The Current Opportunity in Pre-Merger SPAC Investing

A Special Purpose Acquisition Company (SPAC) is a unique entity that is formed for the sole purpose of merging with or acquiring a private company but has no commercial operation itself. 

A SPAC typically has two years to complete an acquisition or else be forced to return all funds to its investors. From an investment standpoint, the pre-merger stage can be thought of as similar to a fixed-income investment because all investment funds in the SPAC are held in a trust with interest or dividends paid to investors. Investing in pre-merger SPACs can offer a low-risk opportunity to park cash in a safe entity during an otherwise volatile time of high inflation, soaring interest rates, and threats of a looming recession.

SPACs used to be looked at with suspicion, but when the stock market was booming at the start of the pandemic, private companies and venture capitalists turned to SPACs as a quicker way to go public than a traditional IPO. Banks charged exorbitant fees to investors eager for returns in a hot market. But then the market turned this year, with high-growth companies getting clobbered and SPAC acquisitions of risky companies becoming far less enticing. Roughly 600 SPACs1 formed in the last couple of years are still trying to complete acquisition deals. Pre-merger SPACs can offer other opportunities besides solely successful acquisitions.

Anyone can invest in a pre-merger SPAC, usually at a price of around $10 per share2, and investors have a right to redeem their investments at any point prior to the SPAC acquiring a company. During the pre-merger stage, SPAC valuations remain fairly steady and then increase after a merger announcement. It’s at this point that pre-merger SPAC investors stand to gain high returns if they sell their shares before the acquisition is finalized. Once the merger is official, valuations usually drop dramatically and the SPAC collapses.

Investing in a SPAC with the intention of staying invested through the acquisition is considered a very risky investment. And as with most risky investments, the majority of post-merger SPACs don’t pay off: the median SPAC in 2021 was underperforming the market by 42 percentage points3 six months after deal closure. Before the strategy of redeeming shares during the pre-merger stage became the norm, only 54%1 of shareholders chose to redeem their shares when a merger was announced. Now, close to 80%1 of pre-merger SPAC investors redeem their cash before the acquisition is complete.

The goal of investing in a pre-merger SPAC can be therefore to park cash in a low-risk company with the option to bail without a loss while gaining interest along the way. The RiverNorth Enhanced Pre-Merger SPAC ETF (SPCZ) is an actively managed ETF, which means that the fund managers buy into SPACs with strong management histories, good size, and negotiating power. They also analyze when to buy and sell at the optimal times. Given market volatility and rising rates, pre-merger SPACs can be viewed as one of the safest investments in a portfolio.