Commentary on Political Economy

Monday, 7 December 2020



Grantham stumbles on $200m profit after Spac swoop on battery maker

Seven years ago Jeremy Grantham’s personal foundation invested $12.5m in QuantumScape, a Stanford University spinout, as part of a series of bets on early-stage “green” technology.  © QuantumScape

Famed investor Jeremy Grantham has “by accident” made about $200m from a personal investment in battery-maker QuantumScape after it merged with a listed blank-cheque company — despite deriding the US craze for so-called Spacs as “reprehensible”.

Mr Grantham, the co-founder of Boston-based GMO, is now semi-retired and works primarily in environmental philanthropy. But seven years ago his personal foundation invested $12.5m in QuantumScape, a Stanford University spinout, as part of a series of bets on early-stage “green” technology. 

Mr Grantham stressed that he is a big believer in QuantumScape. But he is taken aback by his gains from investing in the company, which were supercharged since it announced in September that it would secure a slot on the New York Stock Exchange by merging with a special purpose acquisition company set up by Kensington Capital Partners, a Canadian investment group.

“This is unlike anything else in my career. This was by accident the single biggest investment I have ever made,” he told the Financial Times. “It gets around the idea of listing requirements, so it is not a useful tool for a lot of successful companies. But I think it is a reprehensible instrument, and very very speculative by definition.”

Ironically for an investor mostly known for contrarian bets on undervalued, unfashionable companies and industries, the bet on QuantumScape is on track to be one of the most lucrative investments of Mr Grantham’s six-decade career. 

The combination with Kensington Capital Acquisition Corp valued QuantumScape at $3.3bn, but the vehicle’s stock price more than doubled after the deal was announced on September 2, and spiked to a peak of $52.80 after the merger was formally approved and completed on November 30. That marked a quintupling from the Spac’s listing price.

Although the shares have dipped after that frenzy, the newly combined company still boasts an overall market value of roughly $16bn. Mr Grantham holds about 4.8m shares in the company, which at their $44.17 closing level would be worth over $210m.

But he pointed out that the company itself estimates that commercial production of its batteries for electric cars is years away, and compared the current Spac frenzy to some of the wilder schemes launched in the 18th century South Sea Bubble

Line chart of Share price of Kensington Acquisition Corp/QuantumScape ($). showing QuantumScape shares rocket as Spac frenzy mounts

Spacs have taken Wall Street by storm in 2020, generating lucrative returns for their backers as well as large fees for the underwriters and law firms that have helped usher them to market. More than 200 blank cheque companies have listed so far this year, raising a record $66.3bn, according to data provider Refinitiv.

This September, United Wholesale Mortgage agreed to go public by merging with a blank-cheque company in a transaction that valued United at $16bn: the largest deal ever struck by a Spac.

Mr Grantham sees Spacs as symptomatic of what he considers a historic stock market euphoria — which he reckons rivals the peak of the “Roaring Twenties” bull market in 1929 and the dotcom bubble of the late 1990s. Anything to do with electric vehicles has been particularly frothy, he notes.

Other prominent backers of QuantumScape include Microsoft founder Bill Gates, Volkswagen, and Silicon Valley venture capital firms Kleiner Perkins and Khosla Ventures. Mr Grantham’s investment is made through The Grantham Foundation for the Protection of the Environment — which he runs with his wife Hannelore Grantham — and is locked up until June next year. 

Column chart of Proceeds from special purpose acquisition company IPOs, by year ($bn) showing Blank cheque companies have proliferated in 2020

Merging with a Spac can provide a company with greater certainty over the proceeds they will raise when coming to market as well as their valuation, which is set just days before a deal is finalised.

However, the structures are costly. Spac sponsors typically take 20 per cent of the equity in the vehicle, a stake that converts to shares of the company it eventually merges with. Would-be investors also face the threat of dilution from the warrants that are granted to investors who helped fund the Spac’s public listing.

“They are enormously expensive. Someone is getting . . . 20 per cent of the company for free,” said Michael Klausner, a professor at Stanford Law School. “The structure has an enormous amount of dilution built in that someone will pay for and so far it has been the Spac shareholders who seem to be haplessly paying for it.”

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