Interview With Phil Goldstein And Andrew Dakos Of Bulldog Investors, Part 2

Summary

In part 1, we learned ways the transactional activists at Bulldog Investors averaged a return of 11.2% per year and absent are drops during market swoons.

Here we focus on their secret sauce so to speak for steady Eddie returns, blank check companies (also known as SPACS).

I also have provided updates on various SPAC investments of theirs and info on a cannabis related SPAC.

In part 1, we learned a lot about how Phil Goldstein and Andrew Dakos and the rest of the Bulldog Investors team successfully invest against the herd to generate market beating returns with less risk. We also learned about some high-quality Blackrock (BLK) municipal closed-end funds (MUJ and MYJ) selling at discounts to NAV of greater than the 12% average discount to NAV of municipal closed-end funds at the depth of the market meltdown in 2008. Here in part 2, I am focusing on something even savvy individual and institutional investors may know little about; blank check companies which are also referred to as SPACs (special-purposed acquisition companies).

Phil gave me an education in blank check companies. In his words, investors can have their cake and eat it too. There exists a strategy that will protect and grow your capital: blank check companies. Their unique characteristics provide attractive risk adjusted returns with virtually no downside risk.

Blank check companies begin with an IPO, where investors swap their cash for a stake in the new blank check company. All invested cash (which can be more than 100% of the IPO price) is placed in a trust account, where it earns interest at Treasury bill rates. From there, the blank check company manager generally has 24 months (or less) to complete a M&A transaction, with shareholder approval. If shareholders reject the deal or no M&A target can be found by the “drop dead” date, the trust is dissolved and all funds are returned to the shareholders with interest. The IPO of a SPAC usually consists of shares and warrants (and sometimes rights) which are exercisable only if a transaction is completed. The warrants (and rights) can provide a big kicker if a deal comes through.

He said regardless of the end result, the investor wins – a little or a lot. Blank check companies offer investors a few distinct advantages. A diversified portfolio should produce 6-8 percent gross annual returns with the same risk profile as short-term Treasuries, all while being liquid because they trade on an exchange. Their assets are in a trust account that is segregated until if/when they are invested. You can buy and sell SPAC shares like other publicly traded securities. Even though they can drop below your cost like they did during the 2008-09 stock market swoon, nobody has ever lost money on a SPAC if they held it until a deal happened or a deal did not materialize and they got their investment plus interest back.

He said Bulldog Investors harnesses its expertise to identify the best opportunities and employ a bottom-up, fundamental exploration of each blank check company that hits the market. They research to determine which ones to invest in as part of a diversified SPAC portfolio. Investors can invest in them on their own, through a Bulldog Investors SMA, or (in part) indirectly through the Special Opportunities Fund (SPE) they manage. You can see some of the SPACs they have invested in when reading the latest 2017 annual report for the Special Opportunities Fund. I believe it is best to go with SPAC experts such as Bulldog Investors if you want to allocate into SPACs.

Rajeev Das, Head Trader and Principal of Bulldog Investors has explained the way Bulldog Investors approaches SPAC investing in an interview with NYU Stern School of Business eValuation magazine. He told eValuation:

"Now, if a SPAC announces a deal that you don't like, you can get out. For example, the SPAC will issue $200 million of shares at $10 a share, giving investors one share and one warrant. The money from the IPO will go into the trust, which will be used to fund the deal. When the deal is announced, you have two options. You can continue to stay in the new company or you can get your $10 back. Meanwhile, you also have that warrant which you can sell. If it's a bad deal, the warrants will be worthless, and you can get your $10 back. If it's a good deal, the shares will trade above the trust value and the warrant will pop. And you can make 10-15% on your deal. So, really you have no downside in this investment. SPACs put their money into US treasuries and you can easily get mid-to-high single digit IRRs."

Phil said there is a big mismatch between risk and investor perception with SPACs. They are great for retirement accounts and have less risk than virtually all other equity investments. He said in the last 2 months, a SPAC IPO has come out at a pace of one per week. He said Bulldog Investors likes to be diversified with laddered maturities. Some are large deals which enable better terms. One way of determining good investments is the quality of the management team and their track record in past SPACs. There are SPACs in everything from energy to a very hot area with all the recent legalization across the U.S.A. and more to come, cannabis. Cannabis is so hot Constellation Brands (STZ) is investing $4 billion for a 38% stake in Canopy Growth (WEED). Canopy Growth has delivered a rise from 8 to 52 in its stock since last August and the Constellation Brands investment added fuel to the Canopy Growth stock price increase. MTech Acquisition Corp. (MTEC) is a SPAC that was launched by cannabis industry veterans. According to its prospectus, the company intends to invest in only ancillary companies, not investing in direct cannabis producers or sellers, with a focus on compliance, business intelligence and brands and media. Steve Van Dyke, a Co-Founder and the Chairman of Hypur Ventures, serves as Chairman. Scott Sozio, who is also a Co-Founder and a Managing Director at Hypur Ventures, is the CEO, while Tahira Rehmatullah, a Managing Director of Hypur Ventures and formerly the General Manager of Marley Natural, owned by Privateer Holdings, is the CFO. Phil and his partners met with the team at MTEC and they said there were good terms in its SPAC. They said MTEC has very capable leadership with a great track record.

Bulldog Investors created an informative video, Blank Check Investing: Heads You Win, Tails You Don’t Lose a detailed presentation, and a whitepaper on the same topic. A May 31, 2018 article (Filling in the Blanks) in Value Investor Insight tells you more about blank check companies and shows some of the deals Bulldog Investors has invested in including terminal date, worst and best case value, and offering highlights.

They even provide SPAC Updates on their website such as:

• Union Acquisition Corp. (LTN/U) (2/22/2018)
• MI Acquisition (MACQ) (2/27/2018)
• Opes Acquisition Corp. (OPESU) and Tiberius Acquisition Corp. (TIBR) (3/14/2018)
• TPG Pace Energy (TPGE.U) (3/20/2018)
• Atlantic Acquisition Corp. (ATACU) (4/3/2018)
• Pure Acquisition Corp. (PACQU) and Atlantic Acquisition Corp. (ATACU) (4/19/2018)
• Trident Acquisition (TDACU) (5/8/2018)
• I-AM Capital Acquisition (IAMXU) (5/9/2018)
• Lancadia Holdings (LCAHU), Trinity Merger Corp. (TMCXU), VectoIQ Acquisition Corp (VTIQU) and GS Acquisition Holdings (GSAH.U) (5/21/2018)
• Pure Acquisition Corp. (PACQU) (6/1/2018)
• Osprey Energy (OSPRU), MI Acquisition (MACQ), GS Acquisition Holdings Corp. (GSAH.U), Haymaker Acquisition and Electrum Special Acquisition (HYACU) (6/8/2018)
• Twelve Seas Investment Company (TWLVU), LF Capital Acquisition and Thunder Bridge Acquisition (TBRGU) (6/22/2018)
• Hennessy Capital Acquisition (HCAC) (6/28/2018)
• TPG Pace Energy and Constellation Alpha Capital (TPGE) (8/3/2018)

New York REIT, Inc. (NYRT), an owner and operator of commercial real estate in the liquid New York City market, is another real estate investment trust that is liquidating. It is currently trading at $18.23. Phil said it will probably stop trading this year and will likely be dead money and you can’t readily value it for a few years. He believes with improvements in its properties, it could generate an internal rate of return of 14 to 20% or more. The downside will be a lack of liquidity if you need to sell the shares prior to liquidation.