Thou Art A Bore!

Hi Guys! 👋

Hope you had a great weekend...well that depends on where you live! For all my US based readers, it seems like the weekends are returning to normal as everyone gets vaccinated. And if you’re one of the more baller ones, partying it up in Miami this weekend, like Howie who’s buying gold plated underwear, then that’s even better. For my Canadian folks, we are in yet another lockdown and it’s a rainy one here in Vancouver. But at least we have our Prime Minister Justin Trudeau entertaining us, who was apparently flexing his tattoo while getting the Covid jab. I am getting my first shot tomorrow and I am very much looking forward to it!

Now, things haven’t really moved much in the SPAC land this past week, and at this rate, I’m going to run out of content to write about very soon. Which is really not a bullish sign for my writing career that’s in its infancy, and also because it directly impacts the number of guys sliding in my DMs… But I’m hopeful we will reach a SPAC equilibrium before I have to diversify my rants. 

Currently, there are 427 SPACs ($137.4B in trust value) with an average remaining time of 19.3 months to find a deal. That means we should be seeing around 5 deal announcements per week. This last week saw just 3, until the $SEAH merger with Super Group that was announced this morning, which brought the number up to 4. We had zero SPAC IPOs this week and the average SPAC is trading at a 2.4% premium relative to the LTM average of 8%. So yes, pretty bland stuff.

From a more thematic perspective, the SPAC market bottomed on March 24th, and one of the things that is becoming quite apparent since then is the lack of PIPE funding that’s available to get deals done and the selectivity of PIPE investors in who they choose to back given the excess SPAC supply. PIPE investors want Sponsors to find Targets with reasonable projections, like a flying car that gets you to the moon in 2022 and not 2030. Target companies want to merge with SPAC Sponsors who bring high quality PIPE investors as part of their LOI offer. And now, as SPAC investors look for quality SPACs, they want to invest in SPAC Sponsors who are also leading their own PIPEs. In fact, currently there are only 5% of the Sponsors who are also participating/leading their PIPEs. While this means that the grind for Sponsors is getting even harder, this additional filter should benefit SPAC investors in discerning who has real skin in the game.

Switching gears a bit, I read an interesting academic paper that Howie shared with me, and while academic papers do have their own research biases and caveats, it highlighted an interesting trade that I hadn’t thought about earlier. In the paper, they analyzed a buy-and-hold strategy in which an investor purchases a merged company common shares and warrants on the first day of trading as a new entity and holds them for 1 year or 3 years. What they found was very interesting - warrants outperformed for both the 1-year and 3-year period by returning 44.3% and 52.8% respectively, while the commons lagged at -16.9% and -20.9% respectively. The returns look better on a dollar weighted basis vs the equal weighted analysis above but the divergence in numbers still persists.

Of course, take these numbers with a grain of salt as the sample size of completed mergers was only 105 (till September 2020), and these numbers lack the SPAC euphoria that emerged late last year. It will be interesting to see if the warrants continue to outperform as the sample size of completed deals gets bigger.

Another interesting observation was this: “For the 114 SPAC IPOs from January 2010 – May 2018, investors have earned on average an annualized return of 9.3%. Although SPAC period investors earn most of their returns when SPACs consummate business combinations (9.3%, equally weighted), even liquidated SPACs provide positive returns (2% per year, equally weighted). This is because SPACs are structured to provide upside potential for the SPAC period investors by offering an option to become a shareholder of a newly traded company, with a money-back guarantee that, since 2010, is typically gross of fees. Accordingly, from 2010, even the worst-performing SPAC provided a positive return of 0.51% per year. Given this downside protected nature of the SPAC period investment, a SPAC IPO is equivalent to a default-free convertible bond with extra warrants, making 9.3% an attractive average return.”

That last line is an important one. SPACs are akin to a default-free convertible bond with extra warrants. Aka no downside, only upside. The current yield on ten-year treasury bond is 1.56%. Even the liquidated SPACs have returned more than that! So c’mon guys, hang in there, cuz you know what’s harder than picking the right SPAC…picking the right nail paint. I kid you not!! I was at the nail salon yesterday and legit I could not find what color I wanted for the life of me. At least with SPACs, the good ones anyways, we know 😉

Have a great week ahead!