June 23, 2020 – The current SPAC monitor should come with the warning, “too hot to handle”, given the substantial rally in special purpose acquisition companies over the past month.
I flagged the generational buying opportunity in SPACs back on March 26th, in which an investor could earn 5-10% annualized risk-free returns with significant upside optionality. My, how things have changed! In less than three months, the market for SPACs went from “raining gold” with a tremendous amount of attractive investments to a frothy market with relatively slim pickings.
After the recent market success of stocks such as DraftKings and Nikola, which were borne of blank-check companies, there has been a heightened interest in the SPAC market. Issues have been bid up, such that the average SPAC arbitrage yield currently stands at -0.2%, a steep decline from last month’s 2.6% yield. The Accelerate AlphaRank SPAC Index rallied 6.1% over the past month. The average SPAC has gone from trading at just a 0.3% premium to a stunning 4.5% premium to net asset value.
Perhaps the market is now catching on to the attractive embedded upside optionality in blank-check companies that have not yet announced a business combination. Of the 18 SPACs that have announced, however not closed a business combination, they are trading at an average premium to net asset value of 19.3%. The market is exuberant regarding SPACs that have recently announced deals:
- Opes Acquisition announced a merger with BurgerFi and now trades at a 56% premium
- ARYA Sciences Acquisition announced a merger with Immatics Biotechnologies and now trades at a 64% premium
- Forum Merger II announced a merger with Tattooed Chef and now trades at a 68% premium
- Tortoise Acquisition announced a merger with Hyliion and now trades at a 73% premium
The market is rewarding SPACs for announcing deals. This reward is the reason why we have focused our buying for the Accelerate Arbitrage Fund on the pre-deal SPACs issued in the first quarter of 2019. These are the blank-check companies with the highest likelihood of announcing a deal soon and therefore present the greatest near-term upside. Case in point, earlier this week, it was rumoured that Insurance Acquisition was in talks for a business combination with Shift Technologies, an online retailer for used cars. Insurance Acquisition, which went public in March 2019, rallied 22% on the Shift merger rumour.
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