Back in July, Goldman Sachs’ Portfolio Strategy Research desk put out a note looking at SPAC performance post-deal announcement. Their study has been referenced many times in the financial media, usually with an ominous tone. The quote below has been cited more than once:
During the 1-month and 3-month periods following the acquisition announcement, the average SPAC outperformed the S&P 500 by 1 percentage point (pp) and 11 pp, respectively, and beat the Russell 2000 by 6 pp and 15 pp, respectively. However, the average SPAC underperformed both indexes during the 3, 6, and 12-months after the merger completion. The performance distribution is extremely wide, with the 75th percentile SPAC outperforming the S&P 500 by 22 pp while the 25th percentile transaction lagged by 69 pp. The comparable returns vs. Russell 2000 were +37 pp and -63 pp.
Long-time readers of this newsletter are aware of our crusade against the way journalists have often treated SPACs, superficially comparing every deal against a $10 cash in trust benchmark and ignoring factors that differentiate each deal. The excerpt above fits right into that pattern. In our view, it’s irresponsible to take a simple average across all deals without controlling for factors like size and public shareholder redemptions.
Take Bison Capital Acquisition (BCAC), a $60mm SPAC that redeemed 99.8% of its public shares when it acquired a Chinese pharmaceutical company last year. The 13,811 public shares that remained in the deal traded down to $1.50 for a net loss to remaining public shareholders of just over $100,000.
The Goldman analysis above gives that deal an equal weighting as it does the Diamond Eagle Acquisition Corp. (DEAC) acquisition of DraftKings from April of this year. That deal saw all 40mm public shares remain in the deal, each of which traded up from $10 to over $55 as of this writing, an increase in value to public shareholders of over $1.8bn.
To be clear, we don’t provide investment advice, and nobody is suggesting replacing a portfolio allocation to US small-cap companies with an equal-weight basket of all former SPACs. But any lens that treats all deSPACs equally will fail to see the way that almost all of the capital invested in SPACs has viewed the product.
Much to sponsors’ chagrin, the majority of investors have historically been yield-seeking, rather than fundamental in nature. This makes a sponsor’s task extremely challenging — if the sponsor doesn’t find a buyer for public shares, those shares are extremely likely to just take their cash back.
We’ve explored numerous factors correlated with deal success in the past. But the number of public redemptions may be the strongest correlation of all. Below, we plotted all the closed SPAC deals since 2016, with the number of public shares that were redeemed during each SPAC’s life against the newco’s current stock price:
We should be careful not to give public shareholders too much credit. After all, the easiest way for a SPAC to ensure near-zero redemptions is to be appealing enough for its common stock to trade at a material premium to trust at the time of the deal’s approval meeting. If the common is at $12, any rational shareholder who doesn’t like the newco will sell into the open market rather than redeem for cash.
But the cluster of deals in the lower left corner of the chart above is composed of companies with little or no public float. Taking a simple average of the performance of the entire group is hopelessly reductive.
So what’s a better way to measure aggregate performance? Below, we’ve plotted the same set of deals, with the public float at deal closing on the x-axis.
You can see again that the underperformers are concentrated in the lower left, and the average underperformer had few public shares outstanding. Meanwhile the deals that have traded well have mostly done so with larger share counts.
That’s not to say the median outcome has been successful, as you can see in the histogram below.
But the median outcome is irrelevant. What’s important is that SPACs can be a great way to go public and deliver a successful outcome for all parties. And nobody’s using an investment strategy of allocating to every single closed SPAC deal.
The natural next question is: how have unredeemed public shares done in the aggregate?
We took the P&L on each SPAC’s public shares since deal closing and added it all together. Below you can see the results by year:
Recent results have been spectacular, as shareholders that held onto companies like DraftKings, Virgin Galactic (NYSE: SPCE), Clarivate (NYSE: CCC), Vertiv (NYSE: VRT), Nikola (NASDAQ: NKLA), Utz (NYSE: UTZ) and Immunovant (NASDAQ: IMVT) have seen tremendous gains. Closed deals from 2018 were a huge drag on the overall results, due largely to the energy sector. In fact Alta Mesa Resources (OTC: AMRQQ) is responsible for over $1bn of public shareholder losses alone.
Of course the P&L by year isn’t that meaningful without knowing the amount of principal invested (that is – the amount of unredeemed trust account capital). Those results are shown below.
Putting the two charts above together, you can see the change in value of unredeemed SPAC public shares by deal closing year. For clarity, this year’s $3.489bn of unredeemed trust accounts have appreciated in value by $3.081bn, for an increase of 88.3%.
It’s a bit overwhelming to see just how many of 2020’s closed deals have traded up. And these results don’t even include any of the 40 pending deals, the vast majority of which are trading above cash in trust!
This year’s closed deals are pretty recent and insiders are generally still under lockups, so we should be careful not to assume things will look this rosy forever. If we’re looking for reasons to be cautious, we should also spend a minute on how nearly half the pending deals are being valued on a multiple of future revenues (rather than a multiple of EBITDA). Superficially it seems like any deal in electric vehicles or online gambling has been a winner even if the company is entirely pre-revenue. We live in a low-growth, zero-interest rate world. For better or for worse, the public obviously wants access to this kind of deal flow. If SPACs used to be publicly traded private equity, this year they’ve turned into publicly traded venture capital. And the market can’t get enough of it.