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Debunking the Myth: Why SPACs Can Be a Sound Investment Strategy
The period of hypergrowth during the pandemic encouraged many private companies to go public while taking advantage of stimulus checks flooding the market by individual investors.
Special Purpose Acquisition Companies (SPACs) are one asset class in particular that boomed during the pandemic. SPACs are created for the sole purpose of acquiring or merging with a private company to take it public. After a SPAC completes its initial public offering (IPO), it typically has 18 to 24 months to make an acquisition or it will be forced to liquidate its assets - returning all cash investments to shareholders. Shareholders also always have the opportunity to redeem their investments just prior to a completed acquisition. In addition to the redemption feature of SPACs (which can provide absolute downside protection), SPACs can generate positive yield/returns for investors in a few different ways:
- The value of the SPAC shares held by investors can appreciate if the target company is deemed to be attractive by the market.
- The SPAC’s trust account is required by prospectus to be invested in short term treasuries or treasury money market funds, which earn interest while the SPAC is searching for a merger or acquisition target.
- Post merger completion, the new public company may receive a higher valuation, which can benefit all shareholders.
While the proliferation of SPACs occurred after COVID, SPACs have been around for quite some time. To highlight this exponential growth, there were only 59 SPACs1 created in 2019. In 2020, however, 247 SPACs1 were created. SPAC creation peaked in 2021 with 679 total IPOs worldwide2. For the most part, SPACs remained speculative investments throughout this period, with investors betting big on unicorn acquisitions with generous payouts.
After such a high, the SPAC market seemed to go bust in 2022. But while only 76 SPACs IPO’d3 in the first three quarters of 2022, their role in the investment landscape also shifted. As the market faced bearish conditions, investors looked to park cash somewhere safe. The unique structure of SPACs allowed them to shift from being utilized as speculative investments to investments which can achieve positive absolute rates of return. Many investors were putting money in a SPAC with no intention of staying invested through the acquisition period. Instead, they sought to leverage the 4% return4 their cash collected between the time of a SPAC IPO and the acquisition announcement. The RiverNorth Enhanced Pre-merger SPAC ETF (SPCZ) was created to take advantage of this strategy.
This new age of SPACs has multiple avenues for being able to provide consistent and repeatable single-digit returns above typically safe investments like treasury bonds and more reliably, if perhaps less lucratively, than traditional stocks. Creative, low-risk investors can embrace the SPAC’s evolution away from a speculative investment. The RiverNorth Enhanced Pre-Merger SPAC ETF (SPCZ) aims to achieve positive absolute rates of return, particularly when measured against the level or risk assumed. The Fund can be utilized in the alternative allocation or absolute return sleeve of an investor’s portfolio in an effort to capture alpha with low correlation to traditional asset classes.
Sources:
- https://hbr.org/2021/07/spacs-what-you-need-to-know
- https://corpgov.law.harvard.edu/2022/02/17/2021-a-spectacular-year-for-spacs/
- https://www.whitecase.com/sites/default/files/2022-11/us-spac-de-spac-data-statistics-round-up.pdf
- https://www.barrons.com/articles/spacs-ipos-stocks-closed-end-funds-51670011767
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