SPACs as Cash Alternative with Upside Optionality

[shamelesscloner]

I was recently introduced to the idea of parking cash in SPACs that are close to NAV, as a "heads I win, tails I don't lose much" strategy as I wait for fat pitches.

 

You can learn more about this strategy from this VIC writeup: https://www.valueinvestorsclub.com/idea/Pre-Deal_Tech_SPACs/5377561191

 

And from this Acquirer's podcast episode: https://acquirersmultiple.com/2021/01/ep-97-the-acquirers-podcast-andrew-walker-special-ops-spacs-dropbox-transitioning-from-small-and-micro-deep-value-to-compounders/

 

What are your favorite SPACs at the moment for implementing this approach?

 

Mine are OACB (Oaktree's second SPAC) and SWBK.U

 

PSTH, IPOD, IPOE, IPOF are SPACs that I own but have already appreciated significantly.

[Gregmal]

I forget the thread but theres a good bit of detail on this subject there with Ronchong and a few others.

 

EDIT: https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/evrenewable-bubble-the-next-dot-com-burst/

 

In terms of current plays, you really just need to keep a tab on whats IPO-ing. Had ADERU IPO this past week and FOXWU coming tomorrow/Wednesday.

[shamelesscloner]

You don't even pay attention to the sponsor and track record?

[5xEBITDA]

I've been trading SPACs this way for the last two years, it's great. Unfortunately, the market is so rich that it is almost impossible to buy SPACs at NAV, much less a discount to NAV, unless you are an institutional investor participating in the initial IPO.

[Gregmal]

You don't even pay attention to the sponsor and track record?

 

Just double check that you're buying a cash box and see what the warrant terms are. Otherwise, manager doesnt matter, nor does track record.

[LC]

I've been trading SPACs this way for the last two years, it's great. Unfortunately, the market is so rich that it is almost impossible to buy SPACs at NAV, much less a discount to NAV, unless you are an institutional investor participating in the initial IPO.

 

Well it makes sense, right? Expected payoff here is the value of the embedded call option. I would expect those call options to be highly-priced in frothy markets.

[5xEBITDA]

I've been trading SPACs this way for the last two years, it's great. Unfortunately, the market is so rich that it is almost impossible to buy SPACs at NAV, much less a discount to NAV, unless you are an institutional investor participating in the initial IPO.

 

Well it makes sense, right? Expected payoff here is the value of the embedded call option. I would expect those call options to be highly-priced in frothy markets.

 

Yes, the market currently prices a substantial premium for the call option value. Pre-April/May 2020, the way to trade these was to buy SPACs expiring in less than a year with a discount to NAV annualizing greater than 4-5%. At maturity, you'd either put the shares back to the sponsor and lock the yield in, or sell into the market on a deal pop (the "call option" being exercised). The discount to NAV was generally a reflection of the market's belief in a quality deal being found, as well as the fact that this was a pretty small asset class with only a handful of sizeable players until this past summer. Now, the way to earn a return is to participate in the IPO where you get the warrant for free and the trade is a bet that the market will trade the sponsor well because the share component will trade at NAV or better. For example, if you buy a SPAC unit for $10.00 and get one share and one/third of a warrant for free, if the warrant trades at $1.50 or better you can make a ~5% total return without requiring the market to trade the share above NAV.

 

All else equal, you can make a higher total return in today's market, but the market of yesterday was better to build a scalable, repeatable product. Anyone raising a SPAC fund today in size is making a levered market beta bet.

[shamelesscloner]

I've been trading SPACs this way for the last two years, it's great. Unfortunately, the market is so rich that it is almost impossible to buy SPACs at NAV, much less a discount to NAV, unless you are an institutional investor participating in the initial IPO.

 

Yesterday I believe there was only one SPAC trading at a discount to NAV out of the 300+ available.

[5xEBITDA]

I've been trading SPACs this way for the last two years, it's great. Unfortunately, the market is so rich that it is almost impossible to buy SPACs at NAV, much less a discount to NAV, unless you are an institutional investor participating in the initial IPO.

 

Yesterday I believe there was only one SPAC trading at a discount to NAV out of the 300+ available.

 

Canadian SPACs still trade at discounts to NAV for various reasons, my favorite being that they aren't available on Robinhood.

[scorpioncapital]

I've seen spacs trading at 20% premium to NAV. I wonder if this can be considered a guaranteed capital loss like negative interest rates, short of a brilliant acquisition. As markets power higher, the probability of a good deal decreases. It's a head scratcher for me why spacs go up when equities go up. Instead they should go up when equities crash. Another example of the bubble mentality.

[shamelesscloner]

I've seen spacs trading at 20% premium to NAV. I wonder if this can be considered a guaranteed capital loss like negative interest rates, short of a brilliant acquisition. As markets power higher, the probability of a good deal decreases. It's a head scratcher for me why spacs go up when equities go up. Instead they should go up when equities crash. Another example of the bubble mentality.

 

Ackman's SPAC is trading at a 33% premium and Chamath's are trading even higher than that. Even at these levels I don't see them as a guaranteed capital loss, but you won't find me buying them either. I'm not sure if it's as simple as "higher markets = less probability of a good deal." There is value in partnering with Pershing Square or Oaktree or Social Capital. But I agree, these SPACs get more attractive to me when equities are crashing especially when prices dip below NAV.

 

Speaking of Chamath, have you seen how much he can move the needle on his SPACs with one tweet? He has 746K Twitter followers and I'd love to see him announce a deal quoting the wrong ticker... that thing would moon so fast.

[Jurgis]

these SPACs get more attractive to me when equities are crashing especially when prices dip below NAV.

 

If/when equities crash, SPACs would be way less attractive even if they dip below NAV.

The only hope is that SPACs won't crash to below $9 and can be sold at small relative loss to buy great companies/stocks that have crashed more.

[shamelesscloner]

these SPACs get more attractive to me when equities are crashing especially when prices dip below NAV.

 

If/when equities crash, SPACs would be way less attractive even if they dip below NAV.

The only hope is that SPACs won't crash to below $9 and can be sold at small relative loss to buy great companies/stocks that have crashed more.

 

Because investors will be ditching what is effectively a cash alternative to buy great businesses at discounted prices? And private companies would delay IPOs during a down market?

[scorpioncapital]

We have been conditioned to believe in the divine Fed put and that in a crash things recover and that's just the fate of the markets every single time.  Is buy the dip infallible forever? It might be, maybe we just run out of money from the volatility and extracting cash from portfolios in excess of growth of capital.

[xasm]

I've been trading SPACs this way for the last two years, it's great. Unfortunately, the market is so rich that it is almost impossible to buy SPACs at NAV, much less a discount to NAV, unless you are an institutional investor participating in the initial IPO.

 

Yesterday I believe there was only one SPAC trading at a discount to NAV out of the 300+ available.

 

Canadian SPACs still trade at discounts to NAV for various reasons, my favorite being that they aren't available on Robinhood.

 

Very interesting...can you point to where to find these?

Cheers

[MattR]

these SPACs get more attractive to me when equities are crashing especially when prices dip below NAV.

 

If/when equities crash, SPACs would be way less attractive even if they dip below NAV.

The only hope is that SPACs won't crash to below $9 and can be sold at small relative loss to buy great companies/stocks that have crashed more.

 

Because investors will be ditching what is effectively a cash alternative to buy great businesses at discounted prices? And private companies would delay IPOs during a down market?

Hi Brad.

 

Here is what Howard Marks writes about SPACs in his 2007 Memo: Race to the bottom:

 

Heads We Win/Tails You Lose – Part of being willing to pay more for less relates to the balance between upside potential, downside risk and who gets what.  SPACs – or Special Purpose Acquisition Companies, also known as “blank check companies” or “blind pools” – seem like a good example of miscalibration.  People put equity capital into a SPAC with no certainty as to what will be done with it.  The SPAC’s “portfolio” is likely to consist of just one company.  And the investors will get no return on their money as long as it remains unspent, which can be up to 18 or 24 months.  The sponsor, on the other hand, gets 20% of any profits, as there’s no preferred return.  It does so through warrants, which it can liquidate even without having sold the acquired company.  And if it can’t make an acquisition, it just returns the money without penalty – usually reduced by banking and other fees.

 

So while it has great upside. I think the downside is often overlooked especially when there are now so many spacs on the same "hunting grounds". And while I really like Chamath that doesnt guarantee returns.

[shamelesscloner]

these SPACs get more attractive to me when equities are crashing especially when prices dip below NAV.

 

If/when equities crash, SPACs would be way less attractive even if they dip below NAV.

The only hope is that SPACs won't crash to below $9 and can be sold at small relative loss to buy great companies/stocks that have crashed more.

 

Because investors will be ditching what is effectively a cash alternative to buy great businesses at discounted prices? And private companies would delay IPOs during a down market?

Hi Brad.

 

Here is what Howard Marks writes about SPACs in his 2007 Memo: Race to the bottom:

 

Heads We Win/Tails You Lose – Part of being willing to pay more for less relates to the balance between upside potential, downside risk and who gets what.  SPACs – or Special Purpose Acquisition Companies, also known as “blank check companies” or “blind pools” – seem like a good example of miscalibration.  People put equity capital into a SPAC with no certainty as to what will be done with it.  The SPAC’s “portfolio” is likely to consist of just one company.  And the investors will get no return on their money as long as it remains unspent, which can be up to 18 or 24 months.  The sponsor, on the other hand, gets 20% of any profits, as there’s no preferred return.  It does so through warrants, which it can liquidate even without having sold the acquired company.  And if it can’t make an acquisition, it just returns the money without penalty – usually reduced by banking and other fees.

 

So while it has great upside. I think the downside is often overlooked especially when there are now so many spacs on the same "hunting grounds". And while I really like Chamath that doesnt guarantee returns.

 

I think SPACs are just about always a bad long-term bet, but I find them interesting as a way to get a yield on cash in the short term. Funny that Oaktree has two SPACs now... I wonder if Marks feels any differently 14 years later. Thanks for sharing!

[scorpioncapital]

A spac is not a savings account on cash. It can have a negative return unless you buy it exactly at $10 and even then the return is 0%.

The problem I have is as markets rise and valuations get stretched, there is higher pressure to make a deal. So the odds of a good deal get smaller while the spac is 20-30% above NAV. If they don't do anything until near the end of the 2 year term it is possible the speculators lose interest and let it deflate closer to 10. The hope is the celebrity power of the sponsor. It's almost like a popularity contest.

[MattR]

 

I think SPACs are just about always a bad long-term bet, but I find them interesting as a way to get a yield on cash in the short term. Funny that Oaktree has two SPACs now... I wonder if Marks feels any differently 14 years later. Thanks for sharing!

 

I don't really think Marks feels a lot different now. But Oaktree is not just Marks and is mainly in the money making business for it's clients. I think SPACS can be an interesting short term bet as you said, but at the moment they all pretty much trade at 15+ above the initial offering.

[Jurgis]

FYI, some noname SPAC units are now down below $10.10 or so.

This is deflating fast at least on the noname end.

Do your DD, call Robinhood to tell them "no SPACs for men in tights!".

[shamelesscloner]

FYI, some noname SPAC units are now down below $10.10 or so.

This is deflating fast at least on the noname end.

Do your DD, call Robinhood to tell them "no SPACs for men in tights!".

 

Funny how quickly the market can go after the next shiny object! What's next? A run on decentralized cryptos...

[barminov]

FYI, some noname SPAC units are now down below $10.10 or so.

This is deflating fast at least on the noname end.

Do your DD, call Robinhood to tell them "no SPACs for men in tights!".

 

Units? Which ones? Asking because I have a watchlist of about 100 of the 300 looking for a deal and exactly 1 is below $10.10. It started trading today.

[Jurgis]

FYI, some noname SPAC units are now down below $10.10 or so.

This is deflating fast at least on the noname end.

Do your DD, call Robinhood to tell them "no SPACs for men in tights!".

 

Units? Which ones? Asking because I have a watchlist of about 100 of the 300 looking for a deal and exactly 1 is below $10.10. It started trading today.

 

TLGAU, ITHXU, HCAQ.

 

OSTRU is/was close.

[Jurgis]

So far still possible to pick up 2-4% in couple of days across the spectrum of noname SPACs with 2-4% downside only (i.e. buying at 10.20-10.40 range).

I'm not holding for warrants/deals even. If it runs up, I just sell. Might not be the best tactic, but I don't want to end up with huge position in SPACs if market decides to nosedive. And holding somewhere in 10.80-11 range has a larger downside even if you bought at 10.20-10.40. FWIW.

 

Pretty annoying to put in a gaggle of orders. And Fido insists of sending me paper stacks of prospectuses. I'm gonna get buried in paper...  ::) I wonder if there's a way to get them to stop... (They also pay up to $8 on each for postage...)

[Ronchong]

So far still possible to pick up 2-4% in couple of days across the spectrum of noname SPACs with 2-4% downside only (i.e. buying at 10.20-10.40 range).

I'm not holding for warrants/deals even. If it runs up, I just sell. Might not be the best tactic, but I don't want to end up with huge position in SPACs if market decides to nosedive. And holding somewhere in 10.80-11 range has a larger downside even if you bought at 10.20-10.40. FWIW.

 

Pretty annoying to put in a gaggle of orders. And Fido insists of sending me paper stacks of prospectuses. I'm gonna get buried in paper...  ::) I wonder if there's a way to get them to stop... (They also pay up to $8 on each for postage...)

 

The problem I have with noname SPACs is that they stay noname for a long time. CCAC was trading around 10.4 2 months ago and it has gone nowhere dince. It got up to 11 ish today but it was trading at 10.5 yesterday (Considered long in the SPAC land).

 

I know I'm deviating from the original value based thesis, which is to buy into SPACs close to NAV and wait for the deal announcement pop but there is another play here if you want to improve your returns but it also increases your risks a little.

 

If you were to break down the behaviour of a SPAC, it is simply a function of: (i) how fast it is likely to merge and (ii) how attractive the target is. Like what Greg has said, SPACs have embedded time value and actually increases in value as the deadline approaches since the chances for a deal becomes higher. Branded SPACs come out of the gate at a higher price because of higher perceived (ii) but increases in a lot value faster because their perceived (i) is a lot shorter. This is aided by the hype that their holders (Typical robinhood, Reddit, stocktwits people) would build around these SPACs with their speculations and rumours.

 

While my CCAC has gone up by 3-4%, QELL (a slightly more branded SPAC) that I had bought for 10.8 at about the same time has gone up to 13-14. IPOD and IPOF are both going for 15, 16 when they were 10, 12 two months ago. Heck, if I were to sell QELL today, it would give me an even better return that most of the noname deal-announced SPACs that I had. The good thing is I didn't even have to stick around and wait for the deal announcement if I don't want to.

 

Ironically, just like investment, sometimes it pays to pay a little more for "quality". If you can find a branded SPAC that can goes for 10% premium or less, I would say go for it.