Some investors find stability in PSPCs
The stocks of specialist acquisition companies have lost their luster to those who recently saw them as a get-rich-quick ticket. This is good news for another group of investors, who see them as an alternative to bonds.
While mania has helped increase the number of PSPCs to 6Â½ times what it was at the start of the Covid-19 pandemic, this year’s rout has driven stock prices down. This created what some describe as an almost risk-free opportunity that offers an attractive return over alternatives like short-term US treasury bills.
David Sherman, president and portfolio manager at CrossingBridge Advisors, is among those who have recently taken to the business, setting up an exchange-traded fund for it in September and allocating 15% to 20% to strategy across fixed income mutual funds that he manages.
The big reasons, he said: âFirst, the market has gone up. And then, the prices became attractive.
Here is how it works. A SPAC is a shell company that raises funds as part of a public offer to purchase shares and trades on the stock exchange for the sole purpose of merging with a private company and listing it on the stock market. Investors who buy shares in a SPAC before it merges with another company can still claim a proportional share of its cash when the SPAC seeks approval for its merger. They can do the same in the event of liquidation, after failing to reach an agreement within a specified time, usually two years or less.
In a typical PSPC initial public offering, investors pay $ 10 to buy a so-called unit, consisting of one common share and a fraction of a warrant that entitles them to buy more than one share. ‘shares at a specific price in the future. This $ 10 is placed in a trust, where it is invested in treasury bills.
Investors at this point are pretty much guaranteed at least the return offered by Treasuries for their $ 10. But to attract investors, PSPC sponsors sometimes put extra money into the company’s trust, say 20 cents for every $ 10 unit, promising an additional 2% cumulative return.
Common stocks also often trade for a discount before the PSPC announces a merger, so investors who buy them at those prices can ensure gains this way as well.
Shares sometimes exceed $ 10 when a deal is announced, in which case investors may sell for additional profit. Gores Guggenheim Inc shares.
, for example, once traded at $ 9.70, but climbed to $ 10.45 after the blank check company announced a deal last month to merge with Swedish electric vehicle maker Polestar. Investors can also increase their returns by selling warrants if they hold them.
Taken together, these factors make pre-merger PSPC stocks similar to short-term bonds, investors said, with the liquidation date serving as the maturity date and a return determined by the stock’s discount to the trust value.
PSPC arbitrage has been practiced on a small scale for years, investors said. Basic strategy was nearly impossible during the height of the PSPC frenzy, when average pre-merger PSPCs were trading well above their confidence value. But it has now reached new heights, attracting a range of investors including hedge funds, individual investors and even some fixed income mutual funds like those managed by Mr. Sherman.
The common stocks of 452 of the 469 target-seeking PSPCs were trading below their confidence value on Friday, according to SPAC Informer, an analysis site launched by Mr. Sherman. Among all SPACs looking for a target, the combined trust value of $ 135 billion, the weighted average return at liquidation was 1.71%, and the weighted average maturity was 1.3 years. Just over a hundred PSPCs offered a return of at least 2.25%.
By comparison, the two-year US Treasury bill returned around 0.32%, while a Bloomberg Barclays short-term corporate bond index fell 0.68%.
âIf you’re looking for cash alternatives, it’s 10 times better than what exists,â said Evan Ratner, president of Levin Capital Strategies, which runs a dedicated PSPC arbitrage fund.
There are drawbacks to the strategy. Pre-merger SPACs are more volatile than treasury bills, creating the risk of mark-to-market losses even though investors may eventually get their money back.
They also trade less often, making them an imperfect cash surrogate. And there is what Mr. Sherman considers a “chance in a million” that a SPAC could file for bankruptcy for whatever reason, perhaps after being sued by a service provider for fees, that is. which would lead to a struggle for assets.
The bigger question, however, might be how long the strategy can last. PSPC yields are already down from their summer highs as investor demand has stabilized. The volume of after-sales services could also drop sharply, as new monthly issues are currently only a fraction of what they were earlier in the year.
Still, investors are hopeful that the SPAC market can achieve a healthy equilibrium, with demand strong enough to support more shows than there was before the pandemic, but not enough for pre-merger SPACs to trade. again at a price higher than their trust value.
More WSJ Spac coverage
âAmrith Ramkumar contributed to this article.
Write to Sam Goldfarb at [email protected]
Copyright Â© 2021 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8