SPACs Are Back
Over the course of 2021 the SPAC market has seen a massive shift from irrational exuberance, to a general holding pattern, and now into a better operating, more rational and lasting market. Today we have about 550 live SPACs looking for deals which most agree is still too many. The good news is that generally the pace of new SPAC IPOs remains subdued relative to Q1 2021 – currently averaging around 50 per month – but, the bad news is that deals are only being announced at a rate of less than 20 per month.
This current pacing means that the backlog of SPACs isn’t coming down, but is in fact growing. That will continue to push two of the bigger risks to the market: (1) “Peak Deal” — when the pressure on SPACs to get a deal done creates an influx of bad deals (more later) – and (2) SPAC liquidations. As the market moves into 2022 both are on the horizon and a real risk to the market finding its long-term footing.
On average both pre-deal SPACs and those with deals (excluding DWAC) continue to trade under NAV. Investors should expect this to continue as the market’s oversupply continues and there is little impetus for investors to buy pre-deal given much of the focus is on yield. As we discuss later, recent SPAC IPOs have added sweeteners that will elevate prices for those particular SPACs, but only keeping them closer to NAV versus a material change to the upside.
November brought the first SPAC liquidation in some time. Yunhong International (ZGYH),one of Patrick Orlando’s early SPACs and based in Wuhan, probably became more of a distraction (given DWAC and BENE) than it was worth continuing. It liquidated at $10.31 per share so investors that came in around NAV will have been made whole (or slightly better), but those that tried the sympathy play alongside DWAC may have lost out. For those holding warrants in a material amount, it was a bigger deal. On the Friday it was announced the warrants closed at $0.59 before falling precipitously and becoming worthless.
Overall, there is very little doubt at this point that SPACs are here to stay as an acceptable, and useful, vehicle for select private companies to go public. It also is becoming a haven for yield investors given the $10 redemption, overfunded trusts, rich warrants, and generally low yields available elsewhere.
The big question for the overall SPAC market over the next 6 months is what kind of volatility the market will have to suffer through before it moves into a more stable, long-term equilibrium as it works through the oversupply.
November’s SPAC IPOs – Sweeteners Help Fuel IPOs
There were 58 SPAC IPOs in November raising over $11B in capital. That continues the slowly increasing pace since the massive fall off in April of 2021 and marks the second month in a row with over 50 new SPACs and $11B in capital raised.
Source: Boardroom Alpha’s SPAC Intelligence Service
The increasing pace is not a reflection of increasing demand for new SPACs. Rather, given that demand hasn’t increased, SPAC sponsors have had to offer the market sweeteners in order to get their SPACs out the door. The primary levers that SPAC sponsors have been using is (1) overfunding trusts and (2) higher warrant coverage. Sponsors are overfunding with their own at-risk capital and, thus, lowering the economics they are set to receive for each deal.
So, investors who buy IPO allocation at $10 immediately have enhanced gains and are therefore willing to buy in. Let’s look at a specific example.
Betsy Cohen’s latest SPAC filing, FTAC Emerald is looking to raise $220M and has ½ warrants and a $10.10 overfunded trust. So, an investor that gets a $10 IPO allocation in Cohen’s FTAC Emerald will have an immediate return of 1%. And, the ½ a warrant in the unit will add another 5% of return (1/2 * $1.00).
So, in this example, an investor will get access to the asymmetric upside of investing alongside Cohen as well as locking in a 1% return on the overfunded trust and 5% return on warrants – all for simply investing at $10 at IPO.
It’s also worth noting that alongside the sweetened SPACs, we’re seeing the IPOs better maintain their price levels over $10. This should be no surprise given the extra return that is effectively guaranteed on these and investors should only expect this support for sweetened SPACs.
November’s Deal Announcements – Little Pop, Lots of Giveback
There were 18 SPAC merger deals announced in November – that’s simply too slow to move the market back into balance when compared to the IPO pace. Consistent with recent months, only two, BENE and SBEA, had material deal pops on day-1 rising 10% and 15.5% respectively. However, each has given back much of that initial deal pop and left both close to their NAV (note BENE has $10.15 in trust).
Prices as of market close 11/30
By and large, deals have not been getting material or lasting pops for much of the year since the Q1 SPAC mania. Only DWAC has been able to maintain most of its initial deal pop – though the price action in the days after had investors pushing it upwards of $100 before it fell back to around its initial deal pop price over the next few weeks.
Since August, the median deal pop has only been 0.9% so investors looking for moonshot pops have largely been disappointed. The deal pop dynamic is unlikely to change in the near future, so SPAC investors that are looking for singles and doubles on top of the yield play will be the most satisfied.
For those investors that are in a SPAC that hits it big on a deal pop, they should strongly consider taking the quick gains given the consistent trends for the price to give back most of the initial uptick.
“Peak Deal” – Aging SPACs Will Be Under Pressure
The pressure is now on for an increasing number of SPAC sponsors as “peak deal” approaches. What is “Peak Deal”? As the number of SPACs that are (a) looking for a deal and (b) are rapidly aging towards their deal deadlines there could be feeding frenzy for any private companies that have a decent narrative. In addition, the supply of high-quality private companies could be constrained by an increased reticence to take the SPAC route to go public.
At the current pace of deal announcements, and starting with about 50 SPACs over 12 months old as December begins, the number of SPACs that will be under pressure to get deals done will grow quickly.
The key takeaway for SPAC investors is that the risk of bad deals will increase as the pressure to land the deal increases. Investors will have to evaluate each deal closely to understand the quality and prospects. Additionally, the deal announcement pace will have to accelerate or the market risks a significant number of liquidations in 2022.
SPAC Sponsors – Track Records Show Who Drives Return
One of the most significant outcomes of the past year is that we now have an incredible amount of detail on SPAC sponsors and their performance. A year ago, we’d have defined “serial sponsors” differently given how few there really were. Today, we define it as any sponsor that has had 3 or more DeSPACs – there are 17 of these with an active SPAC that investors could buy into.
Investors will recognize most of these names and know many of the deals. Several have become fan favorites amongst the retail and FinTwit crowd in the same way that other stocks have gone MEME. Chamath Palihapitiya of Social Capital was the first twitter darling of SPACs as he launched his “IPO” series of SPACs that led to Virgin Galactic (SPCE), OpenDoor (OPEN), Clover (CLOV), and Social Finance (SOFI) becoming publicly traded companies.
Serial Sponsors with Active SPACs
(returns calculated since IPO)
However, Chamath’s SPAC celebrity has proven fickle as some believe his returns have faded (your perspective will depend on entry point), actions such as selling material amounts of SPCE and SOFI, and personal attention (at least in the form of active promotion) from him on SPACs seems to have dwindled. This comes at a time when he and Social Capital are still searching for a deal for IPOF and they have also launched their “DNA” series of SPACs that have yet to do any deals. On the following page, you can see how his IPO series has performed to date.
Chamath / Social Capital’s SPACs
The latest sponsor darling is Niccolo de Masi of dMY Technology. dMY’s run on SPACs has been exceedingly strong and de Masi has brought a focus and passion for promotion to each. The latest dMY SPAC, DMYQ is merging with Planet Labs – going to vote on December 3 – and looks to continue their strong SPAC track record.
dMY Technology’s SPACs
Given the massive number of active SPACs investors will continue to see significant build up in sponsor track records that will help them discriminate between which SPACs are better potential buys. Also, importantly, investors will see how many of these early deSPACs perform over their first year of being public – can they deliver operationally and for shareholders.
As these track records continue to build, watch for continuing price and performance discrimination between top serial sponsors and everyone else.
DeSPAC Performance Remains Mixed
DeSPAC performance, as measured by return since IPO, continues to be mixed. Many SPAC detractors point to the poor performers as a sign that SPACs are inherently bad. However, the variability in DeSPAC performance isn’t really that different from what is seen with a traditional IPO. Anyone looking for recent signs of IPOs gone amok can just look at Rivian (RIVN) and their mispriced IPO – originally targeting $70, trading upwards of $170, and now having fallen back down toward $120.
More concerning for SPAC investors will be the pace of DeSPACs which follows along with deal announcements and is also too slow to bring the market into balance. With only 19 DeSPACs in October and 9 in November the market remains well off the pace necessary.
High Variability in Recent DeSPAC Performance
Prices as of market close 11/30
High Redemption / Low Float Trades
One of the most prominent trading trends on SPACs in H2 has been the “low float / short squeeze” play that would come on the heels of a high redemption SPAC deal vote. This has been a very successful trade for a number of investors, but it isn’t a lasting strategy. Meaning that the opportunity to take advantage of this is short-lived. Take, for example DFNS which became IRNT. After having 93% of shares redeemed it traded up to $41.40 before quickly falling back to earth. It now trades in single digits ~$8.00.
The table below shows how low-float trade opportunities have given investors an opportunity to make big, quick gains. However, just like in the DFNS/IRNT example above, the gains were short-lived and now most are trading well off their highs.
Previous High Redemption / Low Float SPAC Opportunities
Prices as of market close 11/30
Expect the trend of higher redemptions to continue for any SPAC that is trading below $10 going into ex-redemption. SPAC investors are too savvy these days to take the risk of not redeeming given the high variability in DeSPAC outcomes – this is especially true as many SPAC investors are now yield focused.
For SPAC investors looking to capitalize on the high redemption/low float trade, watch for how the SPAC is trading going into ex-redemption (usually 2-3 days before the vote date). If it is below $10, expect high redemptions and a possible squeeze that can be capitalized on. And, if the squeeze comes, make sure to get out early and capture gains before the price rocket runs out of fuel and plummets back to earth.
Looking for Opportunities in Warrants
SPAC investors are also increasingly looking to warrants for outsized gains on SPAC investments. Ultimately for those making bets on warrants it will still come down to whether they believe in the same narrative – technical, fundamental, or otherwise — that will drive the common equity price. Some investors screen for potential opportunities by looking for warrants trading below $1 and then make decisions based on their belief in the future path of those SPACs/deals.
Those that don’t have significant experience investing in warrants should use caution. While investing in SPAC warrants can drive great returns, it is also riskier as seen in the ZGYH liquidation example.
SPACs with Warrants Under $1 and Announced Deals
Prices as of market close 11/30
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