One thing you may notice when looking at the U.S. stock market of late - aside from the astronomical valuations of SaaS companies, the vertical stock charts of e-commerce players & 50% rallies in bankrupt companies - is that there has been a relative explosion of SPAC IPOs. For those not "in-the-know", a SPAC is a special purpose acquisition company. As defined by Investopedia, a SPAC is "a company with no commercial operations that is formed strictly to raise capital through an IPO for the purpose of acquiring an existing company." In the first half of 2020 alone, there have been 38 SPAC IPOs (vs. 59 for all of 2019) raising a total of $12.2Bn (vs. $13.6Bn for all of 2019) for an average raise of $321M (vs. $231M in 2019). Suffice it to say, SPACs are increasingly in vogue & are likely here to stay.
To give a sense for the various flavors and broader success of SPACs, recent market darlings having gone public by way of a SPAC include:
While not yet publicly listed, we'd be remiss not to mention Pershing Square Tontine Holdings, Bill Ackman's proposed SPAC that is seeking to raise $3Bn in its IPO!
Now, not all SPACs are as "cool" as those mentioned above, of course. More relevant to our purposes and long-term goals is an interesting, lesser-known SPAC, namely, Galileo Acquisition Corp (NYSE: GLEO). What makes GLEO rather compelling is its core focus:
"We intend to focus our search on one or more businesses based in Western Europe with strong ties and exports to the North American market, and businesses based in the United States with strong ties and exports to Western Europe, with an emphasis on Italian family-owned businesses."
Notably, GLEO's leadership team is comprised of experienced Italian deal-makers, so their preference for Italian family-owned businesses makes sense. To further elaborate on their Italy specific focus, GLEO explains the following in its S-1:
"We intend to initially focus on companies based in Italy that represent the best of the “Made in Italy” brand, reflecting the superior engineering, quality craftsmanship and avant-garde style with which we believe Italian products are synonymous."
While it remains to be seen if the team guiding GLEO can identify & close a transaction, their successful IPO has proven that such a cross-border, country-specific thesis is viable as a U.S. listed SPAC, assuming, of course, that the leadership team is relevantly experienced and the broader investment strategy is both sound and fitting.
Realizing this, the exciting conclusion we then naturally landed upon is to quite simply swap the focus on Italy with that of Japan, our particular country of interest. Being one of the top 5 largest exporters in the world, the "Made in Japan" label is not only widely known, but also associated with high-quality, reliable products produced by dedicated "craftsmen", particularly in the industrial manufacturing space - think sensors, robotics, high-precision instruments, etc.
As those following our ongoing posts may recall, we have spent several years, and a significant portion of the last year in particular, exploring the small business ("SMB") market in Japan. While we would encourage readers to take a moment to briefly skim through our above hyperlinked Japanese SMB investment thesis, we will highlight here the following two key thoughts related to this original proposal. One, we remain incredibly bullish on the opportunity to capture the significant "latent alpha" within and among Japanese SMBs. Two, we have a now different perspective on both the "minimally viable" and "optimal" ways in which to go about "surfacing" this alpha.
To succinctly summarize this updated view...credibility, reputation, branding, relationships & know-how...while these advantages are obviously important and helpful in any business situation in any country, this reality is particularly pronounced in Japan. While more "lean", entrepreneurial approaches to SMB acquisitions, such as search funds, are viable in Japan, they require a uniquely Japanese form and approach at present. A perfect example of this is Japan Search Fund Accelerator, a Japanese search fund investment group who currently backs six active Japanese search funds - the only six active search funds in all of Japan. As noted in their recent interview with Japan Business Insights, the group is partnered with a regional bank on five of the six search funds, with the bank acting as sole LP & co-GP, while guiding all deal sourcing efforts (i.e. introducing their SMB banking clients) & providing any required acquisition financing. The bank is a veritable "one-stop-shop", and for good reason given the norms and realities of Japanese culture and business practices. Put another way, partnering with a bank in this regard today may not be "required", but it is arguably necessary. To our knowledge, there is nothing of the sort being practiced within the search fund space anywhere else in the world - not even close.
The main point we are trying to make here is that starting from as strong of a "position of power" as possible is a critical consideration when doing business in Japan, particularly when assessing relevant risk-reward profiles, execution timelines and subsequent opportunity costs. Again, doing so may not be "required", but it is arguably necessary.
Given such, leveraging a listed SPAC structure - a far more powerful approach than that of a bootstrapped acquisition vehicle, far less onerous than & not as short-sighted as a private equity fund, and immediately able to tap into the innate credibility bestowed upon publicly listed companies in Japan - stands out as a highly attractive - so far never practiced in Japan - alternative investment model. We'll almost certainly have all of the credibility, reputation, branding, relationships & know-how we'll need to do things "right" as soon as we hit "GO".
With that noted, let's flesh out the details of our envisioned Japan focused SPAC a bit more.
So, as a listed SPAC with $100M+ in dry powder to acquire an existing business, our initial purchase will almost certainly be of a sizable corporate carve-out (side-note: about a quarter of the companies on the Nikkei 400 have >100 subsidiaries apiece, and many with >300 divisions below the parent company), a Japan-listed public company or a majority acquisition of a private, family-owned medium-sized enterprise. We won't wade into the details around what, how or why of this initial acquisition - aside from it likely being in the industrial manufacturing space - as we don't feel our "secret sauce" is likely to come from our "big-bang" first acquisition, but rather from our increasingly decentralized, scalable SMB focused acquisition activities that are kick-started by this cash generative, sizable, "Day 1" acquisition.
Being unashamed "copycats", we primarily look to one specific company in the U.S. as the likely best and most realistic initial role model for what we feel would be the optimal strategy for a Japanese SMB focused U.S. listed SPAC. That company is Crawford United, a pink sheet listed $52M market cap industrial manufacturing focused acquisition holding company based in Cleveland, Ohio. We'd urge readers to learn more about Crawford on their own, but are sharing below what we feel is the most concise, powerful investment thesis on Crawford today. Full credit to Alluvial Capital for the below:
With tens of thousands of high quality, smaller, often successor-less industrial manufacturers all around Japan, coupled with 0% interest rates & yield starved Japanese banks overly eager to lend to credible corporates, the opportunity to execute Crawford's model is even more attractive in the Land of the Rising Sun. Thinking longer-term, we would likely pair this domestic acquisition strategy with a global know-how & overseas presence, starting in the U.S., that would serve to power portfolio companies' international sales and ultimately allow us to expand acquisition activities beyond our Japan core. We don't think it is far-fetched to assume that we could slowly but surely build an increasingly global Japanese Indutrade or Danaher.
While ambitious given where we stand today, we strongly believe that the launch of such a Japan focused U.S. listed SPAC is inevitable - it is simply a matter of when. With this particular opportunity set in Japan so large and so timely, with the familiarity with and success of SPACs continually growing & the seemingly insatiable demand for long duration, capital efficient, institutional quality investment opportunities in large global markets, "the when" is really just about being able to pull together the "right" leadership talent, investors and other relevant stakeholders to will this entity into existence...