Founder & Executive Chairman, ELEMENT SOLUTIONS INC
Mariposa's Martin Franklin Expects Shakeout in SPACs
Mar.11 -- Mariposa Capital founder and CEO Martin Franklin says special purpose acquisition companies (SPACs) are here to ...
About Martin Franklin
Martin Franklin, founder and executive chairman of Element Solutions and founder of Mariposa Capital, has been active in the special purpose acquisition company (SPAC) market. In November 2021, Franklin said he had filed two new SPACs, Brimstone Acquisitions and N2, and described the SPAC market as undergoing a "digestion period" with a "shakeout" ahead, predicting that fringe actors would eventually go away. He contrasted his approach with what he called the "story stocks" and "business plan opportunities" prevalent in the U.S. SPAC market, stating that he targets "very profitable businesses, market leaders in their markets, great management teams." Franklin also said that when buying a SPAC, investors are "really buying a two-year CD with equity upside" and that the real valuation occurs when a PIPE transaction is announced and reviewed by institutional investors. Franklin has also commented on the broader IPO market and economy. In September 2020, he said the IPO market "lacks discipline," with "valuations beyond reasonable" and that "venture capital needs to have more discipline on its expectations and investment banks need to have more reality in how they present opportunities." Regarding the U.S. economy, Franklin said in September 2020 that he did not expect a recession in the short term but anticipated "lower growth." He has also discussed his role at Element Solutions, noting in September 2019 that the company was "very high cash flowing" and "the most under levered company I think I've been in for a very long time," and that he had personally invested over $20 million in the company's shares.
Transcript (16 segments)
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Interviewer0:00
Sir Martin, I'll start with you. Obviously, why now? We've seen the boom in SPACs really accelerate into the beginning of 2021 and then turn lower. It looks like the party is over. Am I seeing that wrong?
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Martin Franklin0:15
Well, I'll say a couple of things. First of all, I actually filed two SPACs today. One is called Brimstone Acquisitions, where I'm backing and partnering up with a fellow called Mike Goss, a very experienced person who used to be the CFO of Bain Capital and then after that was the CFO of Sotheby's. The second is my N2, which I'm doing with Noam Gottesman, my longtime partner who we built Nomad Foods together. What's happened is you've got hundreds of SPACs that have filed and raised capital. There is a bit of a digestion period going, but look, I've been doing this since 2005, 2006. I've deployed about eight billion dollars of equity through various SPAC structures, and I think SPACs are here to stay. I think that there will be a transition. This has become obviously a bit of a bandwagon. A lot of players who probably shouldn't be capital allocators are now becoming capital allocators, and that's going to create some indigestion. But I think SPACs as a product are going to be a long-term product, and I think they will modify themselves over time.
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Interviewer1:33
Martin, why are you going down the US route? You've come on with us a few times to talk about your SPACs, why they're different, is that you do them in the UK and you have a slightly different structure. But these two that you've launched today both look a lot like the current wave of SPACs out there. Are you just capitulating to the vogue of today?
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Martin Franklin1:47
Look, here's the reality. The vehicles I have in the UK, built in the UK, they're companies in which I wanted to be, if you like, a controlling shareholder or leading shareholder, and ultimately the chairman or co-chairman of those companies. I chair today three public companies: Nomad Foods, API Group, and Element Solutions. They're great companies, very healthy, profitable businesses, well established. The IPO game in the SPAC market in the US is more to be a conduit for other companies' public offerings. So you're looking to really bring your experience to somebody else to take their company public, where they're the chairman, they're the lead directors, etc. So it is a different product. And I don't think you'll see me trying to buy an entire company to lead until the kinds of structures that I did in the UK are allowed in the US, or the UK ones are modified to take care of some issues that I think US investors have to continue to invest in the types of structures I've had in the past.
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Interviewer3:03
Another notable aspect of the current boom in SPACs has been the kind of companies being targeted. You've seen a lot of electric car companies, flying taxi companies, and other very growthy, splashy companies. Traditionally, when you've done them, you've gone after more traditional private equity models: frozen foods, safety equipment companies. What is it about the crop of SPACs today that is marrying them up with these very speculative, high-growth, but potentially hot air companies?
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Martin Franklin3:34
Look, we're in a period of a lot of speculation. This has become a product somewhat of publicly listed venture capital. I think to look at it any other way would probably be a mistake, because it is venture capital. You're making a lot of promises of companies that are going to have performance criteria looking out where you don't really have a metric to look at until 2026 or something like that. That's venture capital, and that's a caveat emptor game. I've been on record as saying I'm not sure that's well suited for the public markets. I think like so many other things that have become bandwagons, there will be a shakeout. But what has happened, and I think is real, is whereas in the early days I was trying to sell people on the concept that you could do this as a very efficient way of going public, I think the fact that high-caliber companies, profitable ones, solid companies, will find there are a lot of merits to going public in this type of structure. Whereas in the past it used to have a stigma, I think that stigma has gone away. But like so many other bandwagons, as I said before, there will be fringe actors, and the fringe actors at some point in the shakeout will go away.
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Interviewer5:07
There are growing concerns about valuation. You call it a digestion period or a transition when you say people who shouldn't be capital allocators are becoming capital allocators. The concerns that come to mind are for the investors being drawn in, not the professional investors at the table, but the many retail investors that now take part. My question to you is: do you worry about yourself participating in a process that will burn some individual retail investors?
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Martin Franklin5:40
Well, I don't participate in that process at all. The kinds of companies that I buy are high-caliber companies, companies with a long history of profitability, run by good people, where I've done my due diligence thoroughly. I think if people go and buy companies that are run by movie stars or athletes who've never deployed capital for anybody else as a fiduciary, you've got to know what you're buying into. So I do think caveat emptor accounts for something, but the actual product, the special purpose acquisition product, if properly used — I've been saying this for 15 years — if properly deployed, is an extremely useful structure. It's like junk bonds from the 80s. You could say that junk bonds finance bad companies, but the truth is junk bonds financed and built a lot of great companies. So it can go either way.
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Interviewer6:41
Just quickly, should there be more protections in place for investors who may be a little less sophisticated than some of the players in this game?
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Martin Franklin6:50
I do. I think like so many things, there should be better gatekeeping, particularly for businesses that don't have revenue. The idea that you can sell a story to someone and then cash out before you've done anything to prove whether or not it's a story — there probably needs to be some kind of gatekeeper rules in place. I'm not quite sure how they should be crafted, but certainly when it comes to venture capital, the great thing about the venture capital community is they have their own processes that haven't needed to be regulated. You don't find venture capitalists cashing out on their interests until they've proven out their models to some degree.
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Interviewer7:35
On that note, Sir Martin, there are new rules proposed for the UK market. Do you think they're going a step too far?
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Martin Franklin7:47
Well, I think the new rules — I haven't studied all of them — but one of the things that existed in the UK that was a reason I really had to stop doing them in the UK for the time being was that when we announced a transaction, if we were moving from the London Stock Exchange to the New York Stock Exchange, they had frozen trading. Actually, even if we didn't move exchanges, until prospectuses were produced and reviewed, trading would be stopped in the vehicles. Whereas in the US, trading is continuous when a transaction is announced. That became very problematic for funds, who obviously mark to market as an important factor. So I think the changes they're going to make in the UK are going to be helpful. I haven't studied all of them, but hopefully they'll all be helpful for me.
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Interviewer8:38
Martin, I just want to jump in before we let you go. We've talked about this being a boom, a bandwagon, a craze, whatever you call it, all of which suggests at some point it's going to come crashing down. Who is going to be left holding the bag?
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Martin Franklin8:50
I think it's going to be like 2000 on the internet. I think you'll have a lot of equity funds that will post bad results, but I don't think this causes any contagion. That's the beauty of it — it's all being done with equity. It's not like the real estate crisis or anything else because it's all equity-based. I think there are a lot of companies that are trading at very high prices that probably some of them may be worth something and some may be worth a lot, but there are probably a few out there that are worth nothing. And that will play itself out over time.
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Interviewer9:24
We've talked a lot about the effect that all of this capital rushing to this space has had. Sir Martin, you bring two to market here. You believe that yours are different and that when you choose wisely, it doesn't have to be a bad experience. Yet we could see a big valuation correction, just a momentum-driven correction for the whole space. How worried are you for SPACs, for IPOs, for the market in general, for the sheer level of momentum and really mania that we're seeing here?
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Martin Franklin9:52
Look, I think at the end of the day, when you buy a SPAC, remember you're not really buying a deal. You're buying a two-year CD. That's what you're buying — a two-year CD with equity upside. That's the way you should think about it. The real valuation of the company and the deal itself happens when you do the PIPE or you do the transaction and announce the transaction. Most of these deals today require PIPEs, which means that you have institutional investors reviewing the transaction and buying additional equity at ten dollars. That's where the real rubber meets the road. If institutions like T. Rowe Price, Wellington, Fidelity see value in the product that you bring to the table, they will buy that PIPE and the deals will go forward. I think what will happen in the shakeout is these funds will start being far more discerning, because the sort of easy money of announcing something on a story and it trading up will no longer be there. So I think that's probably good for the overall market, probably good for funds. There'll be a digestion period, but that's okay.