Investing in initial public offerings (IPOs) is a relatively straightforward, if somewhat risky proposition. Investors dig in to the regulatory documents -- typically the S-1 filed with the U.S. Securities and Exchange Commission -- to determine the financial performance, customer metrics, and business prospects of a company before its debut to determine if it meets their threshold for investment.
A special purpose acquisition company (SPAC) is a very different animal. The sponsor company goes public first and later acquires a promising business with the funds raised. Investors have no idea what company will eventually be acquired and are therefore relying entirely on the SPAC's management team, or sponsors, to pick an acquisition target that will ultimately be successful. For that reason investors must have a high degree of confidence in the team running the SPAC.
That's what makes MELI Kaszek Pioneer (MEKA) so intriguing.
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A dream team of tech innovators
MELI Kaszek Pioneer (hereafter referred to as MEKA) has strong ties to a company that has been wildly successful, in no small part because of its tech-savvy and forward-looking management team.
Investors are no doubt familiar with MercadoLibre (MELI -1.79%), the undisputed e-commerce leader and digital payments powerhouse in Latin America. Its ability to navigate the unique business, economic, and political climate in the region has led to explosive gains for shareholders, with the stock surging more than 5,300% since its debut in mid-2007.
MEKA brings together Kaszek, the largest early-stage venture capital firm in Latin America, and MercadoLibre as co-sponsors, but its lineage runs deeper, tapping some of "the original founding team from MercadoLibre as sponsors," according to its press release. This group of entrepreneurs reads like a Latin American who's who of disruption and innovation.
Hernan Kazah is co-CEO of MEKA and managing partner at Kaszek. Not only that, but Kazah was one of the co-founders of MercadoLibre, acting as the company's chief operating officer for nine years and CFO for another three.
Pedro Arnt is the other co-CEO at MEKA and has been with MercadoLibre since the beginning, initially as vice president of marketing and sales before being promoted to CFO in 2011, a position he has held ever since.
A review of MercadoLibre's history helps illustrate why its management team is so well suited to disrupt the SPAC space as well.
Disruption at its core
MercadoLibre was the brainchild of CEO Marcos Galperin, who co-founded the e-commerce company back in 1999. It was initially modeled after eBay, which eventually bought a 19.5% stake in MercadoLibre and mentored the company after it was unable to gain ground in the region.
Additionally, Latin America was -- and remains -- largely a cash-based society, which was a significant hurdle for the budding e-commerce company. Undeterred, MercadoLibre developed Mercado Pago, a digital payment system inspired by PayPal. Adding a twist based on local practices, Mercado Pago partnered with a string of local convenience stores, allowing consumers to add money to their account.
While Mercado Pago was originally linked solely to the MercadoLibre platform, it became so successful that it made the jump to brick-and-mortar retail, ushering in a new phase of its growth.
Image source: Getty Images.
MercadoLibre also met the threat from Amazon by developing a shipping solution that tapped the most reliable shippers in each of the 18 countries where it operates. This resulted in volume discounts for its merchants, who in turn can offer free or discounted shipping to their respective customers.
These innovations have helped MercadoLibre become Latin America's leading e-commerce and fintech company.
Disrupting the SPAC
MEKA isn't content to merely find a company to acquire and take public, but instead plans on improving on the traditional SPAC with several features that should bode well for long-term investors.
One departure from the traditional SPAC is MEKA's decision to opt for a "warrantless SPAC." Warrants allow early investors to buy shares at a later date at a pre-determined price. Unfortunately, this typically requires the issuing of new shares in exchange for the warrants, which dilutes existing shareholders. Instead, MEKA will receive at least $50 million in private investment in public equity (PIPE) funds via a forward purchase agreement with MercadoLibre and Kaszek.
MEKA is signaling to investors that its management team is in for the long haul by adopting a longer than customary lock-up period -- which restricts insiders and early investors from selling shares for a period of time after the SPAC merger is completed. The usual lock-up lasts roughly six months. MEKA is opting for an 18-month lock-up, unless certain performance thresholds are achieved.
SPAC sponsors historically have the most to win from the transaction, earning a hefty 25% of the shares sold in the IPO. MEKA has added a performance-based structure to its SPAC, which only vests for the sponsors if the SPAC generates returns for investors.
Finally, rather than simply bringing a company public and then cutting ties, MercadoLibre and Kaszek plan to offer mentoring and business assistance, as well as potential operational partnerships with the target company.
A winning combination
The traditional SPAC is typically little more than a crapshoot, with investors betting that some unknown visionary will make the right acquisition choice that will ultimately result in future gains.
Given the tech pedigree of MEKA's sponsors, their history of innovation and disruption, and the investor-friendly features they're bringing to this transaction, there's a much higher degree of certainty that investors will ultimately win when MEKA finds an acquisition target.