Over the past 12 months the SPAC market has gone through a dramatic transformation, and, as a result, investors are looking to new strategies to maximize returns.
Let’s break down where investors are seeing opportunity across the various areas of investment in the SPAC market.
Sponsor Capital
Previously, the highest return investment was investing in a SPAC’s sponsorship. This investment was generally at an effective price of $2.50 to $3.33/share on a $10 SPAC IPO. If a SPAC performed well and the stock went to $12 or $14 per share, the investor had a dramatic gain. There were some cases where the stock would shoot up to $30+ per share or even higher. Today, we don’t often see the same kind of dramatic pop post-SPAC merger. Additionally, there are more SPACs liquidating, thus increasing the risk associated with sponsorship investing.
That being said, investing with the right team can still garner an investor high returns. We always recommend investors spread their capital allocated to SPAC sponsor investments across a number of sponsors, further de-risking the investment.
Public Shares
Prior to the SPAC market shift in mid-2021, investing in the publicly listed shares of a SPAC could provide good upside for investors. When a business combination was announced, the SPAC’s shares typically had a big bump, e.g. going from around $10/share to $12, $13, or higher.
Today, that type of bump on a business combination announcement is very rare. This is due to a number of factors, including a higher number of deals announced that subsequently terminate, poor performance of many targets post-close, and uncertainty of PIPE and deal structure on the business combination announcement.
So, where is the opportunity in investing in the SPAC’s public shares?
The publicly listed shares of a SPAC remain a virtually riskless investment due to the fact that the proceeds are placed in a trust and each investor has the option to redeem if they do not wish to roll their equity into the new company. SPAC prices tend to trade at a discount to trust value at close/liquidation so the price tends to appreciate over time. While returns using this strategy are likely in the low single digits, this strategy is the least risky way of investing in the SPAC structure.
PIPEs
Investing in a SPAC’s PIPE used to mean purchasing common stock at a slight discount to the redemption value or common stock with warrants. Today, SPAC PIPE investment looks very different. PIPEs tend to be far more structured instruments with significant downside or other protections. These are some recent PIPE structures we’ve seen and/or used for our clients:
- Preferred shares with 12% coupon
- Preferred shares with redeemable warrants covering 50% of the investment
- Preferred shares redeemable at 24 months post-business combination at $10/share
- Senior notes with current pay 12% interest and put-able warrants; and
- Senior notes with current pay 12% interest and contingent value rights.
As you can see, PIPE structures tend to be far more investor-rich than in previous years. With the right structure, investors can realize very high returns.
Bridges
Bridge financings for SPAC targets are a relatively new investment opportunity for SPAC investors. As companies go through the SPAC merger process, many need additional cash to finance the costs of the process or to maintain their growth.
Bridge financings can be structured in various manners but investors are typically repaid in whole or in part at the close of the business combination, making this a relatively short term investment. These tend to be some of the most lucrative investments today in the SPAC market due to their short time frame and high return.
Extension Financing
If a SPAC nears its deadline and requires more time, the team is generally required to add additional capital into the trust account of the SPAC to incentivize investors not to redeem. Many SPACs also need additional working capital to complete their acquisition.
Some SPACs look to outside sources to provide this capital. The returns tend to be high, 100% – 300%. The risk with extension financing is that in the event the SPAC is unable to consummate a business combination and has to liquidate, the investor has little ability to recover their investment. That’s why extension financing is typically provided to SPACs that have signed deals and a clear pathway to close.
Warrants and Rights
At the current state of the SPAC market, it’s difficult to determine whether investing in SPAC warrants and rights will be a fruitful investment strategy. While warrants are currently priced very low pre-DeSPAC, in the event that the SPAC liquidates, both warrants and rights are worthless. Unlike the common stock shares of a SPAC that are backed by cash in the trust account, warrants and rights only have value if a SPAC closes a deal.
The foregoing is provided for informational purposes only and shall not constitute investment advice.
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