There was a lot of excitement on Wall Street when the billionaire Len Blavatnik pocketed nearly $2 billion in cash after Warner Music, the world’s third-largest record label, completed its successful IPO on Wednesday. Lots of rich people made lots more money.
It was the biggest IPO of 2020—thank you, Fed chairman Jerome Powell—and increased Blavatnik’s net worth to more than $31 billion, according to Bloomberg, with some $7.5 billion alone of that increase coming yesterday after the successful deal. By design, Warner Music, received nothing from the sale; all of the proceeds went to Blavatnik and his affiliates that control Warner and will continue to control the company after the IPO. Because the stock moved up 20% after it began trading Wednesday, the IPO was also a boon to investors who bought the Warner stock as it opened or who were lucky enough to get an allocation from the underwriters before it started trading. Warner Music is now valued at around $15.4 billion. The Wall Street underwriters, led by Morgan Stanley, Credit Suisse, and Goldman Sachs, also enjoyed a fee bonanza, likely in the millions of dollars each, although just how much the underwriters made is not yet publicly on file with the Securities and Exchange Commission.
By now, we are mostly inured to the inevitable fact that millionaires and billionaires are finding new ways to get richer during the middle of a global pandemic, where more than 100,000 people in the U.S. have died, more than 42 million Americans are out of work, and protests are convulsing American cities. Facing financial Armageddon, Powell and the Fed have stepped up twice—on March 23 and again on April 9—to flood the financial markets with capital, making it possible for nearly all manner of large companies—from Boeing to Carnival Cruise—to get access to much-needed cash. Without the Fed’s moves, it’s likely our financial outlook, as rough as it is, would be even worse.
The mountain of cash has transformed the market. By attracting most of the attention from the financial press in the past few weeks, Blavatnik’s billion-dollar payday overshadows another shocking pandemic phenomenon: Between March 1 and June 1, some 18 Special Purpose Acquisition Companies, or SPACs, have managed to raise nearly $6 billion of equity in the public markets, according to Renaissance Capital, a Greenwich, Connecticut–based firm dedicated to the IPO market. (Some 33 SPACs have been filed with the SEC since the start of the year.) If you’ve never heard of SPACs, it’s no surprise. They are hidden away in a remote corner of the capital markets and most people never give them a second thought. But rich people who want to get richer know what SPACs are.
Incredibly, the idea behind a SPAC is a simple one: Create a new company on paper, with no assets, but backed by a billionaire, or by a group of investors with a decent investing track record, and give them a boatload of money to use to buy other companies, usually within a given time period. In “normal” times, such deals would be, or should be, preposterous. After all, it’s plenty risky to invest in a company with no assets other than some cash, earning close to nothing in the short run, and the hope that it gets invested wisely by one or two guys who spend their free time looking for companies to buy or with which to merge. It’s not for the faint of heart and is usually the province of accredited institutional investors, who want higher risk (and hopefully higher rewards) by investing in private-equity funds or hedge funds. In effect, SPACs give ordinary investors the chance to invest alongside the big boys. That’s often, but not always, a recipe for disaster.