Special Purpose Acquisition Companies (SPACs) have a reputation for being risky, get-rich-quick gambles that never work in investors’ favor. And it’s not completely unqualified.
However, while that label may fit into some post-merger SPACs that are nothing more than speculative small/mid-cap companies resulting from a SPAC merger, that’s really only half of the story.
Pre-merger SPACs get very little press, but in my opinion, they provide the most attractive and asymmetric risk/reward opportunities in today’s fixed income market, allowing investors to see the fixed income nature of SPACs rather than their high-flying risk. capitalization is allowed. -Reward properties. Given the concerns and impact of rising rates, coupled with higher valuations and tighter spreads, the pre-merger SPAC should be adopted by advisors rather than intimidated, as they prepare their portfolios of clients for 2022.
Let’s start with the basics- SPAC is a company that has no commercial operations which is specially formed to raise funds through IPO so that it can acquire or merge a private company and make it public .
To do this, a group of sponsors seeks to raise capital by offering “units” to investors, typically at $10 each. Each entity consists of a common stock and a portion of warrants and/or rights. Money raised through an initial public offering is held in a trust account and typically invested in the U.S. Treasury—unless the trust proceeds are needed to fund the business merger.
Sponsors usually have 12 to 24 months to find and acquire their target company from the time they IPO. If they do not find a company in that time, SPAC is liquidated, and the proceeds of the trust account are distributed to SPAC’s common stock shareholders. If sponsors find and approve a deal, shareholders can participate by receiving equity in the new company (SPAC following a merger), or if they are not so excited about the deal or just want their money back. , they can choose to redeem their shares in cash from the Trust Account.
When considering the lifecycle of a SPAC, you need to look at it in two parts: 1) Pre-merger SPACs are fixed income instruments; and 2) the post-merger SPACs are 100% equity. Pre-merged SPACs should be viewed as fixed income instruments because they have a defined liquidation date (similar to the maturity date of a bond), with shareholders being fully or more collateralized by a trust account which is usually Invested in Treasuries, and in some bonds like a ‘put’ facility, shareholders of a pre-merged SPAC have the right to redeem their shares for cash from the trust account and put back to the sponsor.
To take advantage of the opportunity in a pre-merger SPAC, a client invests Only In the pre-merger SPAC trading at trust value or discounting trust value (similar to par value of bonds), there is no intention to proceed with the deal. If a SPAC announces a deal rather than speculate on the future of the newly combined company, the investor instead redeems their shares for cash in the trust account, no matter how lucrative the SPAC deal may be. As a bonus, if the market reacts favorably to an announced deal and the price of the SPAC rises, the investor can also always sell on the open market and realize his profit.
Given that SPAC shareholders typically have full redemption rights to their share of a trust account invested in U.S. Treasuries, the downside risks of pre-merger SPACs are fairly limited and present shareholders with potential equity.
SPAC absolutely can Are a risky/speculative investment, but they don’t have to be. Pre-merger SPAC, when handled correctly, can actually be one of the safest investments in a client’s portfolio. In today’s fixed income environment where clients can invest in a security with limited sensitivity to interest rates or credit risk, backed by a trust account, investors have a put facility/full redemption right for their share of the cash within the trust account. offers and gives them the opportunity to participate in the potential equity upside?
John Connor is Director of Strategic Relations at Crossingbridge Advisors, an investment management firm specializing in ultra-short and short-term strategies, including special purpose acquisition companies.
