From 2019 to 2021, some SPAC companies have been among the hottest investments, looking to bring attractive and elusive growth companies to market and reward their sponsors handsomely in the process. However, unfortunately for many SPAC companies, investors performed poorly after finding a deal.
Now in 2022, as growth investments become unfavorable in a bear market. Social Capital, which was an early proponent of the SPAC direction, and expected to replace the IPO, announced plans to “finish” two of the SPACs. Of course, it’s worth noting that IPO activity dropped significantly in 2022 as well.
However, despite the widespread pessimism, SPAC may now offer a return to investors. Just wasn’t the only sponsors expecting. Arguably, SPACs may accumulate relatively well as short-term fixed income assets.
Appeals on short-term returns
Giuliam Klimushko, portfolio manager at Accelerate Arbitrage Fund, which owns more than 200 SPACs, explains how this works. Today, “98% of SPACs are trading less than cash in confidence,” he says. This means an investor can essentially hold $10 for $9.84, according to Klymochko’s current calculations of the average SPAC.
Then regardless of whether SPAC liquidates, votes on a deal, or votes to extend it, you must have the option of redeeming and receiving the value deposited in the trust. Of course, a discount of 1.6% may not seem very tempting, especially if SPAC has several months for a refund.
However, recent moves in interest rates create a potential opportunity. Treasuries have soared, with most SPACs investing heavily, currently paying around 4% for a one-year treasury bond.
This means that the value of SPAC may exceed the initial value of $10 while they search for deals and receive interest while they wait. You may get a discount today on an investment of about 4%. Of course, there’s more complexity here than with other fixed income investments, and your view of the trajectory of inflation is important as well, but SPAC may become an unexpected fixed income investment.
Therefore, SPACs may have the potential to earn more than T-bills, a world of fixed income where even an extra 1% of yield can really matter. Moreover, there is still a chance that some of these SPAC deals will find an attractive deal for investors amid bearish market valuations for 2022. However, in 2022 the performance from SPAC deals was generally poor and many investors choose to redeem rather than embrace deals, which often He's doing poorly.
Repurchase tax involves risk
One recent unexpected risk for SPACs is the recent buyback tax, which as part of the Inflation Reduction Act charges the company 1% of the value of any buybacks beginning in January 2023. This law was not necessarily intended to tax SPAC When the money is returned, but some may have to pay it in light of current interpretations of the legislation. If so, the question is whether investors or sponsors bear the cost.
The buyback tax can dilute returns for those who view SPAC as a fixed income type investment. Here Klymochko realizes the uncertainty. He sees that some sponsors are getting ahead of this issue in their extension documents, and Cayman-based SPAC is not expected to be liable for the tax. However, it may be SPACs that are headquartered in Delaware.
However, former SPACs with more explicit investor protections in their S-1 filings, may be able to use cash that would have gone to investors to pay any repurchase tax. When you look at potential returns on cash, these details will be important.
Then, SPAC guarantees can also look interesting, as can speculative investments. These usually give the option to buy the stock at a fixed price after the deal happens, attracting a lot of potential upside if all goes well.
Of course, things did not go well and 2022 was a nightmare for SPAC guarantees, now an 83% discount since the beginning of the year. However, the average SPAC is trading as if there is an 80% chance that SPAC will not find a bargain on Klymochko's current valuation. That's low compared to history, so unless we see a massive wave of redemptions, which is possible, there could be some value in SPAC orders.
the end of prosperity
So it is clear that the plumber boom of the past years is over. However, SPACs may have an interesting setup as fixed income-like investments for those willing to dive into the details. There is even an argument that some SPAC orders may be priced conservatively, based on history, for the more adventurous investor. However, collateral can still drop to zero if no deal is found.
However, this indicates that we are in a bear market. SPACs showed some explosive growth in equity returns for certain deals only a few years ago, if only temporarily. Now SPACs may be better treated as a fixed income option by investors in the current environment. Times have changed.