April 26, 2021 – The great SPAC frenzy that began in July 2020 officially ended in March 2021.
Over these nine months, there were 509 SPAC IPOs that raised an aggregate $167 billion, representing $18.6 billion per month on average.
As expected, this extreme pace of SPAC issuance, representing 12.4x the previous twelve month average issuance, was proven to be unsustainable.
January represented a market environment in which, for the first time on record, 100% of SPACs were trading at a premium to net asset value. The frenzy was so extreme in January and February that some market participants saw no problem paying 30%+ premiums for pre-deal SPACs (effectively paying $13.00 for $10.00 of cash on hope and a prayer).
Now, I hear daily prognostications that “SPACs are dead” from the same market participants.
Sentiment is certainly in the gutter, which has revealed an overabundance of attractive arbitrage investment opportunities in SPACs trading below net asset value.
The average SPAC trades at a 2.2% premium to NAV and a -1.0% discount on a median basis. This valuation level is comparable to spring 2020, when the equity indices were recovering from their fastest bear market drawdown on record. There aren’t very many asset classes in which you can currently invest at April-May 2020 valuations. For an investor, these attractive valuations may represent the “buy low” segment of the classic market adage to buy low, sell high.
In nearly a year, is is the first time that the Accelerate Arbitrage Fund (TSX: ARB) portfolio of SPACs is at a discount to NAV in aggregate. The net effect of this discount is that it reduces downside risk while increasing upside potential.
Given prices are so low and sentiment is so poor, it is a golden age for SPAC arbitrage. There are 339 SPACs trading below NAV, representing $1.4 billion in virtually riskless profit for those willing to buy and hold to redemption.
New blank check issuance has slowed to a trickle. Month-to-date, SPAC IPOs are down more than -90%. In March, a record setting 110 SPAC IPOs raised nearly $36 billion. Thus far in April, there have only been 10 initial public offerings, raising just $2.5 billion.
The cause of the SPAC IPO window slamming shut can be attributed to two factors:
- The bear market was caused by too much issuance and a flood of supply. An investor would not allocate to a new issue at par when many high-quality SPACs are available at a discount. It is a buyer’s strike until the market recovers.
- The SEC recently came out with a new accounting rule requiring SPACs to classify their warrants as a liability in their financial statements instead of equity. While this relatively simple accounting change has no fundamental effect on blank check companies, it did chill the market in two ways. First, like a classroom being scolded by a teacher for horsing around, the SEC is disciplining sponsors for being overzealous. A good chastising by the regulator will quiet the market for a period of time. Second, accounting adjustments to financial statements are necessary and service providers are now working through the changes required prior to filing for new issues. We believe the SPAC structure will ultimately migrate to replacing warrants with rights on a go-forward basis. Although, some sponsors will be popular enough to issue warrantless SPACs.
There are currently 427 SPACs searching for a business combination, with 19.3 months remaining before their deal deadline on average. Due to a moribund secondary market with very little investor enthusiasm, requisite concurrent PIPE financings are tough to come by. PIPE investors are waiting for the market to pick up before allocating more capital. The deals that PIPE investors are allocating to in the current environment represent the pick of the litter. For every business combination we see announced, it is likely that ten unannounced deals die on the vine due to lack of PIPE financing.
The market supported 557 current SPACs in raising nearly $180 billion of capital. Now it is time for sponsor teams to execute, putting together high-quality business combinations, if they expect to have investor support for subsequent blank check vehicles.
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.
Disclaimer: This research does not constitute investment, legal or tax advice. Data provided in this research should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this research is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Accelerate may have positions in securities mentioned. Past performance is not indicative of future results.
Source: Accelerate Shares – AlphaRank SPAC Monitor – April 2021