Social Capital Hedosophia Holdings Corp. CEO, Founder and Chairman Chamath Palihapitiya, left, rang … [+]
From 2019 into 2021 certain SPACs were among the hottest investments, looking to bring appealing, elusive growth companies to market and rewarding their sponsors handsomely in the process. However, unfortunately for many SPACs, performance for investors after finding a deal was poor.
Now in 2022, as growth investments are out of favor in a bear market. Social Capital, which were an early champion of the SPAC trend expecting them to replace the IPO have announced plans to “wind down” two SPACs. Of course, it’s worth noting that IPO activity has fallen dramatically in 2022 as well.
However, despite the broad pessimism, SPACs may now provide a return to investors. Just not the one sponsors were expecting. SPACs may arguably stack-up relatively well as a short-duration fixed income assets.
Appealing Short-Term Yields
Juliam Klymochko, Portfolio Manager of the Accelerate Arbitrage Fund, which owns over 200 SPACs, explains how this works. Today “98% of SPACs are trading below cash in trust” he says. This means an investor can essentially hold $10 of value for $9.84, on Klymochko’s current calculations for the average SPAC.
Then regardless of whether a SPAC liquidates or votes on a deal or votes to extend, you should have an option to redeem and receive the value held in trust. Of course, a 1.6% discount may not seem too enticing, especially if a SPAC has many months until a redemption opportunity.
However, the recent moves in interest rates create the potential opportunity. Rates on Treasury Bills, where most SPACs invest their cash, have risen substantially, currently paying around 4% for a 1-year Treasury Bill.
This means that the SPAC’s value may grow beyond the initial $10 value as they look for deals and receive interest while they wait. You may receive a discount today on an investment yielding around 4%. Of course, there’s more complexity here than with other fixed income investments, and your view on the path for inflation matters too, but SPACs may be becoming an unexpected fixed income-like investment.
So SPACs may have the potential to earn more than Treasury bills, a fixed income world where even an extra 1% of return can really matter. Furthermore, there’s still the chance that some of these SPAC find an appealing deal for investors amid the bear market valuations of 2022. However, in 2022 performance from SPAC …….