If you are the sort of sailor who knows the difference between a yawl and ketch and yet also how similar they are, then you know that buyout funds and SPACs are similar vessels – but not quite. Buyout funds, like many other closed end funds, are the realm of large institutional investors and ultra-high net worth whales.
The performance of buyout funds is analyzed over years of deployment and exits. It factors in mark-to-market returns for illiquid securities and cash returns for realized exits. There are complexities around exchange rates over time, financing structures with varying levels of profit waterfalls, ESOPs, taxation subject to TRAs and NOLs, and fees subject to hurdle rates and clawbacks. This alphabet soup is familiar to (most) PE investors but induces eye rolls, yawns or angry howls depending on the audience.
On the other hand, SPACs are publicly listed companies that make acquisitions using a mix of cash and listed stock. Their performance is publicly measured tick-by-tick on the world’s largest stock exchanges. Their shareholders can be readily looked up on Bloomberg. Not much mystery here but, oddly enough, there is little understanding of SPAC performance.
Since 2015, there have been 200 SPAC IPOs. 82 of those closed a transaction and 9 liquidated without a transaction. Investors participating in liquidated SPACs recovered 100% of their money plus interest. But, how did those who stayed invested make out?
In all our analysis below, we have used the average price of common stock plus warrant coverage at 365 days from Closing or sooner for deals that closed less than a year ago.
Performance varied sharply across domestic versus foreign transactions. On average, US deals traded at an average price of $10.3 while international transactions averaged $5.6 – that is an 1.8x difference!
Energy-focused SPAC transactions were among the best performing deals at Closing but were hit hard by global factors resulting in an average price of $8.6. A third of the SPACs that liquidated from the Class of 2015-20 were focused on energy – a notable example was Carlyle-backed, Regalwood Global Energy, that elected to return capital to safe harbors rather than heading into stormy waters in Dec 2019 or tacking their sails in a different direction.
Special mention must be made of SPACs where investors demanded Rights in the IPO Unit. Rights are typically a form of “guaranteed return” since IPO investors receive (typically) one-tenth of a share for every common share in the IPO Unit. On a pro forma basis, a Right looks like a guaranteed 10% return at Closing but that is not how they perform in practice.
In SPACs without Rights, the stock price holds up to Trust Value until the redemption window closes. But it has been noted with some bewilderment that SPACs with Rights witness their share price plummet below $10 a few days before Closing. This makes no sense since common shareholders have a put on the SPAC at $10 plus interest. Why would anyone in their right mind sell below the put price just a few days before the Shareholder vote? What is the rush to lose money?
The reason for this perplexing price movement is the conversion of Rights into common shares post-Closing. For such SPACs, an IPO investor would redeem their original investment plus interest and still be left over with shares from the rights conversion – therefore, after Closing, they are left with nearly 10% of the common equity and virtually 100% of the float (insiders are typically locked up). This creates a perverse incentive to short the SPAC before Closing, redeem the common at Closing and dump the shares from the Rights conversion as quickly as possible after Closing. If you are a SPAC with Rights in your IPO Unit then all hope is not lost. There are several ways to mitigate this dynamic – contact us, we would be happy to share our views on strategy with you.
Rights are typically associated with ex-US transaction strategies. If you were one of the 48 US-focused SPACs without a Right in your IPO Unit that didn’t consummate an energy transaction then how did you perform? The average price of such SPACs was $11.9 but with wide variations across the quartiles.
The top quartile SPACs were valued at $23.8 while the bottom quartile SPACs were valued at $3.6. If you picked a SPAC that performed better than average (in the top 2 quartiles) then you outperformed the bottom half by 3x!
Many Sponsor teams have begun to build in Forward Purchase Agreements (FPAs) into the IPO plans. We examined the correlation between SPACs with FPAs and transaction outcomes. Of the closed transactions with FPAs, 8 out of 11 were associated with SPACs that delivered sub-par results.
The ability to redeem capital at shareholder vote is one of the most powerful features of a SPAC. So, we examined how well investors used this right to cherry pick investments. From the redemption data, it appears that SPAC investors have been successful at picking the tails of the distribution (the very good deals and the very poor deals). But investors have not been able to distinguish between 2nd and 3rd quartile transactions. This points to a lack of market efficiency and a potential source of outsize returns for good stock pickers.