SPACs as Cash Alternative with Upside Optionality

[Ronchong]

Sepearate question, how is everyone here categorising their SPACs in their portfolio? Does it form part of your equity allocation or do you have a separate weightage for it?

[shamelesscloner]

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.

 

Ronchong, it sounds like you're optimizing for FOMO, whereas Jurgis is optimizing for downside protection. Be careful that you don't drift higher and higher from the floor riding the wave of SPAC euphoria.

[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...)

 

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.

 

Ronchong, it sounds like you're optimizing for FOMO, whereas Jurgis is optimizing for downside protection. Be careful that you don't drift higher and higher from the floor riding the wave of SPAC euphoria.

 

Well said @shamelesscloner.  8)

 

@Ronchong - yeah, your approach may work fine. I am a bit concerned that we are getting to the late innings of the SPAC game and that there might be a reckoning at some point. I may even pull out from the "can't lose" strategy of buying at 1-2% over $10. It's possible though that I'm early in my skepticism. Chamath vehicles are clearly popular and attractive at the right price.

 

Anyway, I've done SPCE warrants, VVNT warrants, NKLA warrants, IPOB, IPOC warrants. Sold all of those at huge % gains (not huge absolute sums, since I don't have to buy big and hodl). Still have a bunch of small warrant positions in various "interesting" SPACs, most at double/triple digit % gains. I just don't think it's as attractive SPACe  ;D as it has been.

 

Peace and

[Ronchong]

 

Ronchong, it sounds like you're optimizing for FOMO, whereas Jurgis is optimizing for downside protection. Be careful that you don't drift higher and higher from the floor riding the wave of SPAC euphoria.

 

Well said @shamelesscloner.  8)

 

@Ronchong - yeah, your approach may work fine. I am a bit concerned that we are getting to the late innings of the SPAC game and that there might be a reckoning at some point. I may even pull out from the "can't lose" strategy of buying at 1-2% over $10. It's possible though that I'm early in my skepticism. Chamath vehicles are clearly popular and attractive at the right price.

 

Anyway, I've done SPCE warrants, VVNT warrants, NKLA warrants, IPOB, IPOC warrants. Sold all of those at huge % gains (not huge absolute sums, since I don't have to buy big and hodl). Still have a bunch of small warrant positions in various "interesting" SPACs, most at double/triple digit % gains. I just don't think it's as attractive SPACe  ;D as it has been.

 

Peace and

 

Thanks shamelesscloner for the reminder. You said in 2 sentences what I said in 2 paragraphs. I have set myself a ceiling of 11 so that is something I'm very firm about.

 

I too think that there would be a day when the SPAC mania ends and everyday we get closer. This is why I think that the time in the SPAC market is very important, the lesser it is the better it is. Optimising for FOMO lets me get out at an earlier time, a different kind of downside protection if you were to ask me.

 

 

[MVP444300]

I like the idea of using SPACs as a proxy for cash to earn a little extra  than what the banks gives you but what concerns me is being able to do due diligence.  For example, how do I determine how much cash being held in trust is per share and whether that is iron glad locked in or whether management can raid it for whatever they desire if they don't find an acquisition.   

 

One other question is less say you buy the SPAC below trust value of the cash assets (lets put trust value a $10 per share) however you can buy the SPAC at $9.  Can you contact the company to have them write you a check for $10 before they find a target or before the funds must be returned?

 

Thanks for your response.  I am completely new to researching SPACs.

[5xEBITDA]

I like the idea of using SPACs as a proxy for cash to earn a little extra  than what the banks gives you but what concerns me is being able to do due diligence.  For example, how do I determine how much cash being held in trust is per share and whether that is iron glad locked in or whether management can raid it for whatever they desire if they don't find an acquisition.   

 

One other question is less say you buy the SPAC below trust value of the cash assets (lets put trust value a $10 per share) however you can buy the SPAC at $9.  Can you contact the company to have them write you a check for $10 before they find a target or before the funds must be returned?

 

Thanks for your response.  I am completely new to researching SPACs.

 

Cash in trust is held in an account separate from the management company / sponsor. JP Morgan is very big in the management of these trusts, and Continental acts as custodian for the vast majority of cases. These agreements are backed by formal investment management agreement contracts etc., they are a very iron clad thing. No SPAC has ever defaulted on its trust. The S1/offering prospectus explicitly lays out what the company can or cannot do with their trust money and under what circumstances they can access. It is market that the company has ability to take out a very small amount of cash to pay some taxes / working capital, usually no more than $0.03 per share. The market self regulates itself on this matter as its such a serious risk for someone to try and game.

 

For your second question, no there isn't a mechanism by which you can put your shares back to the company ahead of a formal redemption event. But you are free to call the company and always ask...this works if you hold 2-4% of the shares and threaten to vote against their deal AND redeem for cash. Theyd rather pay you NAV for your shares so they can vote it themselves. Sort of a scummy thing to do but :)

[barminov]

 

 

 

[Tim Eriksen]

I like the idea of using SPACs as a proxy for cash to earn a little extra  than what the banks gives you but what concerns me is being able to do due diligence.  For example, how do I determine how much cash being held in trust is per share and whether that is iron glad locked in or whether management can raid it for whatever they desire if they don't find an acquisition.   

 

One other question is less say you buy the SPAC below trust value of the cash assets (lets put trust value a $10 per share) however you can buy the SPAC at $9.  Can you contact the company to have them write you a check for $10 before they find a target or before the funds must be returned?

 

Thanks for your response.  I am completely new to researching SPACs.

 

During the crash in 08-09, there were conservative funds who bought SPACs at 10-20% discounts with the sole purpose of voting no on any acquisition.  They saw it as a guaranteed return.  If I recall correctly, Santa Monica Partners did this.

 

Cash in trust is held in an account separate from the management company / sponsor. JP Morgan is very big in the management of these trusts, and Continental acts as custodian for the vast majority of cases. These agreements are backed by formal investment management agreement contracts etc., they are a very iron clad thing. No SPAC has ever defaulted on its trust. The S1/offering prospectus explicitly lays out what the company can or cannot do with their trust money and under what circumstances they can access. It is market that the company has ability to take out a very small amount of cash to pay some taxes / working capital, usually no more than $0.03 per share. The market self regulates itself on this matter as its such a serious risk for someone to try and game.

 

For your second question, no there isn't a mechanism by which you can put your shares back to the company ahead of a formal redemption event. But you are free to call the company and always ask...this works if you hold 2-4% of the shares and threaten to vote against their deal AND redeem for cash. Theyd rather pay you NAV for your shares so they can vote it themselves. Sort of a scummy thing to do but :)

[shamelesscloner]

"During the crash in 08-09, there were conservative funds who bought SPACs at 10-20% discounts with the sole purpose of voting no on any acquisition.  They saw it as a guaranteed return.  If I recall correctly, Santa Monica Partners did this."

 

Nice strategy! I wonder how quickly they were able to cash in. Having money tied up during a crash when a bunch of bargains are available could be painful.

[5xEBITDA]

"During the crash in 08-09, there were conservative funds who bought SPACs at 10-20% discounts with the sole purpose of voting no on any acquisition.  They saw it as a guaranteed return.  If I recall correctly, Santa Monica Partners did this."

 

Nice strategy! I wonder how quickly they were able to cash in. Having money tied up during a crash when a bunch of bargains are available could be painful.

 

I did this in March...helps to be highly organized with the SPAC universe already. Basically just screen SPACs expiring < 6 months and fire blind once things dip below 90% of NAV. Also, you can do a RV trade and off load them sooner if the market bounces back and just take your total return via trading vs. put.

[Jurgis]

Problem of buying SPACs at 80-90% value during the crash is that usually you can buy other stocks at the time that are way cheaper.

Sure, SPACs may be "cash good" and not risky, but you're still likely leaving a lot of money on the table.

Unless you lever, but then it's not that "not risky" anymore.

 

Personally, if we crash now, I will very likely sell the SPACs at 80-90% value rather than buy more.

 

[BG2008]

Problem of buying SPACs at 80-90% value during the crash is that usually you can buy other stocks at the time that are way cheaper.

Sure, SPACs may be "cash good" and not risky, but you're still likely leaving a lot of money on the table.

Unless you lever, but then it's not that "not risky" anymore.

 

Personally, if we crash now, I will very likely sell the SPACs at 80-90% value rather than buy more.

 

Very true, those are the times when you buy something like AutoDesk at half of what it is trading at now

[bizaro86]

I think SPACs at 80-90 is more useful as a signal that the maximum pessimism is close than it is a direct opportunity.

[5xEBITDA]

Yes, SPACs selling off = people selling a low volatility asset class to raise case to deploy for greater total return opportunities. I put SPACs in a credit opportunities bucket where their risk/reward profile is more comparable.

[shamelesscloner]

I think SPACs at 80-90 is more useful as a signal that the maximum pessimism is close than it is a direct opportunity.

 

Always looking for signals to find the market bottom ;)

 

Here is a fun clip from Sam Zell on SPACs:

 

"If done well it's a very effective transaction. It's one of the few times where the buyer has enormous power. If you're a buyer of an IPO SPAC, the worst thing that can happen is you get your money back and the cost of carry. The best thing that can happen is they make a very attractive deal and then you have a decision to make as to whether you want to play or not."

 

This of course assumes that you buy at or below NAV.

[dpetrescu]

I don’t think the problem is that good quality names are not close to NAV. There are so many quality groups at 10.5 and below. The problem is there are too of them - 20 new ones a day! Private companies can just take the higher offer and investors don’t get a good deal. The quality names help if they stay involved with a board seat.

 

Some low cost name examples....MLAC - 10.15. This is headed by someone who is also on the management team of both of the Peter Thiel ones. I think he’s likely a key person because they’re looking in SE Asia. And the two Thiel rumors have both been SE Asian firms.

 

HPX - mentioned this in the other discussion. Lead person Was CEO of Kraft, CEO of Burger King, was at 3G Capital when they did deals with Berkshire. And is looking in Brazil with less competition. Maybe he can find the next Stone Co.

 

There’s also the one led by the Pfizer CEO, can’t remember the name that was low priced.

 

 

 

[Jurgis]

Edit:

 

Long list of pre-deal SPACs getting below 10.10. Couple below 10.05. Most below 10.20.

Likely end of party?

 

Start looking for those <$10 buys.  8)

[shamelesscloner]

Edit:

 

Long list of pre-deal SPACs getting below 10.10. Couple below 10.05. Most below 10.20.

Likely end of party?

 

Start looking for those <$10 buys.  8)

 

There clearly seems to be a sentiment shift

[LC]

Edit:

 

Long list of pre-deal SPACs getting below 10.10. Couple below 10.05. Most below 10.20.

Likely end of party?

 

Start looking for those <$10 buys.  8)

 

Can you recommend a good screener? Or do you just DIY it with a list of SPACs and a google sheet or some other means.

[Jurgis]

Edit:

 

Long list of pre-deal SPACs getting below 10.10. Couple below 10.05. Most below 10.20.

Likely end of party?

 

Start looking for those <$10 buys.  8)

 

Can you recommend a good screener? Or do you just DIY it with a list of SPACs and a google sheet or some other means.

 

https://www.spachero.com/units/

IPOs at https://spacinsider.com/

[LC]

Merci

[Jurgis]

That went fast. $9.96 quotes already.

 

Edit: time to rename the thread: SPACs as Cash Alternative with Downside Optionality ?  ;D  ::)

[shamelesscloner]

That went fast. $9.96 quotes already.

 

Edit: time to rename the thread: SPACs as Cash Alternative with Downside Optionality ?  ;D  ::)

 

The Robinhood dogs have found other birds to chase

[Jurgis]

That went fast. $9.96 quotes already.

 

Edit: time to rename the thread: SPACs as Cash Alternative with Downside Optionality ?  ;D  ::)

 

The Robinhood dogs have found other birds to chase

 

I don't think it was all Robinhood or even mostly Robinhood. The number of SPACs has been exploding and that definitely sucks up and dries up the capital than can buy SPACs.

I think there has been couple different categories of investors:

- Growth/opportunity investors who bought SPACs for potential investment in future/growth companies

- Conversion pop investors who bought SPACs for deal pop

- Cash Alternative with Upside Optionality investors who are like the conversion pop investors, but a bit more conservative

- Probably missing some group

 

Growth stonks are dropping which is taking growth/opp investors out of the picture. With that the conv-pop investors are leaving too. And due to exploding number of SPACs, the cash alternative investors can't really keep prices up.

 

It's all rational.  ;)  :P  8)  ;D

[dpetrescu]

So now there are SPACs with merger dates set in 1-4 months that are trading at or under $10.

 

Redeeming a SPAC with a merger seems to be easy - call the broker by deadline (usually a few days before merger), request redemption. There’s usually another deadline a couple or so weeks before - you’d have to have purchased the shares by then (but it sounds like that rule isn’t always followed) Then you get your shares on hold, and in a week you get your $10 + interest.

 

Now, in the meanwhile your get free  optionality. So during those 1-4 months:

-if the SPAC drops to 9, you just redeem it for 10+interest (this exact scenario has happened before) most people aren’t aware of the process and the deadlines

-if the SPAC stays at 10, you can always sell it or keep it after merger

- if the SPAC goes up 50%, sell it and keep the profit

 

Is there any downside? Maybe the very low risk that everyone redeems because there’s a new virus pandemic - but even during March 2020 the contracts and redemptions were honored. And sure there’s some opportunity cost. But it’s only 1-4 months. And you can time the purchase by the purchase deadline so you only wait a few weeks (but by then you’ll have a smaller duration of optionality.

 

The one distinguishing factor is - i think it’s tougher to redeem if there isn’t a merger and you have to wait longer and you might not get the full 10 back. But I’m not as familiar with that process. That’s why I think the merger announcement arbitrage seems interesting.