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SEC is creating ‘better SPAC market’ for investors: Strategist

Wealthspring Capital Co-Founder and Managing Partner Matt Simpson joins Yahoo Finance Live to discuss the future of SPACs.

Video Transcript

GARY GENSLER: They've just taken off like, you might say, wildfire in the last six months. And there's hundreds of them, as my testimony said. And there's some real questions about who's benefiting and investor protection.

AKIKO FUJITA: SEC chair Gary Gensler there testifying before a House committee Wednesday, saying the agency is devoting a significant amount of resources to studying emerging risks from Special Purpose Acquisition Companies, or SPACs. More than 300 firms have raised more than $100 billion through SPACs so far this year, easily surpassing last year's total.

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Let's bring in Matt Simpson. He's Wealthspring Capital co-founder and managing partner. And Matt, it's great to talk to you today. When you look at the amount of momentum we have seen in, really, the sheer number of SPACs over the last year, it feels like the party had to come to an end at some point. Increasingly, the SEC cracking down on some of these companies. How are you looking at the dynamic coming from SPACs versus the regulation?

MATT SIMPSON: Sure, and thank you for having me. Let's just take a step back here. When we launched our business in 2018 and 2019, we were really excited that there were 49 SPACs. And we said in 2020, our prediction to clients was there would be 52 SPACs. And the good news is, we'll have one SPAC a week to look at and make a decision and hopefully potentially invest in or not invest in for clients. And we also predicted for clients that an expected return of 6% or 7% from expecting in stacks with relatively low downside.

And then fast forward to what happened in 2020, which we had 248 SPACs come. So we actually had one almost every business day. And it really grew very, very quickly. But remember, SPACs had been around for about 20 years. And they're a type of financial technology. And we're operating in what's called SPAC 2.0, the newest version of SPAC post-Dodd-Frank. But now the SEC is coming in and adding complexities and rules, which are really good, that makes this a better SPAC market, and will hopefully move to SPAC 3.0 very, very shortly. And this is just a little bit of a stumbling block as we get to a bigger and better market.

ZACK GUZMAN: And I mean, when we talk about some of the people who have been active in SPACs, I mean, SPAC king [INAUDIBLE] was out with an op-ed talking about ways to improve this kind of more regulation and calling for more regulation. But I mean, there are concerns around just what is being SPACs. I mean, obviously, if you're a stronger company, you might just go the traditional IPO route.

And you look at some of the names' performance this year, not necessarily very good. So I mean, I understand you want to get investors on board earlier and enjoy the upside here. But some of the companies coming through just might not be as good of opportunities. So I mean, what do you make of maybe that argument that that it's not really helping the end retail investor? Because it's just not very attractive opportunities.

MATT SIMPSON: So I agree with the op-ed that you're referring to. And I do think and we think that regulation is better because it makes stronger markets. And that's why companies around the world want to do business with SPACs here in the US. And we have several examples of that. And I disagree with your point around the idea that regular way IPOs are only for good companies and SPAC IPOs are only for bad companies. It's really about active management. And that's why people should be hiring professional managers if they want this in their portfolios so that people can do the work and understanding of what they are. And they also need to be looked at as a portfolio and as a cohort and as part of an allocation, not on an individual name basis.

ZACK GUZMAN: Yeah, I just-- I mean, I guess, the point that-- so whenever we talk about regulation, it's always about protecting retail investors from volatility. We're hearing the same thing in crypto right now when it comes to Bitcoin is too volatile. We need to protect retail investors. But you think about Nikola, one of those first SPACs we saw, the decline that we've seen from their high this year is larger than what we've seen from Bitcoin.

So when it comes to what you want to see on the regulatory front the most here to come through to protect retail investors, what is it that you'd want to change? Because we know the people who bring-- these SPAC sponsors who come out are getting paid regardless of performance. It's just kind of getting the deal done. So what do you want to see change?

MATT SIMPSON: So I'm very supportive of the SEC's proposals to change the accounting and the representations. It just makes our job a little bit easier of having to clean up financials and understand companies and look at companies. But using Nikola as an example, when that SPAC IPOed as a blank check company, it came at $10. And as you're showing on your screen now, it's $15. So it is up 50%, which is pretty good. Now I understand that it went up a lot higher because people speculated on it and didn't dive into the details to really understand the financial metrics of this company. And so having bought it at much higher prices, of course, they suffered a loss, but having bought it as a SPAC from day one, like today, they've had actually quite a good return.

AKIKO FUJITA: Matt Simpson, Wealthspring Capital co-founder and managing partner, good to talk to you today.

MATT SIMPSON: Thank you.