Trading <$11, pre-deal
Why Invest in SPACs?
Any investor/trader/speculator with half a brain has come across SPACs in the retail mania that was 2020 (and looks to be continuing in the first quarter of 2021 as well). Special Purpose Acquisition Companies are essentially cash shells- well known/celebrity operators like Chamath Palihapitiya or Michael Klein raise hundreds of millions of institutional investors and “hunt” for a private company to merge with to take public. Usually SPACs IPO at $10/share (equivalent to the cash on their balance sheet) and retail investors can buy on the brokerage of their choice. SPACs with high quality sponsors, or popular sector targets (e.g. electric vehicles/clean energy) get bid up 20-30% in anticipation of a promising deal being announced.
Even when paying a premium, most SPACs jump significantly upon announcing a deal. For example, ArcLight Clean Transition Corp. announced a deal with electric bus manufacturer Proterra, and nearly doubled, going from $11.95 to $22.41 (87% increase). VPC Impact Acquisition Holdings partnered with cryptoasset exchange Bakkt, and leapt 53%, from $10.45. Finding the right SPACs pre-target can be incredibly lucrative.
Are SPACs a Bubble?
You might have heard your favorite financial commentator observing “retail madness” or “Robinhood bros” bidding up SPACs and definitively concluding that a bubble is evident. They may or may not be right, but I’ll save my thoughts for a future post. For the SPACs I’m mentioning, I’m specifically mentioning those who have shares trading under $11, and pre any announced deal. Remember, most SPACs IPO at $10, and upon any deal announcement, investors can redeem their shares and get $10 back (per share) if they don’t like the announced target. And yes, pre-deal SPACs can trade under $10, which is basically free money. March/April 2020 was littered with these.
Warrants are another way to participate in SPACs, but contain more risk than just buying shares. I’ll save some ones I’m looking at for a future post.
With each SPAC, I’ll mentioned how much they raised, IPO date, current price, target sector, and leadership team. Here’s why each matters:
SPACs generally target companies 3-4x how much they raise in their IPO. So if they raised $200M, it’s likely they’ll try to acquire a company worth $600-800M. Research also shows that larger SPACs tend to perform better.
SPACs generally have 18-24 months to find a target. You can buy a SPAC right when it IPOs, but you might be waiting for a while for a deal (that’s okay!). As SPACs get closer to their deadline, urgency to find a target ramps up.
SPACs can technically merge with any private company, regardless of their sector(s) mentioned in their IPO filing, but most generally adhere to what they initially indicate, as it reflects the expertise of their management teams. Of course, some SPACs targeting cannabis companies pivoted to the electric vehicle industry (LIDAR targets), so something to be aware of.
Leadership provides some context for what a target could look like. For example, venture capitalists usually have an extensive existing portfolio, and former CEOs of public companies have made prior acquisitions.
Amount raised: $300M
IPO date: October 1, 2020
Current Price: $10.57
Target Sector: Leisure, gaming and hospitality
Leadership Team: Chairman Bradley Tusk, Chief Executive Officer Christian Goode and Chief Financial Officer Edward Farrell
Online gaming SPACs have been incredibly popular, and Bradley Tusk is uniquely positioned to bring a quality deal to market. From DraftKings ($DKNG) to Golden Nugget Online ($GNOG) to Rush Street Interactive ($RSI), they have traded significantly above their offering price as investors begin to price in widescale legalization since states across the country will be strapped for funding sources post COVID (similar tailwinds exist for cannabis as well). Tusk cut his teeth advising Mayor Bloomberg in New York City, and Uber in its early days, and Tusk Ventures specifically focused on funding companies in highly regulated industries. Goode is CEO of Ivory Gaming, and has raised over $2B for gaming related projects.
Amount raised: $345M
IPO date: October 27, 2020
Current Price: $11
Target Sector: Intersection of the healthcare and technology
Leadership Team: Peter Hebert and Josh Wolfe from Lux Capital, CEO is Josh DeFonzo
DeFonzo is a former COO at Auris Health (acquired by Johnson and Johnson for $6B), and Hebert and Wolfe are notorious for the ‘deeptech’ thesis that permeates their work at Lux Capital. Lux sold CTRL Labs (neural interface technology) to Facebook, saw Desktop Metal IPO (3-D printing $DM), and sold Zoox (autonomous vehicles) to Amazon. Some of their other investments include Rigetti Computing (quantum computing), Stacks (Internet 3.0) and Orbital Insight (satellites). Suffice to say, they’re uniquely positioned at the vanguard of health care and technology to find a target that truly can transform our broken system. Learn more about their thesis here.
Amount raised: $200M
IPO date: November 20, 2020
Current Price: $10.22
Target Sector: “Omnichannel” businesses—technology-enabled cross-channel retail and consumer services—including the direct-to-consumer/e-commerce retail, consumer healthcare, consumer marketplaces, consumer services, traditional brick-and-mortar retail and related sectors in North America.
Leadership Team: CEO Matt Higgins (Co-founder of RSE Ventures) and COO Austin Simon
The pandemic exposed businesses who were surviving through brick and mortar means exclusively, and forced everyone from restaurants to sports to figure out digital strategies to continue reaching customers. Higgins’ SPAC is uniquely positioned to shepherd companies making this transition, and at RSE he has invested a panoply of consumer facing brands, from June (smart ovens) and Magic Spoon (low carb cereal), and David Chang’s Momofuku and Gary Vaynerchuk’s digital agency. Similar to Lux, he frequently finds himself ahead of the curve, and should find an exciting target.
As always, do your own research!