SPACs have historically been marketed and sensationalized by the financial media as a way for retail investors to participate in the next Tesla or Amazon IPO.1 While exciting to talk about, what if I told you that’s not how hedge funds, institutional investors and ultra-high net worth individuals invest or view SPACs?
From a risk versus return standpoint, the best time to invest in SPACs is prior to any merger announcement, especially if shares can be purchased, as they can today, below redemption value. That’s right, pre-merger SPACs have a redemption value and a maturity date—they look and act like bonds because that is the definition of a debt obligation. Pre-merger SPAC investors who are able to buy shares at a discount to trust value, can often capture a very attractive, relatively risk-free return given the ability to redeem shares at trust value, all while having equity-like upside if an attractive merger target is announced. We believe the recent weakness in SPACs has set up an incredible entry point for any investor looking for an alternative yield or absolute return strategy. This opportunity has gotten the attention of mainstream media as evidenced by recent articles in both the WSJ and Barron’s.
Potential Benefits of Pre-Merger SPACs
Minimal Credit or Interest Rate Risk – SPACs are required by prospectus to place the proceeds of their IPO into a trust that can only invest in T-Bills and Treasury Money Market vehicles.
Highly Competitive Yields – the pre-merger SPAC universe is currently trading at a yield to redemption (i.e. yield-to-worst)1 of 2.4%--the overall taxable bond market has a yield of 1.4% (Barclays Aggregate Bond Index), and much greater credit and interest rate risk.2
Upside Potential – any merger announcement shortens the period in which the pre-merger SPAC investor will earn back the discount at which the shares were acquired; and, an attractive merger announcement could provide equity-like returns.
1The fund does not hold any of the securities referenced as of 9/30.
2Yield to worst is a measure of the lowest possible yield that can be received on a bond with an early retirement provision (Investopedia).
Robinson Capital serves as investment sub-adviser to the Robinson Alternative Yield Pre-Merger SPAC ETF (ticker: SPAX), the only SPAC ETF that requires by prospectus an exit prior to the completion of a merger. SPAX is an actively managed exchange-traded fund (ETF) that invests in pre-merger SPACs. SPAX seeks to provide total return while minimizing downside risk. Robinson Capital intends to sell or redeem all SPAC investments in the SPAX portfolio prior to completed business combinations.
Jon Browne is the Portfolio Manager and member of the investment management team at Robinson Capital. He jointly oversees the day-to-day management of the Robinson Funds, including its investment strategies and processes, risk management, regulatory compliance, asset allocation modeling, external manager due diligence and selection, and trading. He is also responsible for overseeing the continued growth and advancement of the firm’s CEF and SPAC research efforts, which includes managing Robinson Capital’s proprietary valuation systems.