What happened to that SPACtacular rally?

My grandmother used to love sugar. In fact, she had so much of it that she got diabetes. And now she takes insulin injections instead, but only for the past 27 years. Nicely done, grandma...NOT! Excess of everything is bad. Take a look at the deluge of SPAC issuance that has hit the markets in the first quarter of 2021 for example. Barry Sternlicht in an interview with CNBC this week said that “if you can walk, you can do a SPAC.” Ugh, if you can walk, go walk at the beach in Miami.

We surpassed the annual 2020 SPAC issuance in the first sixty days of the year, and there are currently 552 active SPACs with $178.1B in trust value that are searching for targets (including 117 that have announced Definitive Agreements). That means there are 552 private companies that could potentially become public in the next 18-24 months. Now that is just a lot of companies to take public! (For reference, there were 480 IPOs in the US market in 2020, out of which SPACs accounted for ~50% of those. Excluding 2020, SPACs have generally accounted for 14% of the total IPOs.) And yes, the overall market has been selling off and the ten-year yields are rising but the SPAC’ers just need a refresher on the Law of Supply, which states as supply goes up, prices go down. 

Back in January, we saw that as the SPAC issuance volume went up, the deal sizes got bigger and the warrants got smaller. There were pops happening on SPAC IPOs, just because the market thought that if the SPAC was led by Chamath, it would be a home run by default. I’m a huge fan of his, but I couldn’t get in on $IPOD on the IPO day because it opened at a 12.5% premium! According to a JPM report, over 80% of SPACs were trading at a premium to their trust value back in January at an average premium of 25%. 

I mean you only had to be following the $CCIV story to understand the froth that was brewing in the SPAC land. On January 11th, Bloomberg published a story saying that $CCIV was potentially merging with Lucid Motors, an EV company. Just on that rumor alone (and given that the EV sector has been a SPAC darling historically), the stock first ran up to $20 and then kept running for the next couple of weeks, peaking at $65 on February 18th. When the deal was finally announced on February 22nd, the stock went tumbling down 25%. Apparently the real story was that the two companies only got into negotiations *post* that bloomberg article! Is that serendipity or insanity??!!

But then the Ides of March came and we are now seeing the froth get washed away, but unfortunately, the good SPACs are getting obliterated too. Take the $SPFR merger with Velo3D or the $TBA one with Ironsource that were announced this week. These are high quality SPACs with seasoned teams merging with targets that have high double digit ARR growth and solid financials, and at valuations that actually make sense. And yet, they both got completely crushed on deal announcement, trading down 5% and 9% respectively. Even the $FTCV merger with eToro last week failed to really pop despite the positive market reception. I remember back in the good ol’ January, when Chamath announced the $IPOE merger with SoFi, the stock instantly doubled and was actually halted a few times! Yes, that was irrational exuberance on fire, but I mention for context. 

All to say, that this is a short term gyration and the SPAC land is already adjusting. The SPAC premiums have come down to 3.1% and while the issuance tap will take a while to slow down (Goldman is too busy dealing with its investment bankers’ crisis this week), the deals are getting downsized, warrants are getting bigger again, SPAC IPOs are opening at a discount, and there are real bargains on the table. There are currently over 75 SPACs (~15% of total outstanding active SPACs) that are trading at or below $9.75, which means you can buy them at a discount to their trust value, and that includes some high quality names. I loved buying $HERAU and $LGV at $9.90 - it truly felt like it was on sale, and I may finally even be able to buy $IPOD at a reasonable price! 

They say, great art must satisfy two conditions - it should be surprising, and yet it should also be inevitable. I think SPACs are the great art of modern finance and yes, this recent bloodbath has been negatively surprising, but it was also inevitable. It will help clean up and reorganize the SPAC arena, and we will see good quality SPAC’ers prevail. In the short term, it’s time to put cash to work and buy good quality SPACs, preferably at a discount.