Re: Investing-Deep Dive on SPACS.
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Re: Investing-Deep Dive on SPACS.
I’ve been doing a deep-dive on the current SPAC phenomenon, which I call "SPAC Mania 2.0."
I’ll label the current wave “SPAC Mania 2.0” and compare it to “SPAC Mania 1.0” (roughly the period of 2005-2010). This thread encapsulates some of my findings/observations. Thoughts welcome.
First off, SPAC Mania 2.0 is much bigger. 2020 marked first year that SPAC IPOs meaningfully outpaced traditional IPOs, raising $83B. 2021 trends so far point to an even greater outpacing gap.
This represents a crowd-sourcing of the traditional underwriting function to several hundred sponsors, some of which are less qualified than others. Imho, this is going to lead to a lot more quality inconsistency of companies going public.
Not surprising to see the vast preponderance of returns accrue to sponsors, then buy- and-hold investors (buy on issue/hold post-merger), PIPE investors (brought in to consummate a deal), then “SPAC arbs” (buy on issue/sell on deal), and finally to post-merger investors.
To put returns into perspective, “SPAC arbs” have been making low-risk returns in the 15-20% range by taking positions near trust value and selling on a deal pop. The “pop” has been especially pronounced in bigger tech deals in this ebullient tape.
SPAC sponsors have a much lower basis than regular investors (sometimes 0) and typically make returns that are multiples higher because of the promote and warrants. Sponsor returns have been in the multiple hundreds of %.
No free lunch though. The risk is that the sponsor capital (typically 3% of SPAC size) is 100% forfeit if there is no deal within 24 months, whereas regular SPAC investors have a $10 put. This 3% is much higher than during SPAC Mania 1.0 when it could be <1%.
A liquidity-fueled bull market has emboldened SPAC investors: 1) there are currently no SPACs failing to consummate deals, and 2) no SPACs trade below trust value. That said, with 350+ SPACs outstanding and rising by the day, the competition to get deals done is fierce.
It is a seller’s market for private companies right now, but there are conflicting forces at play: 1) SPAC IPOs are more dilutive than traditional IPOs, 2) BUT the strong motivation for SPAC sponsors to consummate deals is leading to overpayment.
Currently there is so much capital being raised via SPACs there are anecdotes of targets being courted by 9-12 SPACs at the same time; this is leading to overpriced deals and outright sponsor “give-ups” of economics to management teams to convince them to sign.
The counterargument to that is that the number of public companies now (6000) is much lower than decades past (8000 in 90’s), and the current wave of SPACs represents a new paradigm for private companies to go public.
I hate “This Time Is Different” talk, but the New Paradigm talk now compares SPACs to the financial innovation of high-yield bonds in the 80’s, which spurred a massive M&A boom.
The risk I see is that across-the-board overpayment for private companies + inadequate vetting for quality could lead to some big post-merger busts, which in turn could lead to more pre-deal SPACs to trade below trust value.
This happened during SPAC Mania 1.0 when there were many SPACs trading below trust value, which attracted a new breed of “arb investor” (I participated) that bought controlling interests in these SPACs to force “no-deal” votes and disgorge the trust value.
If this happens again, there will be tears for many investors who bought at premiums and even sponsors who will forfeit their sponsor shares/GP capital if they can’t consummate deals within the 24-month timeline.
Some stats from GS: 1) There are 326 SPACs with $103B looking for deals, 2) Ratio of target EV:SPAC capital is now 7x vs 6x in ’20 vs. 3x before ’20. Latter stat suggests that more and more companies are justifying extra dilution because sponsors are paying up more and more.
Another mind-blowing stat from GS: 1) 2020 saw $156B in SPAC acquisitions across 93 deals, 2) YTD 2021 we are already at $123B across 43 deals, most of which is in high-growth sectors.
Bloom is coming off the rose for SPAC arbs. Seeing a bunch of pre-deal names trading below trust now. Will be interesting to see what happens here.
END OF ORIGINAL THREAD.
Additions:
Interesting -- could be start of a new trend.
Another interesting perspective:
I can see this, but I’m guessing that traditional underwriters can fight back as well.
Not sure I’m calling the end just yet but cracks are appearing for sure.
https://www.bloomberg.com/opinion/articles/2021-03-08/spac-party-over- cciv-dive-and-chamath-palihapitiya-spce-sale-say-so
https://www.linkedin.com/pulse/sucker-spac-market-why-bubble-pop-irv-schlussel/?published=t
Points out some of the same dynamics I alluded to in this thread.
It's been less than 2 weeks since I posted this thread, and there are now a ton of SPACs trading below trust. Will be interesting to see how this develops.
Idk if my microcosm of 50 pre-deal SPACs that I track can be extrapolated more broadly, but fwiw, 26% are now trading below trust value, up from zero 2 weeks ago.
JPM just wrapped up an excellent call, and this was the most interesting chart. What I would love to see is a measure of the discounts, because THAT determines whether or not the "Disgorgement Arbs" create a self-defeating dynamic for sponsors.
Been thinking about this issue a lot. Obviously depends on the deal and discount. But you now have 365 looking for dance partners, so risk of bad deals definitely higher.
I think the risk is to weaker sponsors/deals and of course the level of discount. Post 2008, I remember SPACs trading around $8 with so-so sponsors and hedgies just bought these up to force disgorgement of trust value. And that was with a LOT less SPACs out there.
BUT the mitigating factor now might be the separation of deal vote from redemption vote vs an all-in-one vote back then and the fact that large PIPEs can give back capital to SPAC investors who can effectively “have their cake and eat it too.”
Had a very interesting chat last week with a SPAC arb HF that said that ytd 30/36 deals had PIPEs (which effectively allowed folks to get their capital back and still vote yes for the deal). The ones that didn’t have PIPEs traded down 25%.
Great chart from Citi showing how PE growth fits in with SPACs as a preferable way to go public.
Yikes. Just yikes.
60% of my microcosmic universe of tracked SPACs (about 50) now trades below trust value. Not significantly below, but the bloom is clearly off the rose. Key question: What discounts will be enough to entice "disgorgement arbs" to shoot deals down? Mkt environment clearly matters.
Wow. 88% of my tracked SPACs now trade below trust value. Ummm, that's up from 0% in January. SPACs -> SPANCs.
Putting things in context...
Here's a scary thought for SPACs, M&A, and capital formation in general -- if Biden gets his way and taxes long-term capital gains at ordinary income rates, think about the ramifications for ALL financial transactions under the sun.
If I’m a private company, I’m just gonna sit this out and wait for regime change. Perfect storm for record SPAC sponsors looking for deals.
This just out. It appears my microcosmic sample of SPACs trading below trust value was a pretty accurate representation of the overall universe.
Was just a matter of time. Prediction: "SPAC Disgorgement Arb" is gonna be a thing.
