October 21, 2020 – There were a couple of key milestones reached in the SPAC market over the past month.
On October 9th, the SPAC asset class’ aggregate market capitalization breached $80 billion for the first time ever. To provide some context, the total market cap of North American listed cannabis companies is approximately $40 billion. Six months ago, the blank check market was worth only $25 billion.
The dynamic driving the substantial increase in the market value of the asset class is two-fold:
- Record SPAC issuance – Only twenty days into October and the monthly SPAC IPO record has been smashed. Month-to-date, blank check initial public offerings have hit nearly $11.5 billion, significantly higher than the previous $10 billion record set in July. Thus far in October, we have seen on average 1.55 SPAC IPOs per day. In comparison, October 2019 saw only two SPAC IPOs the entire month (about 0.06 IPOs per day, or 4% of the current rate, for you stats junkies).
- Record SPAC size – Blank checks keep getting bigger and bigger. This month, the average SPAC IPO raised $370 million. Last October, the average IPO was $169 million, while last November, it was $201 million.
There are now 207 SPACs outstanding, up from just 90 six months ago. Of these, 50 have already announced a business combination and 157 are out looking for deals. If you run a Series E stage private company, I’m sure your phone is ringing off the hook with calls from sponsors.
The dramatic increase in SPAC supply has not been met with a commensurate increase in demand. The blank check market has increased by $40 billion since the summer, however, the amount of capital in the hands of SPAC arbitrageurs has not increased by anywhere near that much. If you want to help correct this supply-demand imbalance, feel free to allocate to your friendly neighbourhood SPAC arbitrage ETF, the Accelerate Arbitrage Fund (TSX: ARB).
This substantial increase in supply has flooded the market, leading to negative returns as the SPAC Index fell -1.5% over the past month. New issues have been trading poorly. Historically, new issues would often trade above their $10.00 issuance price. Thus far in October, 58% of SPAC IPOs are trading at or below the initial public offering price. There are some deals to be had in new issuance SPAC-land.
Over the past month, 16 blank checks announced business combinations with private companies. Of these 16 SPACs that have announced deals, they are trading at an average NAV premium of 9.3% on a common share basis and an 18.8% premium to net asset value on a unit basis.
Doing the math, the data above show how an enterprising investor can buy a majority of new SPAC IPO units at or below their NAV and then hold onto the units until a deal announcement in which, in the current environment, units are trading to an average premium of nearly 20%. This upside optionality provides significant additional yield on top of the baseline 0.6% average arbitrage yield as showcased in the Accelerate AlphaRank SPAC Effective Yield below.
Of the 50 current blank checks that have announced business combinations, they took 409 days from IPO to deal announcement on average . The average 18.8% NAV premium earned post deal announcement, assuming one buys units at the issuance price, equates to an annualized return of about 17%. This return is even higher if an investor buys units at a discount to NAV, which is often available in the current market. A 17% annualized return is not too shabby for a trade with no downside (assuming one isn’t forced to sell before maturity). As stated in the recent piece Live From The Trading Desk: Low-Risk And 100%+ Upside With The DiamondPeak Arbitrage, “given the exceptional risk-reward characteristics of SPAC arbitrage in the current environment, it may be the closest thing to the holy grail in investing.”
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.
