December 9, 2020- ‘Spotlight on SPACs’ is a weekly column that tracks the latest news, data, and analysis on special purpose acquisition companies, drawing on proprietary intelligence from Mergermarket and Dealreporter, as well as data from Dealogic.

Large institutions pile into SPACs

A few months ago, the Accelerate Arbitrage Fund (TSX:ARB) had its pick of SPACs. But these days the exchange-traded fund is having a harder time buying shares in the blank-check companies it tracks. Of the four SPAC IPO pricings on Monday, three of them were oversubscribed. The Accelerate Arbitrage Fund only received a stake in one of them, and the allocation was 75% smaller than desired. “It’s very difficult to get an allocation,” said Julian Klymochko, the fund’s Alberta, Calgary-based chief investment officer. “We are a small fund, and we manage to get some fills. But we are not Millennium.” New York-based Millennium Management, with more than USD 42bn assets under management, is among a growing group of institutions that are buying up blank-check companies. The hedge fund has invested nearly USD 1.2bn in SPACs so far this year, according to a Dealogic review of 13F filings. Magnetar Capital is close behind, having invested more than USD 1.1bn in SPACs so far this year. The Evanston, Illinois-based hedge fund has already committed more than five times more capital in SPACs in 2020 than it did 2019, when it was the most active investor in the space, according to Dealogic.

Glazer Capital, Lindin AdvisorsWeiss Asset ManagementPolar Asset ManagementHGC Investment Management, and Periscope Capital are among this year’s other most active SPAC investors.

While hedge funds participating in SPAC arbitrage is not new, Klymochko and other financiers say the size of the institutions involved is getting bigger, and the competition for assets is increasingly intense.

In recent days, Chicago-based Citadel, which has USD 35bn assets under management, took a 6.3% stake in Cascade Acquisition [NYSE:CAS], a 6.9% stake in Spring Valley Acquisition [NASDAQ:SVSVU], a 7.7% stake of 10x Venture Acquisition [NASDAQ:VCVCU], and a 7.3% stake in Jiya Acquisition [NASDAQ:JYAC].

“Millennium and Citadel have come into the market in a big way,” said Klymochko.

Patrick Galley, who oversees a USD 200m portfolio of SPAC investments at Chicago-based RiverNorth Capital Management, said SPACs are viewed as a low-risk yield-alternative with unlimited upside.

Firms can buy into SPACs early, wait to see what business it targets in a merger, and then either cash out their shares for a profit if the stock goes up, or redeem their shares for their money back plus interest.

Few stay to the end. Ninety-seven percent of hedge funds either redeem or sell their shares before the SPACs in which they invest complete a business combination, according to a recent study of by New York University law professor Michael Ohlrogge and Stanford law professor Michael Klausner.

Initial investors in SPACs also receive warrants, which they can later exercise for a profit, Galley noted.

“The optionality is the beauty of the vehicle,” said Galley. “Once a blank-check company merges with its target, the downside for investors is all the way down to zero. That’s why we exit by then.”

Earlier this fall, after an active October created a staggering USD 18bn in new SPAC issuance, prices softened, and more than a dozen blank-check companies downsized their public offerings. There was not enough demand to soak up the supply, Klymochko said.

Now, with larger firms bidding up their prices, SPACs are upsizing their offerings. By the time their shares hit the open market, they trade above the company’s net asset value, limiting opportunities for arbitrage. There have been 14 new SPAC offerings so far in December, generating nearly USD 4bn in proceeds, and they were all trading above their issue price as of yesterday’s market close.

“There was an oversupply for a while but now demand is catching up,” said Klymochko. “It’s a frenzy.”

Here are the top 25 hedge funds that have invested in SPACs in 2020:

Institution  Equity AUM   Value  Shares 
Millennium Management          $42.2bn      $1.2bn   113,678,696
Magnetar Capital            $6.8bn      $1.1bn   108,372,973
Glazer Capital            $2.3bn      $717m    70,602,104
Linden Advisors            $1.7bn       $676m    65,956,584
Weiss Asset Management            $1.6bn       $516m    49,913,720
Polar Asset Management Partners           $3.4bn      $489m    46,173,713
HGC Investment Management           $903m       $463m    44,405,218
Periscope Capital           $1.2bn      $457m    45,036,720
Hudson Bay Capital Management           $3.5bn       $412m    40,045,573
Kepos Capital           $894m       $349m    33,402,364
Aristeia Capital          $857m       $298m    29,199,644
AQR Capital Management       $66,807.2       $288m    27,956,867
Shaolin Capital Management          $694m       $280m    27,816,474
Adage Capital Management         $40.7bn       $264m    25,650,000
Tiedemann Investment Group         $1.8bn        $258m    25,349,379
Marshall Wace         $13.9bn       $252m    24,293,097
Sculptor Capital         $5.7bn        $240m    23,336,326
Soroban Capital Partners         $9.1bn        $238m    11,325,000
Sage Rock Capital Management        $479m        $238m    22,532,606
GSO Capital Partners        $3.3bn        $237m    22,995,000
Alyeska Investment Group        $5.9bn        $224m    20,345,379
Radcliffe Capital Management        $535m        $192m    18,629,264
HBK Investments       $1.3bn        $192m    17,897,800
Omni Partners       $1.5bn        $187m    18,382,525
Moore Capital Management       $3.7bn        $184m    16,932,968

In other news:

  • SPACs are timidly sprouting in Continental Europe following record-breaking issuance in the US, but there is debate over whether there is sufficient investor appetite and a convincing regulatory framework for the vehicles, this news service reported.  Last week, telco tycoon Xavier Niel, banker Matthieu Pigasse and retail entrepreneur Moez-Alexandre Zouari, launched 2MX Organic, a new SPAC that plans to raise EUR 300m on the Paris stock exchange for acquisitions of socially and environmentally responsible consumer goods. There have only been two other SPACs – Kisto and Dutch Star Companies TWO – in Europe.
  • Genesis Park Acquisition [NYSE:GNPK], a Houston-based blank-check company, is in active conversations with 15 aerospace and aviation services targets valued between USD 500m and USD 1bn, CEO Paul Hobby said. Ideally, a target will be a platform for additional M&A, he said.
  • The Predictive Index, a talent optimization technology platform, is getting a primer tutorial on SPACs from one of the company’s high-net-worth investors who is launching a SPAC. The Westwood, Massachusetts-based company would “certainly consider” a SPAC deal in the future, but the CEO said it does not anticipate going public for another two or three years.
  • UpHealth, a digital healthcare company, plans to look for bolt-on acquisitions following its reverse merger with GigCapital2 [NYSE:GIX], executive chairman Chirinjeev Kathuria said. To support the Delray Beach, Florida-based company’s growth and further validate the deal, which is expected to close in 1Q21, GigCapital2 CEO Avi Katz said additional capital may be raised through a private investment in public equity, a convertible note, or straight debt.
  • Decarbonization Plus Acquisition [NASDAQ:DCRB], a Menlo Park, California-based blank-check company, has a shortlist of clean technology companies valued between USD 1bn and USD 3bn, said chairman Robert Tichio. Target companies focus on carbon capture or sequestration, as well as electric vehicle infrastructure, hydrogen energy, water treatment and renewable fuels.
  • Li-Cycle, a Mississauga, Ontario-based battery recycling company, is talking to investment banks to advise the company on a 2021 construction financing and concurrent strategic review, which could include a IPO or business combination with a SPAC, according to CEO Ajay Kochhar. In battery recycling, the CEO said the company is one of the first pure-play North American recyclers of lithium-ion batteries from electric vehicles and larger applications.
  • Rooftop solar leasing, loan and other financing providers could combine with SPACs in 2021, this news service reported. Some providers are closely looking at the option.

by Troy Hooper in Los Angeles