December 23, 2021 – If we were to have an “Asset Class of the Year” award, it would undoubtedly go to SPACs.
Special Purpose Acquisition Companies as an asset class nearly doubled in size, ending 2021 with an aggregate market capitalization of more than $200 billion.
There are now 694 SPACs outstanding, up from just 276 one year ago. Of the 694 acquisition companies outstanding, 572 are searching for a deal. In addition, 269 would-be blank check companies have filed an S-1 to go public in the future.
Typically, the SPAC market goes through multiple cycles each year, as sentiment swings rapidly from manic to depressive. SPAC market sentiment is best measured by average NAV discounts / premiums.
However, given the record-setting and unprecedented SPAC market frenzy in the first quarter, the resulting bear market in the back half of the year has been equally unparalleled in both length and magnitude.
With poor sentiment comes opportunity. SPAC investors are entering 2022 with wide arbitrage spreads and high expected yields. This opportunity set has attracted fixed income investors in search of higher yields.
Source: Accelerate, Bloomberg
The current setup seems quite prospective for SPAC investors. The average SPAC yields 2.3%, representing a 160 basis point premium to 2-year T-bills (which come with more duration risk). In addition, SPACs’ 2.3% average arbitrage yield compares favourably to single-A corporate bonds, which are currently yielding just 2.1%.
Also, yield-oriented investors can find great investment opportunities in new issue SPAC IPOs. Specifically, the generous terms offered to SPAC IPO investors include overfunded trusts and generous warrant coverage, in which we can expect to generate returns of 7% with low risk.
As of December 22nd, there have been 611 SPAC IPOs year-to-date, raising an aggregate of $162 billion. Additionally, in December alone, 50 SPACs have gone public, raising over $10 billion.
Why the flood of supply?
In an era of zero interest rates, the expected 7% return for SPAC IPO investors is just too good of a deal to pass up. Especially given the low-risk nature of SPAC arbitrage.
Nonetheless, recent record blank check IPO issuance has pressured the market. As supply has exceeded demand, prices have softened, with some new SPAC issues breaking price (trading below $10.00 issue price), despite the prevalence of the over-funded trust and generous warrant coverage.
Despite this dynamic, we expect new issuance to continue briskly into 2022. As a result, we believe the SPAC market may surpass over 1,000 issues outstanding next year, given the current 693 blank check companies outstanding combined with the recent IPO pace of 30 net new issues per month.
With the forecast increase in supply, and softening trading dynamics, we expect terms to be further improved for IPO investors. There are just so many attractive investment opportunities to choose from. As sponsors try to further incentivize IPO investors, we believe many will start offering even more generous terms, including overfunded trusts of $10.30 or more (representing a 3%+ default return) plus warrant coverage of as much as a full warrant. Increasingly, some sponsors will include rights along with the warrant kickers to further attract investors. These additional incentives could push expected returns for SPAC IPO investors to as high as 10%.
In any event, SPAC investors have never had it so good. After a frenzy in the first quarter, in which the balance of power clearly moved to the sponsor (as many were able to offer warrantless SPACs at the time), it is great to see investors back firmly in the driver’s seat of this market, dictating terms.
One concern on the minds of market participants is the prospect of increased SPAC liquidations. In 2020, two SPACs were liquidated without a deal. In 2021, just one blank check was liquidated. We believe liquidation rates will rise due the flood of supply, decreased timelines, and a dwindling supply of ready merger targets. Despite our forecasted increase in SPAC liquidations, in which they pay back the $10.00 and change in trust to investors, we believe that less than 3% will end up without a deal (i.e., less than 20 liquidating at NAV).
For future successful business combinations, we expect to see more of what we deem “SPAC 2.0”.
As deal creativity becomes increasingly critical in a highly competitive environment, SPAC 2.0 refers to blank check companies merging with corporate carve-outs. Recent examples of this dynamic include AEA-Bridges Impact’s merger with Harley-Davidson’s LiveWire EV motorcycle division and Zanite Acquisition’s business combination with Eve, Embraer’s electric helicopter division.
While 2021 was undoubtedly the “Year of the SPAC”, as the asset class nearly doubled in size, blank check investors are in for an exciting 2022.
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 in the market. 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 a number of securities discussed in this research. Visit AccelerateShares.com for more information.