Jan 14, 2021

Axios Capital

It's been a good week for getting impeached, or raising equity capital.

  • I wrote about CEOs as the fourth branch of government on Tuesday. In this newsletter I'm looking back to the real government, and what Joe Biden's economic policy is likely to look like, especially in light of this morning's dreadful unemployment numbers.
  • Also: A dive into all the different ways companies are going public; a lender with a soaring stock price; a bull case for Tesla; an extremely bad investment; and much more. All in 1,752 words, a 6-minute read.
1 big thing: Biden's muscular economic agenda

Illustration: Sarah Grillo/Axios

Power will move from Wall Street to Washington over the next four years. That's the message being sent by President-elect Joe Biden, with his expected nomination of Wall Street foe Gary Gensler as the new head of the SEC, also by Sen. Sherrod Brown, the incoming head of the Senate Banking Committee.

Why it matters: Biden is going to attempt to chart an economic policy that's visibly to the left of Bill Clinton and Barack Obama. If he succeeds, it's going to show up not only in taxes and spending, but also in regulation.

What they're saying: "In stark contrast to the prior chairman, Gary will actually look out for Mr. and Mrs. 401k and Main Street investors," says Better Markets CEO Dennis Kelleher. "Gary is the right choice to lead the SEC in a new direction."

Flashback: Clinton was constrained by the so-called "bond vigilantes," who would drive up interest rates if they feared a departure from economic orthodoxy. His most trusted economic advisor was Bob Rubin, a former CEO of Goldman Sachs who believed in deregulation.

  • Rubin's acolytes Larry Summers and Tim Geithner, both consummate technocrats, then took over economic policymaking under Obama.

What's new: Economic orthodoxy has moved sharply to the left in recent years. The fears of the bond vigilantes were proved unfounded: Large deficits and low unemployment did not cause any visible uptick in inflation, and a new consensus started to emerge that the biggest danger in economic policy is doing too little, rather than too much.

  • What they're saying: Biden said last week that "the overwhelming consensus among leading economists left, right and center is that in order to keep the economy from collapsing this year, getting much, much worse, we should be investing significant amounts of money right now."
  • Axios' Hans Nichols reports that Biden plans a $3 trillion stimulus plan — on top of new $1,400 checks for most Americans.
  • Bank accounts could also start being provided by the government, possibly via the U.S. Post Office. Postal banking has long been a dream of progressive legislators — and a nightmare of commercial banks, who fear the reach and convenience that a postal bank would be able to provide.

What to watch: A major speech from Biden on the pandemic and the economy, coming later this evening.

The bottom line: Democratic presidential candidate Andrew Yang said last year that "the magic of Joe Biden is that everything he does becomes the new reasonable." Biden's economic policy is likely to be extremely aggressive — but, by dint of his naturally moderate personality, it might not be received that way.

2. The complex new landscape of going public

Illustration: Aïda Amer/Axios

The question is no longer whether a company should go public; it's how.

Why it matters: The much-resented traditional IPO, run by Wall Street and largely for Wall Street, now has competition. A lot of it.

The big picture: The end point of going public is always the same — having a listing on a major exchange, where your stock is likely to trade thousands of times a second.

  • That unrivaled liquidity provides a smooth exit for early investors and creates a valuable currency that can be used to compensate employees and acquire rivals.
  • Airbnb, for instance, is now rich enough post-IPO that it can comfortably pay its D.C.-area hosts to stay empty during Inauguration week. That's a big change from the pre-IPO days when it struggled to compensate hosts for coronavirus-related cancellations.

The window is wide open for new issues. Webcasting platform ON24, for instance, is finally giving its early VCs the exit they've been waiting for since the company was founded in 1998. Even Petco is pricing above its range.

  • By the numbers: Investors are desperate to own newly-public companies mainly because they've performed so well recently. The Renaissance IPO index, which buys stocks five days after they go public and holds them for two years, gained 110% in 2020, compared to 18.4% for the S&P 500.

The catch: The process of going public is long and painful and expensive. Wall Street banks charge an eye-watering 7% fee, and at the same time have a system where their favored clients can make billions of dollars for almost no work at all, thanks to a first-day "pop."

  • Issuers always suspect that the banks are making extra money on those pops, in sums that can vastly exceed their IPO fees.

Between the lines: You only go public once, so CEOs and boards of directors tend to be very conservative when it comes to new ways of doing so. But after Spotify's successful direct listing in 2018, other companies realized that they had a real choice in the matter.

  • Even SPACs have become a legitimate option for top-tier companies like SoFi, after many years of being considered mostly a way for very sketchy companies to go public.
  • When a company goes public via SPAC, it agrees to be bought by a much smaller blank-check company with an already-existing public listing. The fees are even higher than a traditional IPO, but there's significantly less risk.

What they're saying: "The terrific acceptance of various structures now lets companies and their boards opt for the structure that best fits their specific goals," says IPO consultant Lise Buyer of Class V Group.

The bottom line: Traditional IPOs are still dominant, but there are now a lot of other options on the menu.

3. The going-public menu of options

Illustration: Sarah Grillo/Axios

Alternatives to the traditional IPO, where shares are priced by Wall Street investment bankers, have always existed. Until now, however, they have not been mainstream. Companies like Google that bucked the trend were the rare exception to the rule.

  • Hybrid listings like Google's take the pricing out of the hands of Wall Street and force investors to bid against each other in an auction to determine the IPO price. Recent issuers using this technique have included Unity Software and Airbnb.
  • Direct listings (think Spotify, Slack, or Palantir) allow companies to go public without raising any money at all, thereby avoiding any kind of "pop". After all, if there's no IPO price, then there's nothing to pop from. The downside is that they don't raise any money.
  • Roblox has an interesting twist on the direct listing: It's issuing $520 million of new shares only to existing investors, a few weeks before it goes public, and then doing a direct listing. It's a bit like a priced IPO, but if there's a big first-day pop, at least the winners are long-term believers in the company.
  • Primary direct listings combine the auction and the direct listing, and allow companies doing a direct listing to raise fresh capital. The structure has now been blessed by regulators, so expect it to be tried out later this year.

What to watch: SPACs are seeing an even greater range of innovations.

  • Bill Ackman's "tontine" SPAC gives less upside to arbitrageurs who fail to participate in the acquisition.
  • The Spinning Eagle SPAC automatically creates a new SPAC if it doesn't spend all of its money on its first acquisition.
  • Group Nine Media has created a SPAC to buy itself, which is one way of a company taking itself public without having to reveal full financial statements.
  • The Dyal-Blue Owl SPAC is even more complicated, with Dyal owning significant stakes in both the sponsor of the SPAC and the target of the acquisition.

The bottom line: If choosing between IPOs and direct listings is a bit like ordering a la carte, then going the SPAC route is closer to ordering off the menu entirely: Just about anything is possible.

4. Affirm's pop
Data: PitchBook, public filings, Yahoo Finance; Chart: Axios Visuals 

Buy-now-pay-later lender Affirm put off its $1.2 billion IPO from December to January partly because of all the huge first-day pops that were happening at the end of 2020.

  • If CEO Max Levchin wanted to avoid a huge pop, he failed. After pricing at $49, shares rose as high as $103 before closing at $97.24 on Wednesday.
  • Before the IPO, Affirm had raised $1.6 billion in a series of private rounds, at prices ranging from $0.35 in 2012 to $19.93 just four months ago.
5. The case for bullishness

Illustration: Sarah Grillo/Axios

If you're a bemused observer of the massive run-up in stocks in general, and in Tesla in particular, you're probably liable to explain it all away by saying that we're in the middle of a bubble — a short-term mania that's bound to end in tears.

  • That might well be true — but all market participants have learned humility in the face of such assertions. After all, the S&P 500 was at 744 when Fed chair Alan Greenspan warned that the stock market was running too hot in his famous "irrational exuberance" speech; it has now more than quintupled from that level to reach 3,810.

Go deeper: Legendary investor Howard Marks is skeptical of current valuations, but, like all good investors, he keeps an open mind. His most recent letter, about his conversations with his more constructive and bullish son Andrew, is a must-read.

  • On Tesla in particular, I would recommend this bull case from Empire's Kevin DeCamp. Tesla might not be the new Apple — but people spend a lot more on cars than they do on phones, and if it does get there then there's still upside to the stock.

The bottom line: Signs of mania are everywhere. But not all bubbles burst.

6. Where the stimulus checks are going

Illustration: Aïda Amer/Axios

The Mega Millions lottery jackpot is now estimated at $750 million, growing by $350 million just since the beginning of the year.

  • By the numbers: After a $401 million jackpot was not won on Jan. 1, it grew to $447 million on Jan. 5, $520 million on Jan. 8, and $625 million on Jan. 12. In total, $379 million was wagered in 11 days, per the invaluable Lotto Report website.
  • The last time the jackpot got this big was in May 2019. Back then, after a $393 million jackpot was not won on May 24, it grew to $418 million on May 28, $444 million on May 31, and $475 million on June 4. In total, $173 million was wagered in 11 days. That's less than half the current pace.

What changed: The stimulus checks arrived.

7. Coming up: Yellen's confirmation hearing

Yellen at her last Senate confirmation hearing in 2013, then as Fed chair nominee. Photo: Alex Wong/Getty Images

Janet Yellen, Biden's pick to lead Treasury, will face questions from senators at a confirmation hearing on Tuesday, writes Axios' Courtenay Brown.

Why it matters: Yellen will play a key role in constructing and pushing through Biden’s policies as the country fights an economic crisis.

  • Treasury is one of a handful of posts the Biden team has said should be confirmed as close to inauguration day as possible, "given the stakes."
  • After the hearing, the Senate Finance Committee will have to schedule a vote on Yellen's nomination, then another for it to get taken up by the full Senate.

Yellen isn't expected to have trouble getting confirmed. In 2014, 56 senators voted to confirm her as Fed chair — including some current Republican lawmakers. (Bad weather caused many senators to miss the vote.)

8. Building of the week: Gue(ho)st House, Delme

Photo: Jean-Christophe Verhaegen/AFP/GettyImages

The Synagogue de Delme contemporary art centre in eastern France, is a gallery inside a repurposed 19th century synagogue. It also has a reception center, along with studios for artists in residence, that was previously a prison house, a school and a funeral home.

  • In 2012, artist-architects Christophe Berdaguer and Marie Péjus converted the building by covering it in blocks of polystyrene, spraying polyurethane resin on top, and then painting it white.
  • They named the refurbished building Gue(ho)st House, after Marcel Duchamp's aphorism that "A Guest + A Host = A Ghost."