October 26, 2021 – After an eight-month slump, in which negative sentiment was pervasive in SPACville, it took none other than Donald J. Trump to “make SPACs great again.”
Last week, lowly SPAC Digital World Acquisition (DWAC) announced a merger with the former President’s new venture, Trump Media & Technology Group, at a valuation of $875 million. The purported valuation surprised business analysts, as Trump Media does not yet have profits, revenue or even a product.
Nonetheless, in a shock to market participants, the DWAC / Trump deal quickly morphed into a meme stock. The shares skyrocketed from the first post-deal trade and never looked back.
At the start of the week, DWAC was trading at $9.97, below its NAV of $10.20. Without a deal, DWAC shareholders were set to receive the $10.20 NAV as early as September 2022. This redemption/liquidation feature creates a synthetic put option on the shares, given that an investor can reliably receive that net asset value in the medium term.
However, jubilant market participants reacted favourably to the Trump deal, taking the shares from below $10.00 to as high as $175.00. This 1,650% return over just two days was unprecedented for a SPAC business combination.
Source: Bloomberg
Nonetheless, what the DWAC deal beautifully displayed is the attractive risk-reward profile of SPAC arbitrage. As long as the securities are bought at a price at or below NAV, SPACs represent an asymmetric return profile, with minimal downside risk combined with substantial upside potential. In which other asset classes have you seen an investment with practically no downside (as long as you can hold until redemption) combined with 17.5x upside?
Subsequently, the stunning rally in DWAC shares caused a swift 180-degree turn in sentiment for SPACs. We are now seeing the retail interest in SPACs, which drove the historic bull market in Q1, return effectively overnight. With retail investor speculation reignited, bringing animal spirits back to the SPAC market, we are revising our upside optionality estimates for SPACs up dramatically.
At this point, the market is beginning to speculate – which SPAC will be the next DWAC? If it can happen to DWAC, then it can happen to any SPAC.
In this instance, it pays to be diversified. Each SPAC can be viewed effectively as a T-bill plus an equity call option. A long-held tenet of investing is that a basket of options is preferable to an option on a basket, meaning having multiple ways to win is better than just one. That is why the Accelerate Arbitrage Fund ETF (TSX: ARB) currently holds nearly 220 SPACs in its portfolio. Time will tell if one of ARB’s holdings turns out to exhibit the explosive upside potential of the next DWAC. Either way, we are pleased to have this, as Trump would say, “yuge” upside potential combined with downside protection of SPACs, given the built-in redemption mechanism within ARB’s portfolio.
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.
