November 25, 2020 – There have been a jaw-dropping 51 blank check IPOs since we released last month’s Merger Monitor. We run a full-time team analyzing and trading the SPAC market, and even we are left feeling overwhelmed by the brisk pace of SPAC issuance, which appears to be unabating.
A record 247 SPACs are currently trading, of which 52 have announced a business combination and 195 are currently looking. In addition, there are 59 current S-1 filings for blank check companies that have filed to go public but have yet to complete an IPO. The asset class now represents $98 billion in market capitalization.
When hearing about the frenzy in the SPAC market, many investors ask, “given the hype, aren’t the prospective returns for SPAC investing poor?”
Ironically, the opposite effect has occurred. Potential returns for SPAC arbitrage have never been more attractive.
Since the SPAC issuance mania kicked off July 1st, nearly $55 billion has been raised from 160 new blank check companies. There has not been a commensurate increase in SPAC arbitrageur capital allocated to the asset class.
Given the recent flood of supply, combined with a lack of increase in demand, SPAC sponsors have had to incentivize arbitrageurs with extremely attractive economics to support their IPOs. These incentives include higher warrant coverage and overfunded trusts, which increase the prospective returns for SPAC investors markedly.
Nearly half of November’s SPAC IPOs have featured overfunded trusts. This means, when subscribing to a SPAC unit IPO at $10.00, the net asset value will be $10.10 to $10.25 coming out of the gate. This boost to net asset value represents a 1.0% to 2.5% default return, before accounting for the warrant value (which is substantial) and the upside optionality (which is larger than ever). Inclusive of these incentives, it is not out of the question to expect to earn low-risk 10% annualized returns from SPAC arbitrage on a go-forward basis.
We are not the only market participants to notice this. In an academic paper released this month, titled A Sober Look at SPACs, the authors noted the exceptional risk-reward profile of SPAC arbitrageurs: “Among the 2019-20 Merger Cohort, the mean annualized return for IPO investors that redeemed their shares was 11.6% – for a risk-free investment.”
The limited downside risk of a SPAC arbitrage strategy is straightforward, especially when most SPAC IPOs are trading below net asset value on a unit basis, meaning investors are receiving warrants for less than free. The redemption mechanism implies that investors will always have future liquidity at net asset value, limiting downside risk (similar to an embedded put option within every SPAC).
The more compelling side to the investment thesis is the tremendous upside optionality embedded in SPAC arbitrage in the current market environment.
Since the last issue of the SPAC Monitor, there have been 15 business combinations announced. For the SPACs that have announced recent deals, they are trading at an average premium to NAV of 31.7%. In addition, two recent blank check deals are trading at stunning premiums:
- On November 18th, CIIG Merger announced a business combination with electric vehicle company Arrival. CIIG units surged to a 197.8% premium to NAV.
- On November 20th, Longview Acquisition announced a business combination with healthtech company Butterfly Network. Longview units traded up to a 73.4% premium to NAV.
Given these dynamics, SPAC arbitrage is living up to its reputation as the “holy grail in investing” and it is not surprising that the strategy is slowly catching on.
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.