The Economist - USA (2021-07-10)

68 Finance&economics TheEconomistJuly10th 2021

T

hespectacleofthespac, or“special­

purposeacquisitioncompany”,has

preoccupiedbankersonWallStreetover

thepastyear.Thisisinpartbecausethe

vehicles,whichlista shellcompanyon

stockmarketsandraisea potofcapital

beforehuntingfora privatecompanyto

mergewith,areoftentoutedbytheir

backersasanalternativetoaninitial

publicoffering(ipo). Bigbanksmake

meatyfeesfromtheiripobusinesses.For

some,thefactthatspacs havemuscledin

isanunwelcomedevelopment.Asvora­

ciousbuyersofprivatefirms,though,

spacs areattractingasmuchattention

amongtheprivate­equity(pe) baronson

NewYork’sParkAvenueasonWallStreet.

Sincethestartof 2020 spacs have

gobbledupalmost$200bnincapi­

tal.Thewaytheyareconstructedmakes

thempronetooverpayingforfirms.

Creatorsseenocompensationunless

theystrikea dealwitha mergertarget,

whichmustoftenbedonewithintwo

years.Thefounders’payoffisusually

20%ofthesharesthespachelpsissuein

thenewlypublicfirm,whicharegivento

themfora nominalfee.Thismeansthat

evenif thesharesplungeaftertheshell

companymergeswithitstarget,the

foundersarestillwellcompensated.

Theirincentiveisthustodoanydeal

theycan,atloftypricesif necessary.

Thistendencytooverpayisbotha

blessinganda curseforpe. Ifapefirmis

lookingtooffloadoneofitsportfolio

companies,thenfindingaspactobuyit

isanattractiveprospect.InMarchBlack­

stoneandcvcCapitalPartners,twope

shops,tripledtheirmoneywhenthey

soldPaysafe,a paymentsplatform,

throughaspacmergerledbyBillFoley,

aninsuranceexecutive.AfterBlackstone

achievedrecordfirst­quarterearningsof

$1.75bnJonGray,itspresident,notedon

anearningscallthatspacs hademerged

asa newexitoption.

Butpefirmsalsoneedtopurchase

privatecompaniesfortheirnewfunds,

ideallyatlowvaluationsif theyareto

makethejuicyreturnstheirinvestors

havecometoexpect.Littleisknown

publiclyaboutthedealsthatpefirms

missouton,butreportsaboundofspacs

bidding20­50%moreforcompanies

thanthemostoptimisticvaluationsby

analystsinpeshops.

A furthercomplicationintherela­

tionshipbetweenblank­chequevehicles

andpeisthatsomepegiantsaresetting

upspacs themselves.Apollo,forin­

stance,haslaunchedfiveinrecentyears.

Thatcouldposea dilemma:shoulda

targetfirmbeboughtthroughtheprivate

arm,tothebenefitoftheinvestorsinthe

pefund,orbythepublicarm,tothe

benefitoftheinvestorsinthespac? The

spacfrenzymightyieldjuicyreturnsfor

peinvestorswhoboughtintoa funda

decadeago.Buttrickychoicesloom.

Companybuyouts

Frenemies

N EWYORK

Theuneasypartnershipbetweenprivateequityandspacs

Oil markets

Divisionover the

spoils

I

tisrareforspatsaboutoilsupplyto

breakoutbetweenSaudiArabiaandthe

UnitedArabEmirates(uae). Thecountries’

viewsonoutputusuallyalign.Tradersand

analystsregardthem,alongwithKuwait,

asthecoreoftheOrganisationofthePetro­

leumExportingCountries(opec).Soeye­

browswereraisedinearlyJulywhenSu­

hailAlMazrouei,theuae’senergyminis­

ter,toldreportersthatopec’squotaswere

“totallyunfair”.A furthersurprisecameon

July5thwhenmeetingsbetweenthecartel

andits allies(notably Russia), together

knownasopec+,wereabandonedbecause

oftherow.The priceofthebenchmark

Brentcruderoseabove$77a barrelforthe

firsttimeinmorethantwoyears,before

droppingbackbelow$75;thatofAmerican

crudebrieflyhita six­yearhigh.

opec+ introduced swingeingproduc­

tioncutslastspringascovid­19beganto

spread,thedemandforfueltankedandthe

oilpricecollapsedtobelow$30perbarrel.

Morerecentlythecartelhasbeencarefully

increasingsupplyasdemandhasrevived

andoilprices have recovered.The can­

celledmeetinghadbeen convenedwith

thegoalofagreeingonfurtherincreasesto

outputafterJuly.AtthesametimetheSau­

disandotherswerealsoseekingtoextend

thecurrent regimeforassigningcutsto

members’production.

Buttheuaewantsthequotas,whichare

basedoncountries’oil­producingpoten­

tialinOctober2018,toberevised.Itssup­

plycapacityhasgrownbyalmostafifth

sincethen,thankstoheavyinvestment.A

third of its production is now sitting

idle—a greater share than in any other

opec+ country(seechart).

Other members, in particular Saudi

Arabia,arereluctanttoseeproductionrise

toomuch,however.Thatispartlybecause

giving way on quotas could mean that

countriessuchasRussiastarttomakesim­

ilardemands.Butitcouldalsoreflectthe

Saudis’desiretoavoidoverproductionata

timewhennon­opecproducersmayex­

pandsupply,too.

The usual suspects wouldhavebeen

America’sshaleproducers,whointhepast

haveoftenincreasedoutputwhenoilpric­

esrise.Thistimemaybedifferent,though.

Theindustryistryingtochangeitsways,

promisingtokeepa tightreinonoilout­

put,restraininvestmentandreturncashto

shareholders(seeSchumpeter).

Iranisa morelikelysourceofnewsup­

ply.Thecountry’snegotiatorsaretryingto

strikea dealwithAmericathatwouldlift

economicsanctionsinreturnforlimitson

itsnuclearambitions.Iftheysucceed,Iran

couldaddaround1mbarrelsa daytothe

marketbytheendoftheyear;itcouldalso

sellthe200mbarrelsitcurrentlyhasin

storage.ChrisMidgleyofs&pGlobalPlatts,

a datafirm,pointsoutthatSaudiofficials

donotwanta replayof2018,whenAmeri­

ca’sdecisionnottoreimposeoilsanctions

onIrantookthembysurpriseandsentoil

priceslurchingdownwards.

What,then,toexpectfromthecartel

anditsallies?Therearethreescenarios.

Oneisthatcountriesstartproducingwhat­

evertheywant,a pricewarensues,andoil

pricestumble.Analystsreckonthatthisis

theleastlikelyoutcome.Energyministers

stillbearthescarsoftheill­timedpricewar

ofMarch2020,whenRussiaandSaudiAra­

biafailedtoagreeonproductioncuts.The

marketwasfloodedwithoiljustbeforede­

mandsuffereditscovid­inducedcollapse.

Anotherpossibilityisthata newdeal

failstobestruck,andthatcountriesstick

totheircurrentquotas.Thatwouldmean

theextra post­Julyproduction increases

thatthemarkethadbeenexpectingdonot

materialise.Coupledwithasummerup­

Thelatestriftwithinopecisa signof

thingstocome

Why the Emiratis are irate

Spare oil-production capacity*

% of total, 2021

Source: UniCredit *Capacity that can be activated in 0 days

Angola

Russia

Kazakhstan

Iraq

Kuwait

Nigeria

Saudi Arabia

UAE

302520151050