January 12, 2021- Julian Klymochko is the CEO and CIO of Accelerate Financial Technologies, which offers various hedge fund and private equity strategies in the ETF format.
Klymochko’s firm offers an actively managed SPAC-focused ETF called the Accelerate Arbitrage Fund which trades on the Toronto Stock Exchange under the ticker ARB.
In an interview, he breaks down how the labor-intensive strategy works and shares two new SPACs on his radar.
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The SPAC boom of 2020 is showing no signs of slowing down in 2021.
In the first week of January alone, 27 SPAC IPOs have raised an aggregate of $6.5 billion, according to Julian Klymochko, CEO and CIO of Accelerate Financial Technologies.
To put that in perspective, 248 SPACs or “blank-check” companies raised a total of $83 billion in proceeds last year, according to SPAC Insider.
“I thought the end of 2020 was crazy, it’s actually gone even crazier,” said Klymochko, who has been getting up at 4:30 a.m. every day to run his SPAC-focused ETF called the Accelerate Arbitrage Fund.
With the explosive growth in new SPAC filings and IPOs, his workload can seem daunting, especially on days such as Friday when 13 SPAC IPOs debuted to raise $3.4 billion.
“Sometimes I work straight until 10 o’clock at night,” he said. “During busy times like these, 15-hour days are not out of the question.”
The “labor-intensive” fund, which trades on the Toronto Stock Exchange under the ticker ARB, aims to generate consistent and low-risk returns by applying the traditional merger arbitrage strategy to the SPAC space.
Launched in April last year, the fund finished 2020 up about 30%, according to Klymochko. To be sure, it has not posted official performance statistics due to its less-than-one-year track record.
How SPAC arbitrage works
While the traditional merger arbitrage strategy seeks to take advantage of the difference between a company’s current share price and the price paid for its acquisition in light of an announced merger, Klymochko’s SPAC arbitrage strategy is rooted in the fundamental characteristics of SPACs.
“The key aspect of SPACs is they raise capital typically at $10 per unit and then IPO. That unit consists of common shares and warrants,” he said. “The SPACs generally have two years to get a business combination completed. And if they don’t, then the worst-case scenario is they give you your money back plus accrued interest.”
He explained that the strategy is low-risk because the IPO capital that SPACs raised goes into a trust that holds low-risk, short-term Treasury bills. If a deal fails to complete within the required timeframe, the SPAC is liquidated and investors get their $10 units plus interests back. In that case, the warrants are worthless.
In another scenario, if the SPAC does announce a deal, investors are given the option to redeem for $10 plus accrued interests or buy shares of the new company.
“Even if you do redeem, you can hold on to those warrants and those warrants have significant value,” he said. “So even in the instance where the deal is not attractive, you can still make a very high return because these warrants are generally worth 7% or 8% of your purchase price.”
The “ARB” strategy is supposed to generate alpha when it can buy shares at or below $10 per unit or their net asset value. However, because of strong demand by an increasing number of market participants, SPACs have been trading up once they IPO.
“What we’ve been doing is buying new SPAC IPOs at $10 per unit,” Klymochko said. “You hold on until the deal announcement and sometimes after the deal announcements, they are going up 50%, 60%, and even 100% where we’re able to exit at $15 per share, $20 per share, sometimes even $30 per share on a trade that has virtually no downside. Plus you have additional upside through these warrants.”
Investors thinking this is too good to be true can look no further than billionaire Chamath Palihapitiya’s SPAC Social Capital Hedosophia Holdings Corp V, which announced its merger with fintech company SoFi last week.
“This is a clear example of that upside optionality. You can buy that SPAC IPO at $10 and now you’re up as much as 50%,” he said. “With that downside protection at $10, it’s a pretty exceptional risk-reward proposition.”
Two SPACs on his radar
As some of the biggest hedge funds like Millennium Management and Citadel Securities enter the SPAC market, getting access to the hottest new SPAC IPOs has been getting more competitive.
“Every single IPO is probably at least five times oversubscribed,” he said. “The demand is exceptional and the supply has increased tremendously. However, it seems like demand just continues to outstrip supply.”
Despite the overflowing pipeline of SPACs coming to market, Klymochko sticks by his criteria when it comes to evaluating new SPACs.
“First you want to look at the sponsor and whether it gives you confidence that they’ll be able to complete the business combination,” he said. “You also want to see a mandate that aligns with what you want to invest in. And then you want credible underwriters, a well-structured deal, decent size, and adequate terms for investors.”
He shared two new SPACs on his radar: (1) SoftBank’s artificial intelligence-focused SPAC SVF Investment Corp., and (2) billionaire deal-maker John Malone’s SPAC Liberty Media Acquisition Corp.
“These are two of the more high-profile SPACs that I’m really looking forward to in early 2021,” he said.
See full article here: https://www.businessinsider.com/spac-investing-strategy-arbitrage-ipos-to-watch-julian-klymochko-2021-1
