Understanding SPACs’ returns With only a few exceptions, SPACs tend to reward buy-and-hold investors at a lower rate than the markets overall. Three-Month
Six-Month
12-Month
ALL
HQ
NO N-H Q
AL L
HQ
NO N-H Q
ALL
HQ
N ON -HQ
Mean Return
-2.9%
31.5%
-38.8%
-12.3%
15.8%
-37.6%
-34.9%
-6.0%
-57.3%
Median Return
-14.5%
-4.6%
-46.9%
-23.8%
-15.9%
-43.0%
-65.3%
-34.6%
-66.3%
Mean Return (Excess over IPO Index)
-13.1%
25.1%
-53.0%
-33.0%
0.4%
-63.1%
-47.1%
-11.8%
-74.6%
Median Return (Excess over IPO Index)
-32.8%
7.1%
-52.1%
-43.2%
-31.0%
-56.3%
-56.5%
-54.8%
-89.9%
Mean Return (Excess over Russell 2000)
-1.3%
37.5%
-41.9%
-10.9%
22.5%
-41.0%
-21.5%
9.7%
-45.7%
Median Return (Excess over Russell 2000)
-16.1%
16.9%
-47.2%
-17.5%
-2.4%
-57.0%
-44.9%
-36.3%
-55.0%
N SPACs
47
24
23
38
18
20
16
7
9
from public markets because of better returns in private equity. After a decade of intense private-equity activity, SPACs are a quick way for private equity to exit monetize assets. The influx of cheap capital and unforeseen levels of fiscal stimulus have curated ample conditions to bring companies public. And after the WeWork IPO debacle, it’s easy to see why Silicon Valley unicorns prefer to go public through SPACs instead of IPOs. In just one month, the value of WeWork plunged from $47 billion to $10 billion, and the IPO was delayed indefinitely. Recent changes With the Securities and Exchange Commission bringing greater scrutiny to SPACs these days, regulators have, in a sense, legitimized them as an investment vehicle. After all, as recently as 2015, Goldman Sachs prohibited investments in SPACs. Now, it has two SPACs of its own.
As private equity investors have exited their positions, the SPAC process is proving more efficient over time. From 2003 to 2015, at least 20% of SPACs were liquidated as a result of the principal failing to find a company to acquire. In 2020, less than 10% of SPACs were liquidated. But just because SPACs are popular doesn’t mean they’re the most efficient place to put capital. The Harvard Law School Forum on Corporate Governance published a study, A Sober Look at SPACs, in November 2020. The authors dissected the return profiles of SPACs, and the results weren’t friendly: • Although SPACs issue shares for roughly $10 and value their shares at $10 when they merge, by the time of the merger the median SPAC holds cash of just $6.67 per share. • The dilution embedded in SPACs constitutes a cost roughly twice as high as the cost generally attributed to SPACs,
L ESS T H A N 10 % O F S PACS W ER E LIQU IDAT ED LAST YEAR A F T E R FA I L I N G TO F I N D A CO M PANY TO ACQU IR E.
even by SPAC skeptics. • When commentators say SPACs are a cheap way to go public, they’re right, but only because SPAC investors are bearing the cost, which makes for an unsustainable situation. • Although some SPACs with high-quality sponsors do better than others, SPAC investors who hold shares at the time of a SPAC’s merger see post-merger share prices drop on average by a third or more. In fact, three-month, six-month and 12-month returns for both “high quality” and “non-high quality” SPACs are disappointing nearly everywhere one looks. Some observers even call SPACs a bubble, and perhaps that’s true. It’s the inherent irrationality of investor behavior that gives the bubble characterization some credence. After all, 2021 has been a banner year for SPACs, even though, historically speaking, SPACs underperform the market. As always, buyer beware. Christopher Vecchio, CFA, is a senior currency strategist for IG Group’s DailyFX, a commodities, equities and forex research firm. @cvecchiofx
May 2021 | Luckbox
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