What Is a SPAC and How It Can Generate You SPAC-tacular Returns
Oh yes, I went there and it was SPAC-tastic.
Real Talk
The Special Purpose Acquisition Corp is a great investment vehicle, provided you understand the basics and nuances of how they work. The number one key feature of the SPAC is risk management. Sure as an investment vehicle, SPACs are hot right now, everyone wants their SPAC 2x or 4x for them in a few months; however, the potential moonshot is not what makes them so great. The real takeaway is the limited downside. To capitalize on this you need to learn what to do and what not to do when investing in them. Primed with this knowledge and some helpful tips and it is my hope that you will be well on your way to scooping up shares in some great companies and generating some fantastic returns.
A quick disclaimer that refers to me in the third person:
Michael LaRocca is not a registered investment, legal, or tax advisor, or broker/dealer. All investment/financial opinions expressed by Michael LaRocca are from his personal research and experience and are intended as educational material only. It is important to do your own analysis and/or consult a professional before making any investment decisions. I have positions in the following securities, CLOV, IPOF, CCIV, and BTWN which are discussed below.
What is a SPAC?
A Special Purpose Acquisition Company (SPAC) is less what it does and more about its purpose. A SPAC does an IPO to raise money from investors. That money sits in a trust account while the management team searches for a company to combine with through a reverse merger. When the merger is complete the newly acquired company becomes a publicly listed company and receives the proceeds of the deal.
Once the money is raised and the SPAC begins trading it will usually have two years to strike a deal. If there is no deal at the time, then the shares will be redeemed for their NAV(Net Asset Value) which is normally $10. It’s important to note that any time leading up to the merger, shares can be sold on the market or redeemed for their Net Asset Value.
Units
At the time of IPO, a SPAC will usually only trade in Units and the pricing of those Units is usually $10 per Unit. Reviewing the S-1 will give an explanation of what a Unit consists of. For example, a Unit can consist of one share of common stock and 1/3 of a warrant to buy a share of common stock at $11.50.
Again it's important to read the S-1 because SPACs will structure their Units differently on a case by case basis. It will also explain in confusing English, the terms of the Warrants, which at times can be very nuanced.
In general, to not know something and assume about it is a recipe for disaster so read the S-1.
A lot of brokers do not sell Units or Warrants and you have to wait until the Units split to buy the common stock. This means that a large population of retail investors cannot participate on their broker until the commons begin trading. This meaning Units get you an early ticket to the party.
Brokers that I have bought Units or Warrants on…
- Fidelity
- Interactive Brokers (this is a personal referral link, I will only receive credit for the referral if accounts are held for a year with over a $10k balance.
Why I like em’ SPACs
- A chance for a great company.
- The offer price is affordable at $10 in contrast to some of the other high-flying IPO’s.
- Capped losses (pre-merger) as you can always redeem for NAV (usually $10) prior to the merger.
Why SPACs are meh sometimes
- Ties up capital for an extended period of time with the potential of no deal.
- The target could be a company you don’t want a piece in.
- Higher volatility around the news.
Now we can focus on what I believe is a bad idea when investing in SPACs and how you can better position yourself for success.
The #1 Big Don’t.
Don’t chase pre-target SPACs that are high above NAV.
Case — IPOF, CLOV, DGNR
Let me clarify by saying I own IPOF and I’m a big Chamath fan. I love the targets he’s picked up so far (Virgin Galactic, Opendoor, Clover, Sofi) and the future growth mindset he has when closing deals.
Let me also clarify by saying that I bought IPOF at $10.66 the second I found out the commons were trading (I didn’t have an Interactive Brokers account at the time and could only buy Units in my IRA, otherwise, yes I would have bought Units and I will for IPOG, IPOH, and absolutely 100% IPOO). IPOF is currently at $15.50 and I have an unrealized gain of 45%. It’s crazy to me that people are willing to pay a 55% premium to NAV. It clearly speaks volumes about people’s trust in Chamath to find a good target, but it also shows that a lot of people are exposing themselves to significant downside risk.
To connect the dots let’s look at CLOV which was IPOC’s target.
Pre-target IPOC was trading in the high $12’s on the hype of the deal. Post announcement IPOC tanked… over the course of a month, IPOC traded down to $10 and even slightly under $10. Had you bought at $12.50 because you were stoked, you are in the hole 20%. This isn’t the only case of this happening. DGNR was trading near $14.50 pre-target and is now trading at around $11.75 post-announcement.
Revisiting IPOF…
The risk of IPOF’s target not being a home run is 35%. In my opinion, 35% downside is a huge risk. Wait until the announcement. If it’s a killer target, shares will spike. If you want in, then buy shares on the pullback from the spike and be a long-term holder.
Other examples of this… CCIV (in “talks” with Lucid Motors), IPOD, BTWN.
It is a sad but true fact that sometimes you are just too late to the party. This is, truly, a huge bummer. After almost a year of quarantine when parties start happening again, it would be pretty sad to be too late to the party.
Consider the following do’s and hopefully you won’t be late. With the rising popularity of the SPAC things could get crazy out there.
The #1 Do… Get This Dog Some Units ASAP
Not all brokerages offer Units. This means that prior to the split and the commons trading, a large portion of retail investors do not have access to the securities.
Case: CCV.U
I picked up CCV.U (Units) for around $11.00, which to be honest, is a little high for me, but I decided to buy. The commons started on Feb 5th, meaning on that day retail traders were given access to buy the security on their brokers. With all the craziness involving CCIV and a potential merger with Lucid Motors, there was a lot of attention on Churchill Capital.
The retail demand drove up the price as soon as the commons hit the market. I could walk away from this with around 15% just for having access to Units.
Again, the takeaway here is buying Units, if you are not part of a brokerage that lets you do so, consider finding a brokerage that does because it will give you an edge.
This may seem like a unique case, but it’s becoming less so… especially for SPACs with teams that have a track record like Social Capital and Churchill Capital. You may find that the commons can often open for trading at a higher premium to NAV.
The other Do’s
Buy Good Management Teams
Focus on management teams with deal history and a positive track record. The Gores Group, Churchill Capital, and Social Capital as examples (there are lots more). Additionally, you could focus on management teams that have a lot of connections and direct experience/success in an industry that excites you.
Read the S-1
Find by searching for the company name or ticker on https://www.sec.gov/edgar/search/. This public disclosure will tell you the structure of the Units, founder shares, Warrants, etc. This stuff is important.
Do’s and Don’ts from SpacGuru
I thought I’d ping this guy for some pointers because he does some pretty solid research, due diligence, and shares his ideas. Give him a follow https://twitter.com/SpacGuru and enjoy his insights.
- Don’t go with SPACs under 100mm
- Avoid deals with rights
- Pursue SPACs with less dilutive warrant structures
- No SPACs run by a politician or SPACs pursuing a sports deal or cannabis company.
In Closing
These do’s and don’t have been helpful to me over the last half-year or so and I’m sure they will continue to be helpful for the next few months or so. What the landscape will look like in a few months? I really have no idea.
Protect what you have worked hard for and happy investing. :-)
Resources
Feel free to comment or DM me on Twitter if you have good resources and I’ll extend the list. Also, I’d like to create a section on this post for other people's top dos and don’ts. If you have been in the SPAC game and have some knowledge to share, please reach out.
