March 30, 2021 – In February’s SPAC Monitor, we were extremely cautious on the blank check market given the extreme valuations that speculators were willing to pay:
SPAC NAV premiums remain disconcerting, reaching a record high of 26.9% this month prior to declining to the current 20.9% after the SPAC market went through a correction. Accelerate believes that high average SPAC premiums have brought elevated risks to the current market environment, which is why we implemented additional risk mitigation measures in the Accelerate Arbitrage Fund ETF (TSX: ARB). These measures include a more aggressive pruning of the SPAC common share and warrant portfolio and a reduction in leverage. We believe risk management should be investors’ number one priority in the current market environment, which remains volatile.
The contrarian call to sell SPACs and reduce exposure was the correct one, as the SPAC market declined into its steepest correction on record. From its peak on February 19, the Accelerate AlphaRank SPAC Index is down -11.9%. This represents nearly double the -6.6% peak-to-trough decline witnessed during the March 2020 Covid bear market.
That was then and this is now. When prices were high in February, we were notably bearish and selling. Now that prices have corrected in March, we are demonstrably bullish and aggressively buying high-quality SPACs at a discount.
The current environment is highly prospective for SPAC investors as high-return investment opportunities are abundant. Back in January, for the first time on record, there were zero SPACs trading at a discount to NAV. Now, there are 398 blank check companies trading below their cash value, offering arbitrageurs an exceptional opportunity set not seen since spring 2020.
With the correction in the market, the IPO window has shut. The market is indicating that the current 549 SPACs outstanding is enough, and there is insufficient capital or demand to accept any more issues. Last Friday was the first non-Monday in which there were zero SPAC IPOs in months. Two IPOs were pulled. Nearly every IPO over the past two weeks broke price and traded below the $10.00 IPO price. Given current market conditions and the substantial glut of supply, we expect new IPO issuances to slow dramatically and a significant amount of S-1’s to get pulled. Sponsors had flooded the market with new issues, taking increasingly aggressive terms, and investors finally pushed back with “no mas!”.
Despite the IPO window closing last week, March issuances still exceeded February’s record (which we previously predicted would not be beaten). March’s $32.8 billion raised ($35 billion after over allotments) across 108 IPOs month-to-date far exceeded the $31.1 billion record set last month.
Year-to-date, a stunning $96 billion has been raised across 296 SPAC IPOs, eclipsing last year’s $83 billion of initial public offerings in less than three months. It was a frenzy indeed.
With 549 blank check companies now holding an aggregate of $175 billion in trust, it is time for them to execute. The market will need to see a significant number of attractive business combinations announced for SPACs to rally. If this does not occur, we expect a large contingent of SPACs to liquidate and return capital to investors (plus interest).
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.
