Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
desertgoose
Posts: 38
Joined: Sat Jan 14, 2012 3:32 pm

Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by desertgoose »

Is anyone else investing in SPACs (special purpose acquisition companies)? Previous threads (here and here) were pretty light on content.

These are “blank check” companies that IPO with no operations, instead intending to acquire a company in the next 12-24 months. In general, they IPO at $10/share, and generally fluctuate around that level until an acquisition is announced. Prior to the acquisition, shareholders have the option to be redeemed and receive their proportional share of the SPAC’s net asset value (which is generally around $10/share, as the IPO proceeds are invested in Treasuries and operating expenses are covered by the SPAC’s sponsor). Thus, the downside (prior to the business combination) is limited given the redemption rights, but upside remains given potential market optimism about the acquisition.

The biggest downside is opportunity cost, as you are invested but won’t receive equity market returns. But I’m viewing this as an alternative to my non-emergency fund cash allocation. Given where interest rates are now, that opportunity cost is almost non-existent. (And as a SPAC investor, you get the benefit of the interest earned on the IPO proceeds, though that is also minimal.)

Given the minimal downside (prior to business combination) due to the redemption rights, and potential upside, this seems like a great alternative to holding cash. But I’m a believer that there aren’t many free lunches, so I’m wondering if I’m missing something. Are there any additional risks that I'm not considering?
random_walker_77
Posts: 1169
Joined: Tue May 21, 2013 8:49 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by random_walker_77 »

desertgoose wrote: Wed Sep 02, 2020 10:12 am I’m viewing this as an alternative to my non-emergency fund cash allocation...as a SPAC investor, you get the benefit of the interest earned on the IPO proceeds...Given the minimal downside (prior to business combination) due to the redemption rights, and potential upside, this seems like a great alternative to holding cash. But I’m a believer that there aren’t many free lunches, so I’m wondering if I’m missing something. Are there any additional risks that I'm not considering?
This doesn't make sense to me. This is a company gathering funds for an acquisition. Yes, there might be an option to change your mind and get out before the acquisition, but they're presumably counting on this capital to fund the acquisition. Prior to the acquisition, presumably your returns will be minus expenses pertaining to the SPAC's overhead (they've got to be paying people to identify targets and do due diligence)?

How do you make sure you get out before the acquisition? They guarantee a redemption, but at what price? You seem to think you'll get 100% of your money back. There's probably some risk there. Would you be ok if they only give you 90% of your money back?

How liquid are shares in the the SPAC before the acquisition? Do they tend to fluctuate a little below that initial $10?

How liquid are you after the acquisition?

When you say "potential upside," are you thinking that the SPAC immediately gets more valuable when it acquires a company? What is it going to try to acquire? Are these startups with a 90% chance of failing?

On a scale of 1 to 10, with 10 being the most risky, total stock market being a 7, and a federal money market being a 1, where do you think this SPAC sits? To me, this sounds like a 10, but you're talking about this as an alternative to holding cash, which sits at the other end of the risk scale...
annu
Posts: 805
Joined: Mon Nov 04, 2019 7:55 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by annu »

I did on a hunch, bought into SHLL, have made more than I lost this year doing ETF and funds, but not planning on doing anymore, current investment is very hype based, and was luck to be right this time around.
RickyAZ
Posts: 44
Joined: Sun Dec 08, 2019 6:27 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by RickyAZ »

They are just shell companies until they do the merger with a previously private company, the price lingers right around $10. They are probably slightly less risky than your average IPO since the targets are usually pre-existing businesses with existing cash flows, definitely a cheaper process than an ipo. Bought some Draftkings early so that worked out, have a couple of others that have announced targets but not closed yet so no idea if they'll pay out. These belong in your fun money account. I'm sure it'll end in fraud and tears down the road so you'll want to make sure the target business is something that has potential. Cheers

Edit: the SPAC itself is already a public company, so it's as liquid as any small cap. The pop occurs when the target is announced and then again when it closes (and starts trading under the target name).
paisano
Posts: 32
Joined: Sun Nov 30, 2014 9:44 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by paisano »

FINRA Regulatory Notice 08-54 Guidance on Special Purpose Acquisition Companies discusses the risks and potential benefits throughout the life cycle of a SPAC.

Ed Thorpe's book A Man for All Markets describes SPACs as one of his favorites. Like closed-end funds, they sometimes trade at large discounts, which is a good bargain for a basket of US Treasuries. Occasionally one will do a deal that sends the warrant price soaring (e.g., Nikola). https://accelerateshares.com/blog/the-a ... -arbitrage/shows the discounts or premiums as of May 2020.
Topic Author
desertgoose
Posts: 38
Joined: Sat Jan 14, 2012 3:32 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by desertgoose »

random_walker_77 wrote: Wed Sep 02, 2020 10:47 am This doesn't make sense to me. This is a company gathering funds for an acquisition. Yes, there might be an option to change your mind and get out before the acquisition, but they're presumably counting on this capital to fund the acquisition.
That is certainly a risk for the company that wants to be acquired by the SPAC, but the business combinations are usually conducted in tandem with a PIPE (private investment in public equity) in order to raise additional funds for the acquisition.
random_walker_77 wrote: Wed Sep 02, 2020 10:47 am Prior to the acquisition, presumably your returns will be minus expenses pertaining to the SPAC's overhead (they've got to be paying people to identify targets and do due diligence)?
My understanding is operating expense are funded by the SPAC sponsor. In exchange, they get founders shares and warrants. IPO proceeds are placed in a trust and are not released to management until the acquisition closes. But tell me if I'm wrong.
random_walker_77 wrote: Wed Sep 02, 2020 10:47 am How do you make sure you get out before the acquisition?
You respond to the tender offer they send you.
random_walker_77 wrote: Wed Sep 02, 2020 10:47 am They guarantee a redemption, but at what price? You seem to think you'll get 100% of your money back. There's probably some risk there. Would you be ok if they only give you 90% of your money back?
My understanding is your pro rata portion of the assets held in trust, which are invested in short-term Treasuries or money market funds. So unless there is fraud, I'm not sure why your redemption price would be materially lower than the $10/share.
random_walker_77 wrote: Wed Sep 02, 2020 10:47 am How liquid are shares in the the SPAC before the acquisition? Do they tend to fluctuate a little below that initial $10?
The ones that I've seen have generally been $10+/-. I don't think I've seen one trade at less than $9.90. But would love if someone knows of a SPAC that traded materially below it's IPO price prior to the redemption period.
random_walker_77 wrote: Wed Sep 02, 2020 10:47 am How liquid are you after the acquisition?
After the acquisition you are holding a single name equity security, and face the associated risks. I'm talking about owning SPACs prior to the business combination.
random_walker_77 wrote: Wed Sep 02, 2020 10:47 am When you say "potential upside," are you thinking that the SPAC immediately gets more valuable when it acquires a company? What is it going to try to acquire? Are these startups with a 90% chance of failing?
Yeah, if the market "likes" the transaction, you can get a big pop (e.g., SHLL).
random_walker_77 wrote: Wed Sep 02, 2020 10:47 am On a scale of 1 to 10, with 10 being the most risky, total stock market being a 7, and a federal money market being a 1, where do you think this SPAC sits? To me, this sounds like a 10, but you're talking about this as an alternative to holding cash, which sits at the other end of the risk scale...
Like a 2-3? Basically a claim on short-term Treasuries or money market securities but with some extra steps (like remembering to redeem or sell prior to the business combination). But again, would love for someone knowledgeable to tell me where I'm wrong.
Topic Author
desertgoose
Posts: 38
Joined: Sat Jan 14, 2012 3:32 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by desertgoose »

paisano wrote: Wed Sep 02, 2020 11:35 pm FINRA Regulatory Notice 08-54 Guidance on Special Purpose Acquisition Companies discusses the risks and potential benefits throughout the life cycle of a SPAC.

Ed Thorpe's book A Man for All Markets describes SPACs as one of his favorites. Like closed-end funds, they sometimes trade at large discounts, which is a good bargain for a basket of US Treasuries. Occasionally one will do a deal that sends the warrant price soaring (e.g., Nikola). https://accelerateshares.com/blog/the-a ... -arbitrage/shows the discounts or premiums as of May 2020.
Very helpful content, thanks!
Xrayman69
Posts: 582
Joined: Fri Jun 01, 2018 8:52 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by Xrayman69 »

Where does one go to invest in a SPAC. Bill Ackman and pershing square started a SPAC (PSTH) but i cant seem to find how to invest.
GreenLantern2814
Posts: 9
Joined: Wed May 27, 2020 9:37 pm
Location: SoCal

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by GreenLantern2814 »

Xrayman69 wrote: Fri Sep 04, 2020 7:05 pm Where does one go to invest in a SPAC. Bill Ackman and pershing square started a SPAC (PSTH) but i cant seem to find how to invest.
It's publicly traded: https://finance.yahoo.com/quote/PSTH-UN/
annu
Posts: 805
Joined: Mon Nov 04, 2019 7:55 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by annu »

GreenLantern2814 wrote: Fri Sep 04, 2020 10:15 pm
Xrayman69 wrote: Fri Sep 04, 2020 7:05 pm Where does one go to invest in a SPAC. Bill Ackman and pershing square started a SPAC (PSTH) but i cant seem to find how to invest.
It's publicly traded: https://finance.yahoo.com/quote/PSTH-UN/
Looks like cant buy on robinhood....has anyone been able to verify where you can buy?
GreenLantern2814
Posts: 9
Joined: Wed May 27, 2020 9:37 pm
Location: SoCal

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by GreenLantern2814 »

annu wrote: Fri Sep 04, 2020 11:39 pm Looks like cant buy on robinhood....has anyone been able to verify where you can buy?
First Trade, ETrade, Schwab.

(Translation: Real brokerages.)

(Disclaimer: I use Robinhood, too.)
Xrayman69
Posts: 582
Joined: Fri Jun 01, 2018 8:52 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by Xrayman69 »

GreenLantern2814 wrote: Fri Sep 04, 2020 10:15 pm
Xrayman69 wrote: Fri Sep 04, 2020 7:05 pm Where does one go to invest in a SPAC. Bill Ackman and pershing square started a SPAC (PSTH) but i cant seem to find how to invest.
It's publicly traded: https://finance.yahoo.com/quote/PSTH-UN/
Ah yes. I didn’t put the “-UH”.
unbiased
Posts: 52
Joined: Sat Apr 25, 2020 5:46 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by unbiased »

Helpful link to the FINRA document. I made a small investment in Ackman's Pershing but mostly as a low capital experiment. Really just putting blind faith in management for an investment like this since very little other information becomes known until the target is announced.
unbiased
Posts: 52
Joined: Sat Apr 25, 2020 5:46 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by unbiased »

Ackman's company split today common vs. warrants. Anyone decide whether they want to purchase the warrants or the common? Somewhat hard to get information outside the press release. https://pstontine.com/wp-content/upload ... ration.pdf
barros
Posts: 11
Joined: Tue Oct 23, 2018 8:42 am

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by barros »

unbiased wrote: Fri Sep 11, 2020 12:43 pm Ackman's company split today common vs. warrants. Anyone decide whether they want to purchase the warrants or the common? Somewhat hard to get information outside the press release. https://pstontine.com/wp-content/upload ... ration.pdf
I had a few hundred dollars laying around in one of my accounts that I was willing to throw away (long story, but it’s a meaningless amount compared to my 3 fund portfolio) and I did buy the units a few days ago. I confess I did zero research I just knew it’s the biggest SPAC out there, I didn’t even know it would split. That being said, it did split today and I sold all the A shares and bought it all in warrants.
unbiased
Posts: 52
Joined: Sat Apr 25, 2020 5:46 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by unbiased »

barros wrote: Sat Sep 12, 2020 1:17 am
I had a few hundred dollars laying around in one of my accounts that I was willing to throw away (long story, but it’s a meaningless amount compared to my 3 fund portfolio) and I did buy the units a few days ago. I confess I did zero research I just knew it’s the biggest SPAC out there, I didn’t even know it would split. That being said, it did split today and I sold all the A shares and bought it all in warrants.
Pretty much same here. Small amount in my "aggressive" account that is money I can afford to lose. This was a good read: https://spacinsider.com/2020/06/23/pers ... -3bn-spac/

A lot to learn here to get the best "deal" from this investment. I'll try to keep this thread alive so we can all learn together.
paisano
Posts: 32
Joined: Sun Nov 30, 2014 9:44 pm

Re: Anyone Else Investing in SPACs (Special Purpose Acquisition Companies)?

Post by paisano »

You can see a SPAC in action today (2020-09-15).

IPOB (Social Capital Hedosophia II) was funded with 36 million units sold to the public and 5.4 million units sold to underwriters (who exercised an option), raising $360+54 = $414 million. Each unit contains 1 share of Class A stock and 1/3rd of a warrant to purchase a share at $11.50; the stock and warrant are now trading separately alongside the units.

They announced a deal for Opendoor, using $414 M from the SPAC + $600 M extra "private investment in public equity (PIPE)" funding. The first day's market response is:
  • IPOB stock up from $13.05 to $17.56 (+34.56%) (was $10.73 in August)
  • IPOB-WT warrants up from $4.01 to $5.37 (+33.92%) (was $2.75 in August) ($17.56 - $11.50 = $6.06)
  • IPOB-UN units (1 stock + 1/3 warrant) up from $14.19 to $19.14 (+34.88%) (was $11.60 in August)
IPOC, another SPAC by that sponsor, rose on the news despite not being part of the deal.
Post Reply