December 30, 2023 – Four years ago, the blank check market was a niche backwater of the capital markets with just 90 special purpose acquisition companies trading, representing an aggregate market capitalization of less than $25 billion.
Active participants in the asset class were pleasantly surprised when others noticed some of the benefits of SPACs, which ushered in an issuance frenzy in 2020 and 2021. During this period, SPACs experienced a surge in popularity, attracting a wave of new investors eager to participate in this unique investment vehicle. The asset class boomed, peaking at more than $200 billion by the spring of 2021.
However, the enthusiasm that marked the earlier years gave way to a stark contrast in 2022 and 2023. The SPAC market underwent a significant contraction, with issuance activity slowing down considerably. What was once a hotspot for “tourist” investors seeking quick gains has now evolved back into a niche market, primarily catering to specialists with a deeper understanding of the intricacies involved. The departure of many speculative investors has resulted in a more discerning landscape, where industry experts and specialists play a key role in navigating the complexities of blank check companies in the current market environment.
As quickly as the blank check market grew from $25 billion to $214 billion, it declined nearly as fast, falling to $17 billion. We believe the previously oversaturated blank check market has shrunk back to a sustainable level, as we forecast a $15 to $25 billion future blank check market.
Source: Accelerate
However, one significant difference between the current blank check market and four years ago is the number of vehicles seeking a business combination and the prevalence of “zombie SPACs”. We define zombie SPACs as those that have been heavily redeemed after extending their lifespans past their initial deadline (stockholders must approve a deadline extension and get an opportunity to redeem at NAV), leaving cash in trust for zombie SPACs below $30 million.
In 2019, there were fewer than 100 SPACs, which had an average market cap of $272 million. Now there are 258 issues in the market, but with an average market cap of just $65 million. This dramatic change in market structure is due to the emergence of zombie SPACs, which went from essentially non-existent four years ago to now totalling 108. Excluding the zombies, there are currently 150 blank check vehicles outstanding with a reasonable amount of cash in trust.
Source: Accelerate
In terms of IPOs, new issuance remained tepid throughout the year. There were 31 blank checks IPOs in 2023, raising $3.4 billion ($3.9 billion after overallotment options). This year’s SPAC IPO class was the smallest since 2014’s $1.4 billion, and -98% below 2021’s record $163 billion (which will never be beaten).
Source: Accelerate
308 SPACs matured over the past year, with 201 liquidating without a deal for a liquidation rate of 65.3%. In total, sponsors lost $1.6 billion of risk capital launching these unsuccessful blank check vehicles. As always, SPAC investors received $10.00 plus accrued interest, and any overfunding of the trust, on liquidated vehicles.
In comparison, 144 SPAC liquidated in 2022, representing a liquidation rate of 57.8%. In 2021, just one blank check company liquidated without a business combination.
Accordingly, we have likely moved past peak liquidation, given that there are only 121 SPACs in the market searching for a business combination. 137 of the 258 issues currently outstanding have announced, but not yet closed, a merger.
Several interesting business combinations were announced this year, including:
- Screaming Eagle Acquisition’s merger with Lionsgate Studios, representing one of the world’s most valuable film and television libraries, in a deal worth $4.7 billion.
- L Catterton Asia Acquisition’s business combination with global luxury electric vehicle Lotus in a $5.4 billion transaction.
- Churchill Capital VII’s $1.6 billion acquisition of European conglomerate CorpAcq.
In any event, what matters most for investors is prospective returns. The average SPAC yields above 4%, in line with the 2-year Treasury bond. However, certain blank checks trade at wider discounts to NAV compared to others (while others oddly trade at premiums to NAV), equating to yields above that of T-bills. For example, the Accelerate Arbitrage Fund (TSX: ARB) seeks to acquire SPACs in the secondary market at yields of 6.3% or higher (representing a 100bps spread over the fed funds rate) and buys SPAC IPOs at estimated yields of 7% and greater.
Source: Accelerate
Nonetheless, there are two critical differences between SPAC arbitrage and low-duration fixed-income investment strategies:
- Tax efficiency: Blank check companies flow through the yields generated by T-bills held in trust to end investors via capital gains. While Delaware-domiciled SPACs pay corporate income tax on the trust’s accrued interest, Cayman-domiciled SPACs flow through the trust’s interest income tax-free. The yields exceed Treasurys when SPACs are purchased at a discount to NAV, as the discount amortization adds additional return.
- Upside optionality: Arbitrage hedge funds do not invest in SPACs solely for tax-efficient T-bills at a discount. They are in the trade for the upside optionality or explosive positive returns (with limited downside) on a constructive deal announcement, as shown in the example below of CF Acquisition VI’s merger with Rumble.
Source: Accelerate, Bloomberg
While upside optionality in SPAC arbitrage was few and far between in 2023, leading to more pedestrian investment returns compared to previous years, the potential remains.
Here is to more upside optionality in 2024.
The Accelerate AlphaRank SPAC Monitor details various metrics on the current opportunity set while offering details on every individual SPAC currently outstanding. The Accelerate AlphaRank SPAC Effective Yield tracks the average arbitrage yield offered. The Accelerate AlphaRank SPAC Index tracks the price return of the SPAC universe.
* AlphaRank is exclusively produced by Accelerate Financial Technologies Inc. (“Accelerate”). The Accelerate Arbitrage Fund may hold some securities discussed in this research. Visit AccelerateShares.com for more information.
