December 24, 2020 – Last month, I wrote that the “jaw-dropping 51 blank check IPOs” over the preceding month left our investment team “feeling overwhelmed by the brisk pace of SPAC issuance,” expecting the blank check issuance frenzy to settle down.
Not only did the fever in the asset class not abate, it seemingly became more extreme over the past month as 47 SPAC have gone public, raising an aggregate $12.8 billion.
Since last month’s SPAC Monitor, the blank check universe has expanded from 247 to 279 and the total market capitalization of the asset class has increased to $116 billion.
Source: Accelerate
While new SPAC issuance has continued at a frantic pace, there has been more going on behind the scenes. Many sponsors are clamouring to take their blank check company public that there is a backlog of 54 SPACs that have filed a prospectus, however, have yet to IPO. There have been days in which more than ten new blank checks file to go public. The bankers at firms underwriting these offerings recently informed me that the shadow backlog for new issuance is multiples of this.
At the current pace of 20 net new SPACs per month, it is conceivable to see over 400 blank check companies outstanding by summer 2021, up from approximately 100 at the start of July.
The SPAC market has had a tremendous rally this year, especially over the past month, in which the SPAC Index jumped by over 15%. This broad-based increase in prices has boosted the average SPAC premium over trust value to a new high.
Source: Accelerate
With the average SPAC trading at a nearly 20% premium to its trust value, what is an investor to do?
In the Accelerate Arbitrage Fund (TSX: ARB), we have been exiting SPACs once they “pop” after the deal announcement, harvesting the average premium between the signing of the deal and the closing of the business combination. ARB then recycles this capital into new SPAC IPOs at $10.00 per unit, repeating the SPAC arbitrage life cycle. This recycling of capital keeps the SPAC premium within ARB to a reasonable level (8.2% on an average basis and 1.3% on a median basis), significantly lower than the “danger zone” level of nearly 20% within the SPAC Index.
Other arbitrage hedge funds follow the same process of recycling capital from SPACs trading at large premiums to new IPOs. Therefore, new issuance has become extremely competitive, with most SPAC IPOs being 3x to 5x oversubscribed. Nonetheless, ARB punches above its weight in terms of SPAC IPO access, as we added 15 new blank check IPOs to the ARB portfolio over the past month. Not to mention ARB is perhaps the only ETF to subscribe to initial public offerings, democratizing IPO access for everyday investors.
The “SPAC pop” remains as healthy as ever. Over the past month, there were 21 business combinations announced. Of the blank check companies that have struck a deal, they trade at an average premium to NAV of 51.7% on a common share basis and 65.5% on a unit basis (including warrants). The Accelerate Arbitrage Fund holds 11 of these SPACs that have announced business combinations, which will be sold prior to closing and the capital redeployed into new SPAC issuance at NAV.
As long as we can continue to buy SPACs at NAV in the IPO or on the secondary market, and sell at substantial premiums to NAV after deal announcement, the ARB strategy should continue to generate strong returns going forward.
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.
