January 28, 2022 – During the SPAC frenzy one year ago, many early-stage businesses with unproven business models were taken public.
These unproven business models included electric vehicle manufacturing, space infrastructure, insurance technology, and others.
The shares of hyper-growth, unprofitable companies have fallen on hard times. Growth stocks went through more than a decade of outperformance amidst extremely positive sentiment. Due to this dynamic, many unprofitable private companies went public via SPAC at inflated valuations.
Now that the growth stock bubble has popped, unprofitable and unproven businesses have seen their share prices battered.
Some of these unprofitable tech companies have recently cancelled their going-public transactions, escaping back to the private markets and being shielded from the watchful eye of the discerning public markets.
Reading the market tea leaves, it is clear that a shift has occurred. The record 12-year run of growth stocks is over. The current market favours profitable established businesses at attractive valuations. We believe attractively valued stocks of profitable companies will outperform glamourous growth stocks for several years into the future.
Therefore, SPAC sponsors must evolve with the market. Hypergrowth unprofitable startups with unproven business models are out. Steady, profitable companies at attractive valuations are in.
SPACs that pivot to this new regime will succeed. SPACs that do not will see high redemptions upon closing and poor returns with their deSPAC. The era of taking highly speculative story stocks public via blank check company is over.
Still, many SPACs have not yet adapted while sentiment shifted on these investment opportunities. This lack of evolution has opened up an opportunity for investors.
Since speculative stocks have traded down substantially, and growth-focused SPACs have fallen in sympathy, a record number of SPACs are trading at a discount to NAV.
Source: Accelerate
SPACs trading at a discount to NAV offer attractive arbitrage opportunities to investors, given the ability to redeem at net asset value. For example, buying a SPAC at $9.70 is analogous to purchasing a redeemable T-bill for 97 cents on the dollar, as long as one redeems the SPAC at maturity.
Source: Accelerate
There are over 700 SPACs in the market, representing approximately $200 billion of equity value. On average, SPACs are trading at a record discount to NAV. This record discount translates to some of the highest arbitrage yields offered on record, with the average SPAC yielding 3.1%.
It is only a matter of time until SPAC sponsors rotate their sector focus into deals that are “working”. Once this happens, the extreme bearish sentiment may clear, taking NAV discounts with them. However, until then, SPAC arbitrageurs are being compensated more than a 3% yield to wait (excluding upside optionality if the market likes a deal and it trades above NAV).
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.
