Alec Gores SPAC Deal Turns $25,000 Into $80 Million in Months

(Bloomberg) -- It’s known on Wall Street as the “promote” -- and it just made billionaire Alec Gores a quick $80 million.

The promote is trade lingo related to some financiers’ hottest maneuver of late: founding a blank-check company, or SPAC.

Formally known as special purpose acquisition companies, SPACs are designed to give their sponsors an edge in making money. That’s precisely what happened in the case of Gores, who first made his fortune in leveraged buyouts.

His latest SPAC announced Wednesday that it was acquiring United Wholesale Mortgage in a deal that values the mortgage originator at $16 billion. But Gores himself will reap outsize rewards: he and other executives got to buy into the deal for very little thanks to the promote, or founders shares, which are a key element of the SPAC game. They give sponsors an incentive to find a target and compensate them for the costs of raising a SPAC.

Result: Gores and his band put just $25,000 in when his SPAC, Gores Holdings IV Inc., went public in January, according to filings at the time. Once the United Wholesale deal is clinched, their 0.6% stake will be worth $96 million, according to Mark Stone, chief executive officer of the blank-check firm. The payout depends on the deal closing, which is expected to happen in the fourth quarter.

Sponsoring a SPAC isn’t risk free. Gores, alongside his executives, also personally put about $10 million to $12 million of at-risk capital into the deal, said Stone, who also contributed to the initial pool of money.

That money went toward paying investment banks, lawyers and auditors as well as filings and listing fees, he said, and couldn’t be recouped even if the SPAC failed to find a target. Gores is also the lead investor in a $500 million private placement that it raised to finance the transaction, Wednesday’s statement shows.

Still, the wildly lucrative setup helps explain why SPACs have exploded this year as the stock market, until recently, has pushed ever higher. About 40% of this year’s initial public offering volume has come from SPACs, and many prominent figures, such as venture capitalist Chamath Palihapitiya and former Citigroup Inc. banker Michael Klein, have vehicles still hunting for deals.

This month, one of Palihapitiya’s SPACs made $60 million acquiring a stake in Softbank Group Corp.-backed property site Opendoor, he confirmed during an interview on CNBC. When asked about the profit, he told the Financial Times, “I just don’t understand why all of a sudden it’s okay for banks to make money, but it’s not okay for other people to make money.”

Palihapitiya, who took Richard Branson’s space tourism company Virgin Galactic Holdings Inc. public, filed listing documents for three more SPACs last week, seeking a combined $2 billion.

For Gores, the net gain of over $80 million, a more than six times return, far outpaced any indexes over the same period. The tech-heavy Nasdaq Composite Index has gained 18.5% this year.

A representative for Gores declined to comment on further details of the finances.

Gores’s other blank-check firm, Gores Metropoulos Inc., announced a $3.4 billion merger with driverless car startup Luminar Technologies Inc. just last month. Another one of his SPACs, Gores Holdings V Inc., is still searching for a deal.

Not every SPAC deal includes founders shares. Pershing Square Capital Management’s Bill Ackman left out the promote in his $4 billion record-breaking blank-check company. However, his SPAC’s board and investors were allowed to purchase warrants that kick in after a transaction is closed and if shares trade above a target price.

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