September 30, 2023 – Despite not considering myself a Swiftie, like many other parents of teenage girls, I recently found myself competing for tickets to popstar Taylor Swift’s The Eras Tour.
If you have not heard about it yet, Taylor Swift’s latest tour is set to become the biggest of all time. Analysts forecast that The Eras Tour will likely surpass $1 billion in revenue by March of next year. Her tour’s economic effect is so significant that it is estimated to generate close to $5 billion in consumer spending in the United States alone. You cannot just shake it off.
Look What You Made Me Do
Our concerted effort to acquire The Eras Tour tickets was well orchestrated. First, several family members, working on multiple devices, registered for the Taylor Swift ticket raffle. Winning this raffle would allow us to gain entry to the digital line-up to purchase tickets.
One of our many accounts hit, and several weeks later we were invited to participate in the much anticipated The Eras Tour ticket sale, targeting the Taylor Swift stop at Rogers Center in Toronto coming November 2024. We waited in anticipation for several hours in the digital queue. But alas, the tickets were long gone by the time our opportunity arrived. It was no love story.
The $200 to $300 tickets we attempted to acquire through our rigorous and coordinated effort are now listed on secondary ticket listing platforms for $2,000 to $3,000. As much as we like her songs, we wouldn’t pay 10x the retail price in our wildest dreams.
You’re on Your Own, Kid
It has been an absolute knife fight for Taylor Swift tour tickets, and only the luckiest or the most well-connected ended up on the receiving end of these highly sought-after golden passes.
While initial public offerings do not typically see the 10-fold pop in price that The Eras Tour ticketholders experienced, some hot IPOs are just as much of a knife fight to obtain allocations as Taylor’s Tour is.
In September, the IPO window opened with a couple of high-profile companies capitalizing on the positive sentiment to go public. Specifically, chip-maker ARM Holdings and grocery app Instacart went public in highly anticipated offerings of $4.9 billion and $660 million, respectively.
As expected, both new issues “popped” on their first day of trading, jumping more than 10%. However, sentiment quickly cooled, and a couple of weeks later, both stocks found themselves back near their issue prices, down markedly from their first trading day peaks.
In contrast to the heavily hyped but mediocre returns for recent high-profile tech IPOs, the returns from SPAC IPOs present a different story.
From a sentiment perspective, SPACs face the complete opposite of tech IPOs. To the lay financial professional who listens to CNBC, they think SPACs are untouchable. They often confuse high-risk deSPACs, or stocks that SPACs have turned into once they have completed their merger, with low-risk SPACs, which represent a T-bill plus an equity call option.
After a SPAC completes its business combination, investors lose their redemption privilege, and the downside protection ends. Given the expiry of the redemption privilege, it is one of the most critical aspects for an arbitrageur to exit prior to the deSPAC, in order to capitalize on the capital protection provided by the redemption option. Once the merger closes and the security converts to a deSPAC (and arbitrageurs have exited), the security no longer has downside protection.
Many deSPACs have performed poorly, which has soured sentiment around them. Third Point’s Dan Loeb wrote about stocks “smeared by the taint of having come public in an unorthodox manner and bearing the four scarlet letters ‘S-P-A-C’.” This negative sentiment is pervasive, and given the lack of knowledge regarding the structure of the mainstream media, it has translated to the ultrasafe pre-deal SPACs as well.
This confusion has created an opportunity for investors. As previously outlined in the memo IPO: It’s Potentially An Opportunity, we like SPAC IPOs for one simple reason: We expect them to generate high returns with minimal risk.
For example, the most recent SPAC IPO, 99 Acquisition Group, is up 360bps in 5 weeks (Disclosure: Long in the Accelerate Arbitrage Fund (TSX: ARB)).
Source: Google
Nearly all SPAC IPOs look the same, with attractive returns right off the bat. There have been 22 SPAC IPOs year-to-date, and they’re up on average 520bps. The worst SPAC IPO issued this year is up 2.6%, while the best gained 7.0%. None went down.
I often challenge capital allocators to name a superior fixed-income investing strategy than pre-deal SPAC arbitrage. I have not heard back yet.
In the capital markets, if something sounds too good to be true, it probably is. To generate equity-like returns with Treasury bill-like risk through SPAC arbitrage certainly sounds too good to be true.
Unsurprisingly, there is a catch.
Given the attractive risk-reward dynamic of SPAC IPOs, the competition is intense, and obtaining a satisfactory allocation in an initial public offering is extremely challenging. Many investors are competing for allocations in SPAC IPOs, and most only get a fraction of the desired shares.
Swifties can resonate with the sentiment – obtaining a satisfactory SPAC IPO allocation is almost as difficult as landing The Eras Tour tickets.
Demand consistently exceeds supply. Compounding this imbalance, issuance is way down. Year-to-date, there have been just $2.5 billion of new SPACs issued. This year is on track to be the slowest for SPAC IPOs since 2014, with aggregate issuance expected to be down -75% from last year and -98% since the peak in 2021.
Source: Accelerate
Soon You’ll Get Better
While September came and went without a single new issue, we see a reasonable amount of S-1 filings indicating future SPAC IPOs coming to the market over the next several months. Since July, six new blank check vehicles have filed a registration statement for their IPO, and we expect them to go public in the near term. In addition, dozens of sponsors have filed their paperwork for a SPAC IPO that could also come to market at some point, especially as many begin to recognize the dearth of competition for blank checks coming in the back half of 2024.
In any event, activity remains relatively robust in other areas of the blank check market. In September, seven business combinations were announced, representing an aggregate enterprise value of $2.5 billion. In addition, 21 SPACs matured, with 11 having business combinations and 10 liquidating without a deal.
Call it what you want, but we remain bullish on future SPAC IPOs. However, once new issuance picks up, the knife fight will continue.
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.
