Author Topic: SPACs  (Read 2115 times)

PDXTabs

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SPACs
« on: February 13, 2021, 02:45:23 PM »
Someone in my family is very interested in SPACs. They are already retired and don't need to lose a bunch of money. My cursory understanding is that they are a risky investment. Does anyone here have some good articles that might shed some light on them?

Thanks in advance!

reeshau

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Re: SPACs
« Reply #1 on: February 13, 2021, 04:22:57 PM »
Are they looking to invest before a target is identified, or afterward?  If the answer is afterward, then the due diligence is similar to any IPO investing.  (Though there are some differences)  Like any IPO, they are definitely risky.  And being at a peak level of activity and interest, they are riskier now than they probably were a year ago.

Most articles start with an opinion, and go from there.  As an overview, this article from The Wall Street Journal gives some history, and talks about the current mania.

Full disclosure:  I have invested in two SPACs in the last year:  Luminar, which was quite successful for me, an SoFi, which has yet to close its merger.  I did both after the target was named.

If your relative is looking to get rich quick, then tell them this is the new Gamestop. :)  If they are looking to do a little speculation for fun, then they can only lose what they bet.

Rdy2Fire

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Re: SPACs
« Reply #2 on: February 13, 2021, 06:08:43 PM »
Spacs are definitely speculative but as reeshau it also depends on when they invest. if before the target is identified it's a complete gamble but could be a bigger win (or loss)..

I am in the same ones as reeshaw as well as IPOA (which has since become SPCE) and 4 others (2 with targets and 2 without). I concur with "If they are looking to do a little speculation for fun, then they can only lose what they bet." which is true of any investment; it's all unknown

PDXTabs

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Re: SPACs
« Reply #3 on: February 13, 2021, 06:14:11 PM »
The target is a good point. I knew them as "blank check" corporations, but after the target is identified that is less true.

Thanks for the article and the thoughts!

MustacheAndaHalf

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Re: SPACs
« Reply #4 on: February 14, 2021, 05:12:47 AM »
In the middle of last year, SPACs were a great thing to get in early on, and then sell right after the IPO.  As a long-term investment, it's questionable.

Unfortunately by the time everyone hears about something, it's too late.  There's at least 5 SPACs associated with sports celebrities, which should be a red flag to stay away.  Apparel?  Sure.  Venture capital acquisitions?  Not really a specialty of basketball, baseball or tennis players.

GoCubsGo

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Re: SPACs
« Reply #5 on: February 14, 2021, 09:19:04 AM »
I've invested in 4 SPACS and they've all done really well.  Bill Ackman is doing a SPAC (PSTH) and it's been moving higher even though he hasn't identified a company to invest in yet (people are speculating on the target company daily... it's fun to watch). 

Bill Ackman is a known quantity (just like Chamath who did the Sofi and SPCE  SPAC).  I have no problem in taking on some risk with guys like that leading the way.  So far I've done exceedingly well with them.  Everyone and their brother are announcing SPACS, it doesn't mean they are all bad.  I'd definitely be leery of some of them, but I don't mind betting on smart VC's and interesting companies.

Rdy2Fire

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Re: SPACs
« Reply #6 on: February 14, 2021, 07:27:33 PM »
I've invested in 4 SPACS and they've all done really well.  Bill Ackman is doing a SPAC (PSTH) and it's been moving higher even though he hasn't identified a company to invest in yet (people are speculating on the target company daily... it's fun to watch). 

Bill Ackman is a known quantity (just like Chamath who did the Sofi and SPCE  SPAC).  I have no problem in taking on some risk with guys like that leading the way.  So far I've done exceedingly well with them.  Everyone and their brother are announcing SPACS, it doesn't mean they are all bad.  I'd definitely be leery of some of them, but I don't mind betting on smart VC's and interesting companies.

I agree on Ackman and Chamath, I am leery on many others but they seem to be on their game. I am in IPOE (already identified but still a buy, IMO) but if you're ok with some risk and like Chamath check out IPOD and IPOF.

mizzourah2006

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Re: SPACs
« Reply #7 on: February 15, 2021, 09:29:19 AM »
The target is a good point. I knew them as "blank check" corporations, but after the target is identified that is less true.

Thanks for the article and the thoughts!

There is still due diligence that can be done as part of the blank check portion. I usually look at the leadership team of the SPAC, if they've taken other companies public before via SPAC or otherwise how did that turn out, what industry are they targeting, trust size, etc.

SPAC shares have a NAV of $10 (in most cases, Ackman's has a NAV of $20) until after the merger is completed, so while they are blank check corporations if you can invest around NAV your downside is actually somewhat capped by the fact that the shares themselves have $10 sitting in a trust. In my mind that makes them not very risky. I usually identify ones with good leadership teams that just IPOd and get in near NAV, $11 or less, and then just let it sit there. This theoretically caps my loss at 10%. Now it is possible that after the merger they can go below NAV or if the market crashed people may be willing to sell their shares below NAV for liquidity, but until the merger the trust with $10/share is there.

The problem with the "great" leadership teams is it becomes very hard to get in near NAV with them. Chamath's are all 50% above NAV even pre-target or rumor. Ackman's is currently about 60% above NAV on rumors of Stripe (which I think are very much just rumors). I sold a couple $15 CSPs for IPOF for $1/share. So if I happen to get assigned my cost basis will only be 40% above NAV instead of the ~55% it's currently trading at, but it's also looking like I won't get assigned.

IMO when you chase SPACs you're going to lose. But if you get in very close to the IPO date and just let it sit there doing nothing for 3-4 months 10-20% gains are extremely reasonable. It's also important to know the SPAC trading life cycle. When an agreement is reached in most instances share prices will jump 10-50%, depending on the target. Typically people will get out there as that's the peak until the actual merger date is announced. It'll bleed back down between DA and Merger announcement date. Then they'll slowly start to run up as the merger date/ticker change approaches. In most instances you don't want to hold through merger as that's when a lot of Pipe investors can dump their shares on the open market and some brokers charge money for the ticker change. So if you want to own it long term best bet is to sell a few days before merger, then wait for the dust to settle over the first couple of weeks and then get back in at that point.

Honestly I thought it was sketchy at first when a friend told me about it. But you need to think about this differently. It's not investing, it's more akin to house flipping. You just have to be the one patient enough to park your cash in something that is literally nothing for a few months in a market where everyone is trying to make a quick buck. Buying near NAV SPACs is like watching paint dry :)

HeadedWest2029

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Re: SPACs
« Reply #8 on: February 15, 2021, 09:33:33 AM »
Michael Batnick posted this recently

Quote
The median investor lost 53% compared with the Russell 2000 Growth Index. The median post-merger investor lost 63% against the Russell 2000 Growth Index.

https://theirrelevantinvestor.com/2021/02/10/an-inside-joke-for-the-super-rich/

mizzourah2006

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Re: SPACs
« Reply #9 on: February 15, 2021, 10:03:57 AM »
Michael Batnick posted this recently

Quote
The median investor lost 53% compared with the Russell 2000 Growth Index. The median post-merger investor lost 63% against the Russell 2000 Growth Index.

https://theirrelevantinvestor.com/2021/02/10/an-inside-joke-for-the-super-rich/

That's not really a fair comparison because at that point it's not a SPAC. It also assumes a buy and hold strategy. IMO SPACs are not a good buy and hold strategy. They are flips. You buy at NAV and sell no later than right before merger.

SPCX is an index fund that was created about 2 months ago to buy near NAV SPACs and sell at definitive agreement and it's up 27% since inception. IMO that is the best way to play SPACs. You do not want to buy and hold them.

HeadedWest2029

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Re: SPACs
« Reply #10 on: February 15, 2021, 10:38:02 AM »
How is that not fair?  The OP is trying to talk retirees out of buying SPAC's because they can be risky.  I provided information on why they can be risky.  I'm pretty sure my hobby in retirement won't be flipping SPAC's.  If you want to do so, fine, but quoting the 2 month return of a newly created fund is certainly a risky way to go about retirement. 

mizzourah2006

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Re: SPACs
« Reply #11 on: February 15, 2021, 10:52:43 AM »
How is that not fair?  The OP is trying to talk retirees out of buying SPAC's because they can be risky.  I provided information on why they can be risky.  I'm pretty sure my hobby in retirement won't be flipping SPAC's.  If you want to do so, fine, but quoting the 2 month return of a newly created fund is certainly a risky way to go about retirement.

It's not fair because that's not how you "invest" in SPACs. At that point it's not a SPAC. If you wanted to compare SPACs you'd use the "SPAC investor buy and hold return vs. the Russell 2k Growth Index" and in that instance the average return is +27% when comparing the two. But as I said earlier that's not how you make money in SPACs. You have to sell before the merger is complete. If you don't want to do that, that's perfectly fine, but what you quoted is not even the same thing as investing in SPACs and median isn't a fair metric in this instance either because that assumes you're blindly picking SPACs. If you had split your money evenly in Chamath SPACs at $11/share you'd be up 184% right now and the worst one is up 10%.

As I said above investing in SPACs near NAV actually have very limited risk as they have a NAV of $10/share.

Go ahead and tell all retirees to not invest in SPACs, that's perfectly fine, just trying to educate people that might be interested. IMO near NAV SPACs are a great place for some of your ER cash. You get the upside of the stock market with the floor of the trust.
« Last Edit: February 15, 2021, 11:04:36 AM by mizzourah2006 »

trollwithamustache

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Re: SPACs
« Reply #12 on: February 15, 2021, 11:02:10 AM »

As I said above investing in SPACs near NAV actually have very limited risk as they have a NAV of $10/share.


One does have to keep track of SPAC redemption dates... I suspect with the smorgasbord of new SPAC not everyone will find a deal. and at the two year mark, you have to be ready to redeam. ie, spend a lot of time with your brokers customer service agent who may not yet know how to do it. Not a deal breaker, but maybe not as passive as some expect.

mizzourah2006

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Re: SPACs
« Reply #13 on: February 15, 2021, 11:07:06 AM »

As I said above investing in SPACs near NAV actually have very limited risk as they have a NAV of $10/share.


One does have to keep track of SPAC redemption dates... I suspect with the smorgasbord of new SPAC not everyone will find a deal. and at the two year mark, you have to be ready to redeam. ie, spend a lot of time with your brokers customer service agent who may not yet know how to do it. Not a deal breaker, but maybe not as passive as some expect.

that's a fair point. Definitely not completely passive as you'll want to keep track of them. But then again there are plenty of people here that have "side gigs". Depends on how passive you want to be. It's like investing in any individual security. If you want to set it and forget it buy index funds.

I set aside ~2% of my portfolio to test active SPAC trading vs. index funds. So far I'm up 37% and VTI is up 4.2%. But I don't know how much longer it'll last honestly. It does require that somebody is actually interested in buying the company you invested in near NAV. That's why I think it's becoming more and more important to choose a solid management team as they have the best chance of getting a deal done with an attractive target.
« Last Edit: February 15, 2021, 11:11:10 AM by mizzourah2006 »

GoCubsGo

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Re: SPACs
« Reply #14 on: February 15, 2021, 02:39:50 PM »
I definitely wouldn't tell the average investor to blindly invest in SPAC's (and I haven't looked at any of the celebrity SPACS), but the way I see it, it's definitely worth having exposure to if you want to take on some risk with strong upside.  In regards to "chasing" goes,  I bought Draftkings because I read a lot about the company and their partnership deals and watched interviews with the CEO.  They were an early adopter in the rapidly growing online gambling world and I felt they would have a strong runway once baseball and football came back.  I didn't buy it super early, but did get in at $23 (technically chased it) and it closed Friday at $61.  I've rode the rollercoaster with it for a few months and have sold my initial investment. 

I personally think Sofi (IPOE) is in a strong spot within the fintech world and Chamath has a strong track record.  I have no problem owning that long term.  I did buy in early and have done extremely well with it.  Theoretically it could blow up and go to zero but I would be out of it long before that.  Just because it came to market via the SPAC process shouldn't make SoFI something not worth investing in.

Not all my SPAC buys will be long term but I always like to have a portion of my portfolio invested in high upside stocks (and pre- merger SPAC's) and it's really paid off..  To each their own. 

reeshau

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Re: SPACs
« Reply #15 on: February 15, 2021, 11:37:42 PM »
Honestly I thought it was sketchy at first when a friend told me about it. But you need to think about this differently. It's not investing, it's more akin to house flipping. You just have to be the one patient enough to park your cash in something that is literally nothing for a few months in a market where everyone is trying to make a quick buck. Buying near NAV SPACs is like watching paint dry :)

Just to give a counter-example, I *am* investing in these companies, not flipping.  I was able to get into LAZR a month after merger announcement near NAV.  They do have plenty of risk, but I have deep industry knowledge here, so I am comfortable with it.  I did sell a bit post-merger, but have 90% of my shares, and am up 370%.  No need to watch daily wiggles to further optimize that.  SoFi, while not profitable, has a number of mature, scaled business lines.  So, unlike the typical SPAC, they are not pre-revenue or pre-commercialization.  They have something solid to fall back on.

I am sure I am in the minority on this approach.  And most SPAC's do not interest me.  But it takes many approaches to make a market.

Rdy2Fire

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Re: SPACs
« Reply #16 on: February 16, 2021, 06:56:47 AM »
I agree with both @GoCubsGo and @reeshau

As I stated above, I have invested in some, it's not for everyone and although I am in a couple that aren't tied yet i.e blank checks, once there is a merger announced it's very similar to investing in an IPO. I've done well with most of mine but like any stock typical stock they have their ups and downs. I 100% agree on SoFi which I am invested in, so far it's not doing much but they have a great model, I think they will be strong in the future and as stated 'something solid to fall back on' . Another one I believe will become a big player is VGAC which is Branson's Virgin SPAC that will become ME (23 & Me). For those interested I'd say do some research and think about all of the uses for the DNA information that they have.

Bottom line with SPACs like any investment, comes down to willingness/level of risk you find acceptable. Do your research and gamble accordingly

mizzourah2006

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Re: SPACs
« Reply #17 on: February 16, 2021, 07:57:18 AM »
Honestly I thought it was sketchy at first when a friend told me about it. But you need to think about this differently. It's not investing, it's more akin to house flipping. You just have to be the one patient enough to park your cash in something that is literally nothing for a few months in a market where everyone is trying to make a quick buck. Buying near NAV SPACs is like watching paint dry :)

Just to give a counter-example, I *am* investing in these companies, not flipping.  I was able to get into LAZR a month after merger announcement near NAV.  They do have plenty of risk, but I have deep industry knowledge here, so I am comfortable with it.  I did sell a bit post-merger, but have 90% of my shares, and am up 370%.  No need to watch daily wiggles to further optimize that.  SoFi, while not profitable, has a number of mature, scaled business lines.  So, unlike the typical SPAC, they are not pre-revenue or pre-commercialization.  They have something solid to fall back on.

I am sure I am in the minority on this approach.  And most SPAC's do not interest me.  But it takes many approaches to make a market.

This is definitely another approach to take. Especially if your broker waives the ticker change fee or you just don't care about it and if you plan to hold for 6 months + after merger and don't care about the volatility that will come the few weeks after the ticker change. I have a couple I'm interested in long term. Specifically BFT because of their ties to online gambling, IPOE because it's SoFi, THCB, because they are already producing EV batteries, and possibly CCIV, if they are in fact Lucid. but I'll probably sell before merger and get back in as the price drops. If you want to take this approach and still do it while it's a SPAC, I'd wait until about 2-4 weeks after the definitive agreement to buy. It typically bleeds after the DA until the merger actually starts to get closer.

As an example of my strategy. I bought PDAC warrants and they just announced a potential merger with Li-Cycle, a battery recycler. So the warrants jumped as high as 50% in pre-market. I sold mine a bit before market open and ended up making 25%. I actually don't hate what I've seen from Li-Cycle, but it is very much a buy the rumor sell the news type of thing for a lot of these as now the warrants are only up 11%.

Edited to add that it seems a lot of people here are actually waiting for the DAs to drop and then investing in companies that they think have a bright future. That's obviously another way to do it. I typically get in on 10-15 pre-DA that I like because of trust size, target industry and strong management teams. Then sell when they announce who they have an agreement with, then I might get back into the one's that I like a few weeks later. Once the merger is announced the risk increases because then you aren't talking about buying at $10.50, you're talking about buying at $15+. So now you do have 50% plus downside instead of ~5%. The deals could always fall through for a number of reasons after DA.
« Last Edit: February 16, 2021, 08:29:47 AM by mizzourah2006 »

CloudLiu

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Re: SPACs
« Reply #18 on: February 18, 2021, 02:10:15 PM »
Some people buy SPAC before they have merger targets as saving accounts. It's allways $10 per share.
After they have merger news, the share price usually goes up 50% to some cases 5 times!  However, it takes a long time for them to find merger targets and sometimes take couple years. YOu get 0% for those years.

After the SPAC stock goes up, it's risky to buy because the market cap is complicated to calculate after merger, it's going to be different than before merger. You risk over paying.   
Then there's the warrant dilution problem.



mizzourah2006

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Re: SPACs
« Reply #19 on: February 18, 2021, 03:30:00 PM »
Some people buy SPAC before they have merger targets as saving accounts. It's allways $10 per share.
After they have merger news, the share price usually goes up 50% to some cases 5 times!  However, it takes a long time for them to find merger targets and sometimes take couple years. YOu get 0% for those years.

After the SPAC stock goes up, it's risky to buy because the market cap is complicated to calculate after merger, it's going to be different than before merger. You risk over paying.   
Then there's the warrant dilution problem.

This is what I've started doing. It typically takes 4-6 months for a SPAC to find a merger target. Some have taken longer. Ackman's is one of the longer one's and it's just about at 8 months.

mntnmn117

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Re: SPACs
« Reply #20 on: March 24, 2021, 05:26:32 PM »
SPCX is an index fund that was created about 2 months ago to buy near NAV SPACs and sell at definitive agreement and it's up 27% since inception. IMO that is the best way to play SPACs. You do not want to buy and hold them.

SPCX on 2/15 32.08
SPCX today 3/24 28.48

And now down 11% since the post. Its seems like a sure thing but riding it down 10% while the total market flatlined makes me wonder what happens in a market correction. I don't think people would be chasing SPACs if normal stocks were on sale.

reeshau

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Re: SPACs
« Reply #21 on: March 24, 2021, 06:55:20 PM »
I don't think people would be chasing SPACs if normal stocks were on sale.

That's really true of every peak in IPO activity.  The causal way to describe it is: no company wants to go public when the market P/E is low.

Ryo

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Re: SPACs
« Reply #22 on: March 25, 2021, 12:18:35 AM »
I'm a beginner, but curious.  Could somebody enlighten me on:
1. What happens to the shareholders if there is no suitable merger target found within two years?  There have been allusions above to this being akin to a savings account (albeit 0%) ... how is it that a SPAC investment can be (nearly) risk-free?

2.  How is the liquidity?  Is it quite easy to buy/sell freely at the retail investor level. or are you pretty much locked in for a while?

reeshau

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Re: SPACs
« Reply #23 on: March 25, 2021, 07:56:20 AM »
I'm a beginner, but curious.  Could somebody enlighten me on:
1. What happens to the shareholders if there is no suitable merger target found within two years?  There have been allusions above to this being akin to a savings account (albeit 0%) ... how is it that a SPAC investment can be (nearly) risk-free?

2.  How is the liquidity?  Is it quite easy to buy/sell freely at the retail investor level. or are you pretty much locked in for a while?

Technically, the deal is at the end of the two year period, the amount held in escrow is returned to shareholders.  Of course, the SPAC does have operating costs, which are in a separate bucket, but could use up earnings on the escrow.  So, it's not guaranteed to return all your money, but in practical effect that's what happens.  This is actually also true even when a deal occurs--if you don't like the deal, you can opt in for a return of capital, with the same rules.  When LAZR went public, that payout would have been $10.06.  I have not seen any kind of average, but there's an example.

2.  I have only traded in 2 SPACs, (the other is SoFi) but I never had problem with liquidity.  Since the SPAC is a public offering, there is a lot of shares on the market; the only lockup pre-deal is the founder's shares--the managers of the SPAC.  On deal close, the target company's prior shareholders usually have a short lockup period, too.

Edited to add:  of course, this is only good if you buy at the $10 nominal price, or below.  If you bought at $15 or $22 or something, you would still only be entitled to your share of the initial capital, which is likely to be $10.0X.
« Last Edit: March 25, 2021, 08:33:52 AM by reeshau »

MustacheAndaHalf

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Re: SPACs
« Reply #24 on: March 25, 2021, 08:23:42 AM »
While I can't recommend the "Shaq SPAC" to others seeking to make money, it's a lot of fun to say.  I've lost $4 so far - worth it!

I also wanted to mention some SPACs will rise on rumors, not the actual merger deal.  In the case of CCIV mentioned above, the stock plummeted when the details of the deal came out.  The price has ranged from $10-$65, currently $22.55.  Some people doubled their money, some people lost 2/3rds of their money.

Since there's been more SPACs formed this year, Jan-Mar, than all of last year, it's likely they are running out of high quality companies to take public.  Another interesting factor is the SEC's Enforcement Division asking for SPAC details this week, which could be a prelude to a formal SEC investigation.

trollwithamustache

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Re: SPACs
« Reply #25 on: March 25, 2021, 04:39:27 PM »
There are a ton of SPAC's trading below Trust value. Look at the time to termination and interest they will accumulate from T-bils and you can calculate a % yield.

I want a broad portfolio of say 15+ SPACs, so I've got a chance of catching one of the 2-10 baggers.