May 27, 2021 – The recovery in markets over the past fourteen months has been nothing short of stunning.
Nearly every asset class is up materially since early April 2020. At the start of 2020’s second quarter, global markets were bouncing off the lows of one of the quickest bear markets on record.
In early April 2020, junk bonds yielded north of 7.0%. They now generate a measly 3.4%. Bonds have rallied markedly since the crash.
Source: FRED Economic Data
Over the past fourteen months, the earnings multiple of the S&P 500 has expanded by 43.5%. U.S. equities are now near their highest valuations on record.
Source: Multipl
Everywhere we look, valuations have surged and yields have dropped.
That is, everywhere but SPACs.
Source: Accelerate
SPACs appear to be the only asset class that an investor can buy in currently at the same valuation as early April 2020.
Junk bond yields have fallen by 400 basis points since last April. SPAC arbitrage yields have remained the same and have risen 500 basis points over the past three months.
The low-risk arbitrage opportunities within the SPAC asset class are not only exceptional on an absolute basis, but also attractive on a relative basis compared to other asset classes such as high yield bonds.
While a 1.3% arbitrage yield is not an investment opportunity to write home about, despite 2-year Treasury yields at 0.15%, this SPAC arbitrage yield does not tell the full story. In addition to the current 1.3% arbitrage yield, SPACs offer upside optionality. Of the 149 SPACs that have announced a business combination, they trade at an average premium to NAV of 5.8%, with some has high as 100%. This premium valuation on deal announcement indicates the yield of SPACs is significantly higher than expected, given the ability to often exit at a premium to NAV, which boosts the yield significantly.
Imagine being able to take a time machine back to early April 2020 and invest at those valuations. This investment opportunity is available in the SPAC market, given the current extreme negative sentiment that has caused NAV discounts to widen not seen since the depths of the Covid bear market. The Accelerate Arbitrage Fund (TSX: ARB) currently holds over 240 SPACs and has an above-market arbitrage yield of 4.4%.
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.
