Tom Finke recounts how he went from running a $345 billion money manager to joining in the SPAC boom as a sponsor — and shares 3 characteristics investors should look for in an ideal blank-check company

• Tom Finke is the former CEO of the $345 billion asset manager Barings and a board member of Invesco.
• Finke and his partner raised $115 million via their SPAC Adara Acquisition Corp. (ADRA) this week. 
• Finke breaks down why he is jumping on the SPAC bandwagon and shares what to look for in SPACs.
• Visit the Business section of Insider for more stories.

The red-hot SPAC market broke a new record this week as 133 special-purpose acquisition companies raised around $40 billion this year through Wednesday. It took until October to reach the same number of SPACS last year. 

Tom Finke’s Adara Acquisition Corp. (ADRA), which made its debut on Tueday, was among the new “blank-check companies.”

While Finke’s name might not be as familiar as recent SPAC entrants such as Colin Kaepernick or Shaquille O’Neal, he is a financial force of his own — having served as the CEOs of two asset managers and famously led the 2016 merger of Babson Capital, Barings Asset Management, and two other MassMutual Life subsidiaries to create Barings, a $345 billion money manager.

That’s why when he entered SPAC land, investors took notice. 

SPAC investor Julian Klymochko, who manages the Accelerate Arbitrage Fund (TSX: ARB), said his ETF subscribed to the ADRA IPO because he believes that Finke’s background and experience in financial services make him a strong SPAC sponsor.

But the idea of launching a SPAC came from Finke’s long-time friend Martin Sumichrast, the CEO of cbdMD, a producer and distributor of cannabis products. 

“Marty and I have known each other for over 15 years. Our kids have grown up together and we coach together and in fact, Marty is on one of the fund boards at Barings,” Finke said in an interview. 

Sumichrast, who led the reverse merger of Level Brands and cbdMD, rang Finke up over the summer to gauge his interest in chairing the SPAC.

The timing was right. Finke said he was already working on his succession at Barings and was looking for his next opportunity. 

“At Barings, it’s a big job but you’re not in the details every day, to be blunt,” he said. “With the SPAC, in a way, it gets me back to my roots when I was a trader and an investor in the high-yield markets looking at great companies and really being a principal in investing the capital.”

Searching for the ideal merger in a SPAC boom 

Having worked in finance for almost three decades, Finke is no stranger to SPACs, which have existed since 1993.

He thinks the SPAC boom of 2020 is a trend reversal of companies staying private a lot longer or turning to private equity for capital over the past five years or so. 

“The SPAC provides companies that might not have gone public given the costs in the process of doing an IPO with an opportunity to go public, so it’s a little more efficient,” Finke said. 

On top of that, the low-rate and low-yield market environment over the past 12 years is pushing investors to find alternative paths to raise money. 

“Even with the recent pandemic, you don’t really see the yields rising dramatically anytime soon,” he said. “And money is looking for investments, and that always helps an emerging asset class.”

But much like private equity, the success of a SPAC is heavily tied to its acquisition target. 

He said his SPAC’s target fundraise size of $100 million to $115 million allows them to home in on companies with enterprise value between $300 million and $500 million.

“We felt that the middle market was a very attractive place to be in general, especially across broad consumer-type industries,” he said, adding that he’s looking at companies ranging from health and wellness to e-commerce and IT.

According to Klymochko, Finke’s ADRA is a relatively small blank check at $100 million versus the average SPAC at $300 million. As of Thursday, it traded at a 3.3% premium over trust (cash) value compared to the 6.2% average premium for all 44 SPAC IPOs thus far in February, he added.

3 characteristics to look for in a winning SPAC

The continued enthusiasm for SPACs beyond 2020 has led some investors to question whether the market itself is becoming a speculative bubble, but Finke said he is asked similar questions every time an emerging asset class such as private equity or high yield grows at a rapid pace. 

“It’s very hard to say if we are overdone. You may see years where the SPAC volume will go down from what it was in 2020. But that’s no different than a lot of markets; you have up years and down years,” he said. “But I do think the state of the SPAC industry is one that will not go away.”

Like any asset class, it is more about picking the investable opportunities that will deliver. That’s true for both SPACs that are looking for merger targets and investors looking for potentially high-return SPACs.

Finke said investors should focus on three aspects of a SPAC when it comes to conducting due diligence. 

First, the entire team of sponsors, management, and board members should be evaluated based on their expertise and experience instead of simply buying in because of a famous investor or celebrity leading the SPAC launch. 

The strategy outlined by the SPAC should also be studied, Finke said, especially those focused on investing in specific sectors or narrow industries. 

Last but not least, he believes that investors should examine the current stage of the market cycle and whether the sector that the SPAC is targeting has become out-of-favor. 

“Just like in any type of investing, you have to have a good sense of the industry or industries that the SPAC is targeting,” he said, “and feel comfortable that you believe the growth prospects in that industry are strong and there are other companies within that industry that are good candidates to be acquired.”

Source: Read Full Article