Over the last few years, we have witnessed the creation a whole new playground for value investors, distressed securities specialists, and—more recently—private equity funds. I’m talking about…
SPACs. These special purpose acquisition companies (SPACs) were all the rage in 2020 and 2021. Everyone touted them as pre-IPO shares, and wild-eyed speculators engorged with meme stock profits piled into them. They were betting on announced combinations with companies with stardust in their eyes and several zeros in their bank account.
That didn’t work out well for investors. Today, most SPACs, whether new or old, are deep in the red. Most of them deserve it.
But this SPAC “orphan” is a screaming buy right now…
During the heyday of SPACs over the last two years, we saw the creation of SPACs aimed at electric vehicles, miracle drugs, commercial space flight, quantum computing, and just about anything and everything else underwriters and operators could dream of selling to the investing public.
Because of a loose regulatory environment, some of the SPACs’ revenue and profit calculations were a tad aggressive.
Those who understood that SPAC trading is an arbitrage game played it the right way and made an enormous amount of money selling shares and warrants back to speculators who dreamed of huge gains in short time periods.
Now, retail investors can rarely buy shares in a SPAC right at the IPO because the fixed-income arbitrage shops and private equity firms take all the shares. They either redeem the shares for a small profit or sell the pop on a well-received business combination announcement.
But arbitrage shops like Saba Capital, Bulldog Investors, and Guggenheim Capital hoovered in cash during the SPAC IPO boom. Almost all of them are still actively trading SPAC arbitrage. Private equity firms like Apollo (APO), Blackstone (BX), and KKR (KKR) also figured out they could play the SPAC arbitrage game and add excess returns to their portfolios as well.
Most deals included warrants along with shares. The arbitrage players either sold them to increase the fixed income-like return or redeemed the stock and kept the warrants with a zero-cost basis.
We will do an in-depth review of SPAC arbitrage at some other point in time. The most important thing to understand today is that once the SPAC merges with its target and the business combination closes, the underwriters, the arbitrage shops, and most of the private equity players are done with the SPAC.
Wall Street has pocketed its gains and walked away, singing a happy song. Individual investors who bet on hopes and dreams, however, did not fare as well.
Many of these businesses had no business becoming public companies. Some had good ideas but were years away from having a viable business. Others were just garbage companies exploiting the SPAC craze to line their pockets.
The price of many SPACs headed south quicker than a…
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