Special Situations With Wilbur Ross
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Ride Along with This Jockey for Huge Potential Gains by TMFDeeJ aka Jason Knapp.
I have become increasingly focused on researching and investing in Special Purpose Acquisition Corporations aka SPACs and discussed an investment tat I made in one that had already deployed its funds. Today I want to talk about another SPAC, but this time it’s a blank check that has not found a target yet.
WL Ross Holding Corp. was created by the famous investor Wilbur L. Ross, Jr., in mid-2014, see Wilbur Ross-led 'blank check' company's units rise slightly in debut.
The SPAC was created with approximately half a billion dollars to deploy in an investment that the famous investor finds attractive. That's actually a fairly large chunk of cash as far as SPACs go. My personal opinion is that when investing in an SPAC, bigger is better. The more cash the corporation has to deploy, the larger the pool of high-quality companies and divisions of larger companies it has to fish in. Moreover, to use a timely analogy given this weekend’s Preakness race, when investing in an SPAC it is important that your horse has a good jockey. Is Wilbur Ross such a steward of capital? I think so. Here’s a brief bio on him from WL Ross Holding Corp.'s prospectus:
“Our management team is led by Wilbur L. Ross, Jr., our Chairman and Chief Executive Officer, who has 17 years of experience in the private equity industry and 24 years of prior experience in the restructuring financial advisory industry. Over the course of his career, Mr. Ross and his team have invested in approximately 135 portfolio companies across four continents, deploying approximately $10 billion of invested capital. Mr. Ross is the only individual who has been elected to both the Private Equity Hall of Fame and the Turnaround Management Association Hall of Fame.
Mr. Ross is the Founder, Chairman and Chief Strategy Officer of WL Ross & Co. LLC, which we refer to throughout this prospectus as WL Ross, an affiliate of our sponsor. Mr. Ross was also formerly the Chief Executive Officer of WL Ross prior to stepping down from this role on April 30, 2014, to become its Chief Strategy Officer. Founded in 2000, WL Ross is a global distressed private equity firm with approximately $8 billion of assets under management as of December 31, 2013, across private equity, credit, infrastructure and mortgage funds. Mr. Ross and our management team will leverage the relationships of the investment professionals of WL Ross to identify and complete an initial business combination. Acknowledged as one of the world’s leading turnaround groups, WL Ross invests in and restructures financially distressed companies in industries in which the investment professionals of WL Ross have knowledge. WL Ross seeks niche opportunities in markets where it believes its knowledge, insight and experience offer an advantage in assessing and cultivating new investment opportunities. WL Ross has offices in the United States, China and Japan, and WL Ross’ current network of approximately 40 portfolio companies, which operate in over 10 industries and 12 countries across the globe, provide a broad network of relationships and market insights that we believe will help our management team source attractive value-oriented investment opportunities…
Over the last 17 years, the sponsored funds of WL Ross and their predecessors have invested in industries as diverse as airlines, automotive components and parts, banking institutions, basic building materials, financial services, food manufacturing, marine transportation, media and telecommunications, metals and mining, oil and natural gas exploration and production, pulp and paper, rail car manufacturing and textile and apparel manufacturing. The companies in which WL Ross has invested were generally experiencing operational or financial difficulties at the time of WL Ross’ investment or were perceived to have limited growth prospects. WL Ross has undertaken to add value by infusing capital, improving business strategy, reducing costs and supplementing or replacing management teams. In several instances, add-on acquisitions were accomplished in order to improve a company’s product mix, geographic mix or market share. These investments have been primarily in North America but also in Europe and, to a lesser degree, in Asia and Latin America.”
Wilbur Ross has stated that his goal for the SPAC is to find assets that are “…idiosyncratically distressed, where we believe the long-term fundamentals are in place."
Most of the SPAC investments that I personally have made thus far have been after the entity has found a use for its cash, such as the Boulevard Acquisition Corp. $BLVDinvestment in DOW Chemical’s $DOWAgroFresh division that I discussed last week. There is risk in buying into a situation where the cash has not been deployed yet, both in that you might not like the company that the SPAC ends up purchasing and in that it might not ever even find a target at all, resulting in a potential loss for anyone who paid a premium for shares. The amount of cash held in trust by WLHR would likely result in a distribution to shareholders that is likely only slightly above $10/share. So if you were to buy shares of the SPAC at today's level of $10.50, there likely would be a little downside should the SPAC be liquidated without finding an investment. The ideal time to purchase WLHR would have been when its shares were trading for less than $10/share at points in 2014. An investment at that level would have represented little or no downside other than the opportunity cost of tying up your funds, which is not great in today's low rate environment.
While there is risks in purchasing a pre-acquisition SPAC, there is also opportunity. When a SPAC announces that it has found a place to deploy its funds, its stock usually immediately soars. $BLVD’s stock soared over 18% when word initially broke about its purchase. So, when one is involved in an early stage SPAC, they can often reap a fairly quick gain if they are so inclined.
As of today, WLRH has not found an acquisition target. Rumors surfaced in late 2014 that the SAC was looking at investing in the Canadian energy sector, possibly in oil-by-rail, see U.S. billionaire Wilbur Ross eyeing Canadian, U.S. energy sectors.
As someone who has done extensive research on oil-by-rail, I hope that is not the direction that Mr. Ross takes the fund. However, I am very intrigued about the possibility of purchasing something in the energy sector, possibly a distressed oil and gas play. Here’s what he had to say on the subject in an interview last fall:
"If you (have) a theory that the longer-term outlook for oil is okay, then the very severe price decline of some of the equities might very well be a buying opportunity. If the stocks keep going down, it (investment) will probably be quicker. Many of the oil stocks are off 20 or 30 percent. So we're certainly inclined to think that they are closer to the bottom than to the top."
While the potential for gains in SPAC investments is huge, one shouldn't invest in one thinking that they are all unicorns and rainbows. On average, the returns for SPACs are actually pretty terrible. According to a firm called SPAC Analytics, slightly over one third of the SPACs that were formed since it began tracking this type of investment in 2003 have liquidated without finding an investment to deploy their money in. Even worse, many of the SPACs that do find something to purchase have performed horribly. The average annualized return of the 123 SPACs that SPAC Analytics tracked was NEGATIVE 12.5%, versus a gain of 6.4% for the Russell 2000 over the same period. For every Burger King $BKWor Platform Specialty Products $PAH(to name two Bill Ackman former SPACs that were home runs) there's multiple terrible SPACs, including Pangea Logistics Solutions $PANLand the now bankrupt Crumbs Bake Shop.
Furthermore, under the rules of SPACs, the entities usually have 18 months from the time they begin trading to find an acquisition target. If none is found they are liquidated, potentially resulting in a loss for investors who bought in at the wrong price.
Lastly, this fund does not represent a substantial investment for Mr. Ross. He is a billionaire with a ton of investment balls in the air. As of last year, he only owned 20% of WL Ross Holding, which amounts "only" around $100 million. That’s not huge for a billionaire. Having said that, most famous investors have a great deal of pride and Mr. Ross’ name is attached to this company so I am sure that he wants to see it succeed.
There's a lot to like about an investment in WRLH, including a successful jockey and its size. I currently hold a small, real money position in WL Ross Holding Corp. $WLRHand am keeping an eye on it to see what Wilbur Ross does. If the shares dip below $10/share again or if the company announces an acquisition that I believe is attractive, I will likely increase the size of my investment.