November 30, 2022 – Rewind back to the summer of 2020. The global economy was reeling from the Covid pandemic; however, stock markets were making a historic bull run to new all-time highs.
Unprecedented stimulus measures, designed to stave off economic collapse, led to billions of dollars falling into the laps of financial speculators. As a result, the markets gained a casino mentality. A speculative fervour gripped investors and traders alike.
This new bull market, fueled by zero interest rate policies and trillions of stimulus measures from central banks globally, lit a fire under certain asset classes.
While many market segments benefited from this excessive liquidity and speculative mania, the Special Purpose Acquisition Company segment was a unique beneficiary of this flood of liquidity.
On July 22, 2020, the SPAC IPO boom officially kicked off with Pershing Square Tontine’s $4 billion blank check IPO. Churchill Capital Corp IV’s $2 billion IPO followed one week later. That month, more than $10 billion of capital went into SPAC IPOs for the first time.
New issuance continued to grow, and the blank check frenzy reached a fevered pitch. Issuance peaked in March of 2021 when more than $33 billion was raised for blank checks in the U.S. These record amounts will likely never be rivaled.
Source: Accelerate
SPAC capital has a time clock attached to it, and the majority of new blank checks issued during the frenzy had a two-year window to complete a deal. If they did not strike a merger, they would liquidate and return their IPO cash, plus accrued interest, to investors.
As time passed, the boom turned into a bust. Markets soured, sentiment turned, the PIPE financing market completely shut, and suddenly, the last thing a private company wanted to do was go public via SPAC.
The chickens came home to roost. There is more than $146 billion of capital held by SPACs with deadlines coming up in the next year, including nearly $40 billion maturing next month.
Source: Accelerate
During the boom, it was a knife-fight over the billions of dollars of IPO allocations (we know – the Accelerate Arbitrage Fund ETF participated in hundreds of blank check IPOs). SPAC IPOs weren’t just for arbitrageurs anymore. Suddenly – from generalist hedge funds to multistrategy funds to family offices – everyone wanted to participate in the blank check new issue market.
Given a SPAC IPO’s exceptional risk/reward dynamic – a protected downside and potentially 100%+ upside – it’s hard to blame them. Participating in a SPAC IPO is one of the best risk/reward dynamics found in markets anywhere.
In the spring of 2021, demand was so high for blank checks that nearly anyone could raise one. At the time, billionaire real estate investor Barry Sternlicht told CNBC, “if you can walk, you can do a SPAC.” Sternlicht went on to launch six SPACs.
Fast forward eighteen months and the boom turned to bust. The SPAC market went from red hot to ice cold. Nearly everything in life is cyclical, and the blank check market is no different. More than $150 billion went into the SPAC market, and now $150 billion will come back.
Who is this flood of cash coming back to? What are the implications?
We estimate that SPAC capital was provided by three main sources:
- SPAC arbitrageurs – Hedge funds focused on the SPAC market.
- Generalists – Including long-short equity and event-driven hedge funds, pension funds, and family offices.
- Multistrategy funds – Large hedge funds that do a bit of everything.
If we assume that these capital sources allocated an equal amount to the SPAC market, $50 billion of maturing SPAC capital will return to each allocator group over the next year.
We can safely assume that generalists and multistrategy funds have largely moved on from SPACs and will seek to allocate this capital elsewhere.
Therefore, we estimate that arbitrage hedge funds will receive a $50 billion flood of cash into their accounts from maturing blank checks over the next twelve months.
This $50 billion of capital will require redeployment into arbitrage investment opportunities. With the moribund SPAC IPO market raising less than $400 million per month on average over the past six months, we expect the SPAC market to fall from $150 billion to less than $50 billion over the next year.
Source: Accelerate
A growing pile of cash, in the tens of billions of dollars, will be pushed into a shrinking market. Demand for SPACs will grow while the supply of SPACs will shrink.
What appends when demand exceeds supply? Prices go up.
SPAC prices are currently attractive, as shown by the average SPAC arbitrage yield of more than 6.0%. Moreover, this is a near risk-free arbitrage with a low duration, given maturities are measured in months and blank check companies hold their cash in Treasury bills.
Source: Accelerate
With arbitrageurs expected to have a significant amount of capital to be put to work over the coming months, SPAC prices may get bid up and arbitrage yields may fall.
Position your portfolio accordingly.
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 a number of securities discussed in this research. Visit AccelerateShares.com for more information.
