June 1, 2022 – “The reports of my death are greatly exaggerated.” – Mark Twain
If that quote could be attributed to an asset class, SPACs would be telling everyone who would listen.
If you have not noticed, the media has a negative bias toward blank check companies, generally choosing to publish clickbait as opposed to rational analysis.
Source: CNBC, Wall Street Journal
For example, at its most basic, most media outlets incorrectly classify the asset class. When the media publishes negative articles purportedly about SPACs, nearly every time these articles are in fact not about SPACs. Typically, these articles cover a different asset class, companies that went public via a blank check company (generally called “deSPACs”).
SPAC arbitrageurs know that SPACs and deSPACs are entirely different asset classes that are in no way comparable.
Buying a SPAC at a discount to NAV is a low-risk proposition because an investor can be cashed out at the redeemable NAV at the deal vote or maturity. It can be viewed as buying a discounted T-bill and getting a call option for free.
In contrast, a deSPAC is a high-risk proposition with a poor track record of performance. DeSPACs have no redemption option and therefore provide no downside protection. Over the past year, the average deSPAC fell -47.8%.
The media constantly gets SPACs and deSPACs confused, but investors should not.
SPACs good, deSPACs bad.
Year to date, there have been 39 traditional IPOs raising $3.9 billion. Over the same period, there have been 68 SPACs issued raising $10.5 billion ($11.9 billion including over-allotments). SPACs account for nearly two-thirds of the U.S. new issue market this year. This activity does not sound like a dead market to me.
Source: Accelerate
2020 and 2021 were outliers for SPAC IPO issuance, representing a blank check issuance frenzy that is unlikely to be repeated. Thus far in 2022, $10 billion of SPACs have IPO’d, representing a run rate of $2 billion per month or $24 billion per year. At the current rate, SPAC IPOs are on track to nearly double their 2019 issuance rate. In addition, the asset class has maintained its $200 billion size since April 2021. Unfortunately, the negatively biased media fails to mention these positive aspects.
Moreover, business combinations continue to be announced at a brisk pace. In May there were 19 SPAC mergers announced, compared to 12 the previous month and 18 in May of last year. This SPAC market is business as usual.
That being said, the asset class is not impervious to market conditions and regulatory challenges. As such, liquidations have increased.
Year-to-date, five SPACs have liquidated, while forty business combinations have closed. While a 12.5% liquidation rate is high, it is not a calamity as the media would have you believe.
It is important to note that a maturity wall is approaching in Q1 2023, and we expect liquidations to increase then. In any event, SPAC shareholders make out fine in a liquidation scenario, as they get their money back plus accrued interest.
While SPACs may be considered the Mark Twain of capital markets, the asset class may very well be the personification of the late Rodney Dangerfield – they don’t get no respect.
However, a SPAC’s unique attributes, which make it a low-risk arbitrage investment with high potential upside, should be appreciated by investors despite the media’s lack of understanding.
It is the desire from investors for the unmatched, attractive risk/reward characteristics offered by pre-deal SPACs trading at a discount to NAV that is keeping the market not only alive but thriving.
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.
