In this analysis, I'll be covering everything you need to know about Special Purpose Acquisition Companies, or SPACs, and my own strategy that I use to choose for risk minimization, and profit maximization.
SPAK, the chart above, is an ETF that was specifically designed to invest in SPAC companies.
This is not investment advice. This is for educational and entertainment purposes only. I am not responsible for the profits or loss generated from your investments. Trade and invest at your own risk.
1. What is a SPAC?
- SPAC stands for Special Purpose Acquisition Company.
- They’re also called Blank Check Companies or Shell Companies. But what is this special purpose that they’re talking about?
- Their purpose is to acquire an existing company, so that it’s available for trades and investments in the stock market.
- They need to acquire a company within a given time frame between 18 to 24 months, sometimes 36 months depending on the conditions.
2. SPAC vs. IPO
- Normally, companies go public through a process called an Initial Public Offering, or an IPO.
- There’s another method called Direct Listing, which is the method that Spotify and Slack used to go public, but for the sake of simplicity, we’ll just look at a comparison of IPOs and SPACs.
- In terms of time period, SPACs can help companies go public much faster than if they were to go public through an IPO.
- The process is also much simpler, and has less requirements, and it also costs less to go public through a SPAC.
- But, the company’s valuation is discounted, when they get listed through a SPAC.
- So for instance, if a company that has an enterprise value of 100 billion were to do an IPO, they’d be valued as a 100 billion dollar company, whereas if they get listed through a SPAC, they’d be discounted as an 80 billion dollar company.
3. Who Makes SPACs?
- Normally, people with a reputation in the market make these SPACs.
- For instance, Bill Ackman, who’s the CEO of Pershing Square Capital, is extremely well known as one of the best investors, and a lot of people want to bet their money on him.
- So people like Bill Ackman are the ones who gather investors up, and create a SPAC.
4. Constituents
- When a SPAC is created, and goes through an IPO, the shares are owned by three entities: the founder, individuals, and PIPE, which stands for Private Investment in Public Equity.
- Private stake refers to the shares that the founders, or the creators of the SPAC get.
- Public stke refers to the shares that individuals buy when the SPAC gets listed.
- PIPE refers to the investors who lend money to the SPAC so that they can acquire a company.
- So for instance, Let’s say that SPAC is trying to acquire a $10 Billion dollar company, but they only have $5 billion in their trust.
- A PIPE can hop in, and lend the remaining $5 billion to the SPAC, and in return, they get shares of the acquiring company for a cheap price.
5. One SPAC Unit
- One SPAC unit consists of 1 share and the warrant that comes with the share.
- The Warrant is essentially the right to purchase the SPAC share at a designated price later in the future.
- It essentially acts as an incentive for the SPAC investors who take on risk.
- But you can use the warrant only within a designated time period, which is usually divided into two conditions:
1) either 30 days after the new company’s IPO
2) Or 365 days after the SPAC IPO
6. SPAC Trust Account
The money for the SPAC is deposited in a trust, and the funds cannot be used for any other purposes than acquiring a company or refunding the investment seeds back to the investors, in case an acquisition does not happen.
7. Negotiation and Acquisition
- When the SPAC gets listed, it’s time for people to search for companies to acquire, and negotiate.
- Once everything is prepared, they now move onto searching innovative firms, normally between a timeframe of 18 to 24 months, sometimes a little longer depending on the conditions.
- The business that they acquire needs to be at least 80% of the value of the trust account.
- So for instance, if the trust account has $10 billion, the company that the SPAC acquires needs to be at least around $ 8 billion in fair market value.
- Once the negotiation is done, and the acquisition is announced, they go through a process of getting permission from the SPAC shareholders.
- If the SPAC shareholders agree to the acquisition, they get shares of the new company equivalent to the shares of the SPAC they hold, at a 1:1 ratio.
- If they were to disagree, they can simply cash out their stake.
8. Example
Here's an example to help your understanding:
- A SPAC sponsored by BIll Ackman’s Pershing Square Capital made its debut to the New York Stock Exchange, with the largest blank-check IPO (PSTH).
- The offering includes 200 million units at $20 each, railing $4 billion in proceeds. Each unit consists of one common share and one-ninth of a warrant, exercisable at $23.
- So the ticker of this SPAC is PSTH, and the company they’re acquiring hasn’t been announced yet, so let’s just say that they’re buying a company called Mike’s Burgers, which’ll be listed under the ticker MIKE.
1. As an investor, you buy 9 shares of PSTH at $20 as soon as it gets listed.
2. You now have 9 shares, and a warrant that you can use, since 1 unit of the stock includes 1 ninth of a warrant.
3. So you have 9 shares, and a right to purchase 1 more share at $23.
4. Let’s say Mike’s Burgers got listed on the New York Stock Exchange, and the stock goes wild because the burgers taste great.
5. After the IPO, the stock trades at $50 a share.
6. You, as an investor, think that the stock prices could go higher for whatever reason.
7. So, you decide to wait 3 more weeks, so you can use your warrant.
8. 3 weeks later, the stock soars a bit more, and trades at $60 a share.
9. You now have 9 shares that you bought at $20, and you use the right to purchase 1 more share at $23.
10. You then sell all 10 shares at market value. So, when you sell all your shares for $600, and you’re left with an initial investment of $203, and $397 in profits.
11. So in a trade like this, you could double your investment easily.
9. Risks
- First of all, there are risks involved with PIPEs selling their stake.
- It’s not like these entities have a lockup period, they can sell their shares as long as they have permission granted from the SEC, so there’s risk involved in that.
- For instance, Nikola’s stock prices (NKLA) plummeted after its PIPE sold all their stake.
- Secondly, you’re investing in a paper company and you don’t know which company they’ll acquire.
- Normally, SPACs are run by veteran investors who know what they’re doing, but there’s absolutely no guarantee that the company it acquires will be a good one.
- For instance, there were rumors about how Bill Ackman’s SPAC would be acquiring Airbnb (ABNB) , but as you guys know, it turned out to be false.
- So as an investor, who’s not an insider, it’s hard to invest in a paper company without knowing what’ll happen to the SPAC company.
10. How to Choose the Right SPACs
- So, we obviously want to minimize risk, and maximize our returns, and to do that, it’s important to choose the right SPACs to get into.
- I’ll be providing my own strategy on finding the right SPACs. I’ll call this the 2N strategy.
- The key of this strategy is the combination of narrative and numbers.
- This is how I select stocks to invest as well, but the approach to SPACs are slightly different.
- What do I mean by narrative? I mean that the SPAC or the company that they’re acquiring, needs to have a good story.
- They need to have a good leader for the SPAC, they need to acquire a company in a prominent field, and a management team with expertise in the field.
- So here are some things I’d look for:
- First of all, I would want to see a figure who’s already acknowledged and successful.
- Of course it’d be better if they have a successful SPAC deal experience. (Bill Ackman is a good example of someone I’d have my money on.)
- I’d also look at the backgrounds of members of the management team.
- Look into what their expertise is, their work experience, professional backgrounds, and any noteworthy achievements.
- This type of information is normally all available on the SPAC’s website, but you can also look them up on linkedin.
- Also look into the institutions that are involved.
- If big names like BlackRock and CVC are taking part, and they hold SPAC shares, that’s good news.
- You want to make sure that acknowledged institutions are behind the project.
- Last but not least, it’s important to look at the industry that the SPAC has eyes on.
- You want to take part in a prominent industry, and obviously the trend is tech.
- Electric vehicle SPACs have also shown some crazy gains recently, but make sure you invest in a SPAC that operates in a field that you’re familiar with, and has high growth potential.
- Now, let’s take a look at what I mean by numbers.
- Before we can talk about numbers, we first need to understand how we can capitalize on SPAC opportunities.
- The best thing about SPACs is that you can minimize your losses, or even trade risk free if you’re lucky enough.
- The offering price of a SPAC stock varies, depending on the company, but normally it’s around $10.
- And the best thing about investing SPACs is that there is a price floor.
- It’s not that prices are legally prevented from trading below the initial IPO price, but there’s no reason for it to be traded anything below than its offering price, because in the unlikely case that an acquisition does not take place, everyone gets a refund anyways.
- So basically, given that you enter at the offered price, there’s nothing to lose, and everything to gain. This is what makes SPACs special.
You might ask, how much is there to gain?
- The answer is at least as much as its net asset value.
- In case you don’t know, the net asset value is calculated by subtracting all liabilities from the assets a company has, and dividing it up by the total number of common shares.
- If you actually do your due diligence, and calculate the net asset value of the SPAC you’re investing in, you’ll realize that the net asset value normally ranges around $10.10 to $10.25 right off the bat.
- This means that you have a 1-2.5% default return before even taking into account the warrant value, which is substantial, and the upside opportunity.
- So, going back to what I mean by numbers, you want to either find a SPAC that is traded at around its offered price or below its offered price.
- A SPAC that is already trading at 3 times its offered price probably won’t get you the best returns.
- You want to find a SPAC that’s cheap.
- Also, make sure you check the trust value, the SPAC’s market cap, and their net asset value.
- You want to make sure you get into companies with a high trust value, and a net asset value that is not too far from its market price.
Conclusion
As long as investors conduct their own research, there is huge opportunity they can capitalize on, with very little to no downside. Thus, I highly encourage that people start exploring the world of SPACs, and maybe even consider adding prominent companies to their portfolios early on.
If you like this analysis, please make sure to like the post, and follow for more quality content!
I would also appreciate it if you could leave a comment below with some original insight :)
SPAK, the chart above, is an ETF that was specifically designed to invest in SPAC companies.
This is not investment advice. This is for educational and entertainment purposes only. I am not responsible for the profits or loss generated from your investments. Trade and invest at your own risk.
1. What is a SPAC?
- SPAC stands for Special Purpose Acquisition Company.
- They’re also called Blank Check Companies or Shell Companies. But what is this special purpose that they’re talking about?
- Their purpose is to acquire an existing company, so that it’s available for trades and investments in the stock market.
- They need to acquire a company within a given time frame between 18 to 24 months, sometimes 36 months depending on the conditions.
2. SPAC vs. IPO
- Normally, companies go public through a process called an Initial Public Offering, or an IPO.
- There’s another method called Direct Listing, which is the method that Spotify and Slack used to go public, but for the sake of simplicity, we’ll just look at a comparison of IPOs and SPACs.
- In terms of time period, SPACs can help companies go public much faster than if they were to go public through an IPO.
- The process is also much simpler, and has less requirements, and it also costs less to go public through a SPAC.
- But, the company’s valuation is discounted, when they get listed through a SPAC.
- So for instance, if a company that has an enterprise value of 100 billion were to do an IPO, they’d be valued as a 100 billion dollar company, whereas if they get listed through a SPAC, they’d be discounted as an 80 billion dollar company.
3. Who Makes SPACs?
- Normally, people with a reputation in the market make these SPACs.
- For instance, Bill Ackman, who’s the CEO of Pershing Square Capital, is extremely well known as one of the best investors, and a lot of people want to bet their money on him.
- So people like Bill Ackman are the ones who gather investors up, and create a SPAC.
4. Constituents
- When a SPAC is created, and goes through an IPO, the shares are owned by three entities: the founder, individuals, and PIPE, which stands for Private Investment in Public Equity.
- Private stake refers to the shares that the founders, or the creators of the SPAC get.
- Public stke refers to the shares that individuals buy when the SPAC gets listed.
- PIPE refers to the investors who lend money to the SPAC so that they can acquire a company.
- So for instance, Let’s say that SPAC is trying to acquire a $10 Billion dollar company, but they only have $5 billion in their trust.
- A PIPE can hop in, and lend the remaining $5 billion to the SPAC, and in return, they get shares of the acquiring company for a cheap price.
5. One SPAC Unit
- One SPAC unit consists of 1 share and the warrant that comes with the share.
- The Warrant is essentially the right to purchase the SPAC share at a designated price later in the future.
- It essentially acts as an incentive for the SPAC investors who take on risk.
- But you can use the warrant only within a designated time period, which is usually divided into two conditions:
1) either 30 days after the new company’s IPO
2) Or 365 days after the SPAC IPO
6. SPAC Trust Account
The money for the SPAC is deposited in a trust, and the funds cannot be used for any other purposes than acquiring a company or refunding the investment seeds back to the investors, in case an acquisition does not happen.
7. Negotiation and Acquisition
- When the SPAC gets listed, it’s time for people to search for companies to acquire, and negotiate.
- Once everything is prepared, they now move onto searching innovative firms, normally between a timeframe of 18 to 24 months, sometimes a little longer depending on the conditions.
- The business that they acquire needs to be at least 80% of the value of the trust account.
- So for instance, if the trust account has $10 billion, the company that the SPAC acquires needs to be at least around $ 8 billion in fair market value.
- Once the negotiation is done, and the acquisition is announced, they go through a process of getting permission from the SPAC shareholders.
- If the SPAC shareholders agree to the acquisition, they get shares of the new company equivalent to the shares of the SPAC they hold, at a 1:1 ratio.
- If they were to disagree, they can simply cash out their stake.
8. Example
Here's an example to help your understanding:
- A SPAC sponsored by BIll Ackman’s Pershing Square Capital made its debut to the New York Stock Exchange, with the largest blank-check IPO (PSTH).
- The offering includes 200 million units at $20 each, railing $4 billion in proceeds. Each unit consists of one common share and one-ninth of a warrant, exercisable at $23.
- So the ticker of this SPAC is PSTH, and the company they’re acquiring hasn’t been announced yet, so let’s just say that they’re buying a company called Mike’s Burgers, which’ll be listed under the ticker MIKE.
1. As an investor, you buy 9 shares of PSTH at $20 as soon as it gets listed.
2. You now have 9 shares, and a warrant that you can use, since 1 unit of the stock includes 1 ninth of a warrant.
3. So you have 9 shares, and a right to purchase 1 more share at $23.
4. Let’s say Mike’s Burgers got listed on the New York Stock Exchange, and the stock goes wild because the burgers taste great.
5. After the IPO, the stock trades at $50 a share.
6. You, as an investor, think that the stock prices could go higher for whatever reason.
7. So, you decide to wait 3 more weeks, so you can use your warrant.
8. 3 weeks later, the stock soars a bit more, and trades at $60 a share.
9. You now have 9 shares that you bought at $20, and you use the right to purchase 1 more share at $23.
10. You then sell all 10 shares at market value. So, when you sell all your shares for $600, and you’re left with an initial investment of $203, and $397 in profits.
11. So in a trade like this, you could double your investment easily.
9. Risks
- First of all, there are risks involved with PIPEs selling their stake.
- It’s not like these entities have a lockup period, they can sell their shares as long as they have permission granted from the SEC, so there’s risk involved in that.
- For instance, Nikola’s stock prices (NKLA) plummeted after its PIPE sold all their stake.
- Secondly, you’re investing in a paper company and you don’t know which company they’ll acquire.
- Normally, SPACs are run by veteran investors who know what they’re doing, but there’s absolutely no guarantee that the company it acquires will be a good one.
- For instance, there were rumors about how Bill Ackman’s SPAC would be acquiring Airbnb (ABNB) , but as you guys know, it turned out to be false.
- So as an investor, who’s not an insider, it’s hard to invest in a paper company without knowing what’ll happen to the SPAC company.
10. How to Choose the Right SPACs
- So, we obviously want to minimize risk, and maximize our returns, and to do that, it’s important to choose the right SPACs to get into.
- I’ll be providing my own strategy on finding the right SPACs. I’ll call this the 2N strategy.
- The key of this strategy is the combination of narrative and numbers.
- This is how I select stocks to invest as well, but the approach to SPACs are slightly different.
- What do I mean by narrative? I mean that the SPAC or the company that they’re acquiring, needs to have a good story.
- They need to have a good leader for the SPAC, they need to acquire a company in a prominent field, and a management team with expertise in the field.
- So here are some things I’d look for:
- First of all, I would want to see a figure who’s already acknowledged and successful.
- Of course it’d be better if they have a successful SPAC deal experience. (Bill Ackman is a good example of someone I’d have my money on.)
- I’d also look at the backgrounds of members of the management team.
- Look into what their expertise is, their work experience, professional backgrounds, and any noteworthy achievements.
- This type of information is normally all available on the SPAC’s website, but you can also look them up on linkedin.
- Also look into the institutions that are involved.
- If big names like BlackRock and CVC are taking part, and they hold SPAC shares, that’s good news.
- You want to make sure that acknowledged institutions are behind the project.
- Last but not least, it’s important to look at the industry that the SPAC has eyes on.
- You want to take part in a prominent industry, and obviously the trend is tech.
- Electric vehicle SPACs have also shown some crazy gains recently, but make sure you invest in a SPAC that operates in a field that you’re familiar with, and has high growth potential.
- Now, let’s take a look at what I mean by numbers.
- Before we can talk about numbers, we first need to understand how we can capitalize on SPAC opportunities.
- The best thing about SPACs is that you can minimize your losses, or even trade risk free if you’re lucky enough.
- The offering price of a SPAC stock varies, depending on the company, but normally it’s around $10.
- And the best thing about investing SPACs is that there is a price floor.
- It’s not that prices are legally prevented from trading below the initial IPO price, but there’s no reason for it to be traded anything below than its offering price, because in the unlikely case that an acquisition does not take place, everyone gets a refund anyways.
- So basically, given that you enter at the offered price, there’s nothing to lose, and everything to gain. This is what makes SPACs special.
You might ask, how much is there to gain?
- The answer is at least as much as its net asset value.
- In case you don’t know, the net asset value is calculated by subtracting all liabilities from the assets a company has, and dividing it up by the total number of common shares.
- If you actually do your due diligence, and calculate the net asset value of the SPAC you’re investing in, you’ll realize that the net asset value normally ranges around $10.10 to $10.25 right off the bat.
- This means that you have a 1-2.5% default return before even taking into account the warrant value, which is substantial, and the upside opportunity.
- So, going back to what I mean by numbers, you want to either find a SPAC that is traded at around its offered price or below its offered price.
- A SPAC that is already trading at 3 times its offered price probably won’t get you the best returns.
- You want to find a SPAC that’s cheap.
- Also, make sure you check the trust value, the SPAC’s market cap, and their net asset value.
- You want to make sure you get into companies with a high trust value, and a net asset value that is not too far from its market price.
Conclusion
As long as investors conduct their own research, there is huge opportunity they can capitalize on, with very little to no downside. Thus, I highly encourage that people start exploring the world of SPACs, and maybe even consider adding prominent companies to their portfolios early on.
If you like this analysis, please make sure to like the post, and follow for more quality content!
I would also appreciate it if you could leave a comment below with some original insight :)
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Related Ideas
Due to a request regarding case studies, here's an example of how to approach an undervalued SPAC, and capitalize on an opportunity with 0 risk.
This is not investment advice. The example provided is for educational purposes only.
We can take a look at Apex Technology Acquisition Corp. (APEX) as an example.
Looking at their 10Q filings to the SEC, we can find out how much money they're holding in their trust account, and divide that by the number of shares.
The only confusing part is finding out the exact value of their assets (cash) and numbers of shares.
We can see that their Net Asset Value (NAV) is around $10.55. Thus, an entry anywhere below that level is an absolute steal. You can essentially trade risk-free if you manage to identify the NAV of a SPAC and find ones that are trading below its NAV.
We can also see that the stock soared up over 60% from the NAV value. This means that if you were lucky enough to sell the absolute top, you would have an upside potential of 60% with 0 downside, as the NAV acts as a practial price floor.