Happy New Year!
Hi Folks!
I’m almost past the respectable deadline for HNY posts but here’s wishing everyone a very Happy New Year! Hope you had a wonderful time over the holidays and are all rejuvenated, vaxxed and boosted for the new year. Yes, I have been MIA for the last few weeks but I have missed y’all! And so many of you reached out - it was truly touching and I am very grateful! The reason for my absence began with travel, first to Europe then to India for my cousin’s wedding, but then it morphed into part laziness and part “do I really wanna be the continual bearer of bad SPAC news.”
SPACs are so 2021 and having made my Tiktok debut recently, I learned about the algorithm’s affinity for supporting only the current viral trends. But that’s just not TikTok, that’s investing too, especially when YOLO, FOMO, and MOASS (Mother of All Short Squeezes!) are the over arching themes. So with that, my intention for 2022 is to continue writing with a focus on SPACs but to also expand into subjects that are more reflective of what I’m reading, where I’m paying attention and ultimately, where I am investing.
However, for the first post of the year, I want to write my “predictions” for SPACs in 2022. Wow, it does feel a bit ballsy to be honest. But my therapist will be proud of me, so here we gooo!
Increased SPAC deal terminations/ Deals at lower valuations
Increased Pre-merger SPAC liquidations/Extensions
Money Market funds FTW
Higher return opportunity in trading Warrants (quality sponsors)
Increased regulatory oversight
FOMO out of SPACs and into Oil, Energy & Commodities
SPAC Issuance to taper beginning H2/2022
Fewer higher quality deals
Yes I hedged my predictions by not giving a numerical estimate, but that’s really just a futile exercise IMO as it’s not so much about how many deals we land at or what the average return looks like as opposed to figuring out the direction in which the sector is headed.
We peaked in Q1 last year but the wheels were already in motion. The euphoria that was building up in the first three months of the year saw every Tom Dick Harry sponsor file for a SPAC and so the excess supply was already in the system by the time the Ides of March struck and the SPAC market crashed. The performance has been abysmal since (SPAC ETF $SPAK was down 22.2% for the year), but we still saw 614 SPAC go public in 2021. That’s on top of 248 IPOs in 2020. However, against the heavy issuance, there were only 267 deals announced in 2021 and only 198 mergers closed.
As y’all know the average SPAC has a maturity date of 2 years, and with way more SPACs that are still outstanding and coming close to their deal deadline, there are gonna be many that will have to simply return the money cuz the Startup factory churning SPAC’able companies simply can’t keep up with the excess supply in the market. (Also, reckoning is coming for every Tom Dick Harry founder who thought he could launch a company and have it exit via a SPAC in few years, but that drama unfolding in the private markets is for another post). On top of the already excess supply, when the market conditions turned non-sponsor friendly in the last few months, we started to see SPAC IPOs with maturities for as low as 9 months. Like WTF bro! How you plannin’ to fish in the drought?! I dunno how but I guess they just wanted to get their IPO out the door and offer sweet terms and were maybe planning to rely on extensions or crazy good luck in finding a deal in that short of a time frame. But if Chamath hasn’t been able to close a deal since Feb of last year, then maybe it’s not as easy out there…?!
So liquidations and deal terminations are comin’ baby. Given that backdrop, I would suggest we stick to the quality bros if we still have any allegiance left to the asset class. Although I agree, there are greener pastures elsewhere. But even when it comes to holding Quality names, it’s not lost on me that 96% of the commons are trading below NAV, at an average discount of 1.4%. So, for a retail investor, a better way to play in that environment is via warrants, which are also trading close to ATL’s and given the cost basis is so low, you can diversify your bets while still gaining exposure to the same SPAC names.
I think there is an opportunity for trading SPAC units but it’s for the money market funds, simply because it’s a bit about volume and sophistication. I have written about it before but it is an easy and risk-free 5-7% return, which is way above the 2yr treasury yield at 0.87% (or even 10yr (1.7%) or 30yr (2.1%) for that matter). Money market funds have killed it last year by buying SPAC units, and they can outperform at their jobs for another year!
Overall, I believe that 2022 is not going to be a SPACworthy year because the Reddit mafia and Twitter squad has already moved on to new themes. Further, Gary has already been skeptical of the asset class and we will continue to see more scrutiny on both the sector and individual deals during the year. I believe it’s this lack of enthusiasm that backchannels its way to the sponsors and informs them of the waning appetite, and that is how we see a slowdown in issuance in the back half of the year.
We are still gonna see some good quality deals, and the occasional pops. I also believe that the pressure is high on Chamath, Churchill, Gores et al to deliver good deals and to restore some of the faith in the sector. They may not be tendies but who knows!
There you have it. We’ll find out if I am cancelled or not by January 2023!
Have a great week ahead,
Nikita