Illustration: Annelise Capossela/Axios

The prime example of something highly improbable that became conventional wisdom: The idea that both interest rates and inflation will remain near zero for well over a decade.

Why it matters: As Axios' Dan Primack writes, private equity firms (the polite rebranding of "leveraged buyouts") have historically bought companies and loaded them up with debt.

  • Now, they're starting SPACs, filled with fresh equity capital, with the intent of taking companies public. "The acquisition part is the same," says Dan, "but the transaction financing is inverted."

The big picture: Normally, debt is cheaper than equity, because it is tax-advantaged. In 2005, for instance, the effective tax rate on equity financing was 36%, while the effective tax rate on debt financing was negative 6.4%.

  • What's changed is that interest rates have become so low that tax-deductible debt service expenses aren't big enough to generate much of a tax savings. Simultaneously, stock prices are so high that raising equity capital has never been cheaper.

The bottom line: SPACs are less work for private equity companies: Rather than own and operate a company, they will often just take a board seat. But they will still see enormous upside if the deal works out.

  • SPACs also come with less accountability. There are no deep-pocketed limited partners asking awkward questions, just public shareholders who can come and go as they please.

Go deeper

Dan Primack, author of Pro Rata
Oct 22, 2020 - Economy & Business

McAfee raises $740 million in its IPO

Illustration: Aïda Amer/Axios

McAfee, a San Jose, Calif.-based provider of antivirus and endpoint security software, raised $740 million in its IPO at an initial market value of $8.6 billion.

Why it matters: The company's IPO prospectus lists "brand recognition" as its top competitive strength, even though its eponymous founder was recently arrested on tax evasion and firearms charges. John McAfee, who also was a "person of interest" in a 2012 murder in Belize, is no longer involved with the company.

Dan Primack, author of Pro Rata
Oct 23, 2020 - Economy & Business

BC Partners to split up PetSmart and Chewy

Photo: Rafael Henrique/SOPA Images/LightRocket via Getty Images

BC Partners plans to disentangle pet supplies retailer PetSmart from online rival Chewy, via a recapitalization plan.

Why it matters: This reflects PetSmart's improved performance, driven largely by increased pet adoptions during the pandemic. It's also a tacit admission by BC Partners that its original investment thesis was flawed.

Updated 43 mins ago - Science

Tropical Storm Zeta may strengthen into hurricane before reaching U.S.

The U.S. Gulf Coast and Mexico are bracing for another possible hurricane after Tropical Storm Zeta formed in the Caribbean Sea Sunday.

Of note: Zeta is the 27th named storm of the 2020 Atlantic Hurricane season — equaling a record set in 2005.

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