April 21, 2021- Business Insider, Vicky Ge Huang- April is indeed the cruelest month, especially for the SPAC market.

Despite some 308 SPACs raising a total of $100 billion this year, the proceeds raised from SPACs coming to market in April have plunged more than 90% month-over-month as of Monday, according to data shared with Insider by Accelerate Fintech.

The sentiment shift is as clear as day. Hedge funds and short-sellers were already waging a $2.7 billion bet against SPACs in early March. Billionaire Chamath Palihapitiya, who has been a big proponent for such blank-check companies, has seen short interest in three of his six SPACs skyrocket since mid-December last year.

According to Bank of America, retail buying of SPACs has also come down significantly.

“We believe the fever has broken. SPACs have fallen 9% from their February 2021 peak, and the pace of issuance has slowed significantly,” Bank of America analysts led by Jared Woodard said in an April 13 note. “More importantly, rising growth expectations have meant a broader range of viable investment alternatives.”

Hedge fund giant Marshall Wace is the latest to sound the alarm on SPACs. The London-based fund, which has $1 billion of gross exposure to SPACs, recently told investors in a newsletter that SPACs have generated “awful returns” and it has ramped up short bets against SPACs.

But the cooling-off of the SPAC market might not be all bad news for investors.

As Bank of America’s Woodard said in his note: “We expect SPAC issuers will face a less manic, more mature demand base in coming months as investors adopt a “know what you own” attitude and require more due diligence for companies that often have no profits or revenue.”

Resetting ‘unrealistic expectations’

For Julian Klymochko, founder and chief executive of Accelerate Fintech, the recent slump in SPAC performance and issuance marks a much-needed reset of what had become “unrealistic expectations” from some investors.

“In January and February, investors were thinking there’s no problem to pay a 30% premium over trust value for a SPAC, which in my opinion was insane,” he said in an interview. “And those who got overly zealous on the asset class are kind of paying the price now.”

He attributed the market retracement to three factors: (1) a glut of supply from the SPAC boom, (2) a regulatory overhang that has stalled SPAC issuance, and (3) a reluctance for some institutional investors to finance PIPE deals due to recent decline in performance.

As a total of 431 SPACs with $140 billion are still out there competing for merger targets, it is no wonder that the market has an oversupply issue.

“We need to work through the oversupply issue,” Klymochko said. “The way to do that is to have good SPAC combinations and to cut off the issuance.”

Interestingly, the Securities and Exchange Commission played a part in turning off the spigot for SPAC issuance last week by releasing a staff opinion about whether some SPAC warrants may need to be reclassified as expenses on balance sheets.

“It’s a non-factor but it comes into play in terms of there’s not going to be enough S-1 approved until they figure that out, so it has the effect of basically halting new issues,” he said.”At the end of the day, it’s a positive for the SPAC market because we need supply to decline.”

The growing reluctance of institutional investors to provide private investment in public equity (PIPE) deals to some SPACs also ensures that the only deals getting done these days are of “super high quality,” according to Klymochko.

“To have a successful combination, you 100% need a PIPE financing that validates the valuation and those have become difficult to underwrite these days,” he said. “That really separates the wheat from the chaff.”

3 SPAC arbitrage opportunities

As the retail frenzy fades from the SPAC market, there are now hundreds of SPACs trading at a discount to their trust value.

That might not be the best news for speculators hoping for SPACs to double overnight, but it signals opportunities for SPAC arbitrage investors such as Klymochko.

His Accelerate Arbitrage Fund (TSX: ARB), which manages $50 million in assets, has returned  39.8% in the past year. The fund employs a low-risk “buy low, sell high” type of strategy where it buys SPACs trading below their trust value and sells after their business combinations are announced.

At the peak of the SPAC boom, it was almost impossible for Klymochko to find SPACs trading at a discount, but he is now scooping up high-quality SPACs from well-respected sponsors again.

His thoughts are shared by legendary value investor Bill Miller, who told CNBC in a Tuesday interview that he is finding attractive opportunities in SPACs after they have corrected from the “extraordinarily expensive valuations” at which they became public.

Miller said he owns Desktop Metal (DM), which merged with Trine Acquisition Corp. and Metromile (MILE), which went public by combining with INSU Acquisition Corp. II.

For Klymochko, the top three SPACs on his radar are (1) Rice Acquisition Corp. (RICE) which on April 7 merged with renewable energy firms Aria Energy and Archaea Energy; (2) Longview Acquisition Corp. II (LGV.U); and (3) Khosla Ventures Acquisition Corp. (KVS

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