in the space. Can’t keep up that pace. I’m sure it’ll slow down at some point, but giving them massive amount of S-1, we’ve seen filed. I think this is only going to get a bit crazier prior to it slowing down, but nonetheless, if you enjoy the episode, check out more at the absolutereturnpodcast.com, definitely leave us a review. Tell your friends and colleagues and certainly Mike, they should follow you on Twitter. What’s your handle?

Michael Kesslering: It is @M_Kesslering.

Julian Klymochko: Check me out as well. My Twitter handle is @JulianKlymochko. We wish you all the best in your trading speculating. Perhaps some IPO allocating as well, but until next week, we’ll chat with you soon. Cheers.

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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