After soaring last year, interest in PSPCs seems to have waned a bit in recent months. Should they be abandoned for all that, or are there still interesting prospects?
After defining PSPCs yesterday and how they differ from a “classic” IPO, today we see if they are worth the investment for you.
Economists Gahng, Ritter, and Zhang (March 2021) calculated the performance of 114 PSPCs from 2010 to 2018 and concluded that even the poorest performance averaged 0.51% per year for the investor.
With this downside protection, a SPAC can be likened to a convertible bond: the investor who subscribes can get his money back if he wishes, and the subscription warrant (warrant) allocated to each action provides an average profitability of 9.3% per year (see below).
The investment includes two important periods, however: pre- and post-merger. Indeed, if an investor who initially subscribed to a PSPC made money (thanks to the warrants), it is a whole different story for the investor who accompanied the PSPC after a merger.
Indeed, the latter has almost always been the loser. No doubt the price tends to rise until the day of the announcement, to fall again thereafter (as the stock market adage goes: buy the rumor and sell the news).
The correct method would be to subscribe to a PSPC and wait for the announcement of a deal to exit (and cash in the value of the warrant). This seems to be confirmed in fact by a study by Klausner, Ohlrogge and Ruan (2021) who, based on a sample of 47 PSPC, estimate that the average amount in cash within a SPAC at the time of the merger is $ 6.67 per share (instead of the IPO’s $ 10 price) due to high buybacks by investors.
The majority of investors are institutional. The 20 largest investors (identified by the 13F declarations to the SEC) total nearly $ 22 billion in outstanding PSPC (and are nicknamed the members of the “SPAC-Mafia”). Those are hedge funds who subscribe at the time of the creation of the SPAC to obtain the warrants and thus generate performance with their resale.
SEC Chairman Gary Gensler recently said retail investors bear the majority of the risk by holding onto their shares after the merger, while original investors (hedge funds) sell at the time of the announcement to limit their risk (by cashing in their earnings).
Recent developments in PSPCs
PSPC has seen recent developments, and one of the instigators is none other than Pershing Square boss Bill Ackman. As a reminder, Vivendi and Pershing Square Tontine Holdings (PSTH), the SPAC created by Bill Ackman, announced last June that they had signed an agreement consisting in the sale by Vivendi of 10% of the capital of Universal Music Group (UMG) in favor of of PSTH, on a valuation of $ 40 billion.
Bill Ackman broke new ground by offering investors who had subscribed for shares of his SPAC warrants from a new company: a SPARC (Special Purpose Acquisition Rights Company). A SPARC does not raise money right away and has no time limit. Bill Ackman will notify investors when he has found the ideal company, and they will exercise their subscription rights or not.
This is a smart (because less dilutive and more economical) way to attract fundamental investors, rather than creating an expensive and dilutive structure in which investors are paid 10% to entrust their money for two years. A desirable development and tending towards a more sustainable model with a better alignment of the interests of sponsors and investors.
The terms of payment for sponsors are also changing. The very last SPAC to be listed on Euronext Paris (DEE Tech) announced that the sponsor – instead of receiving 20% at the time of subscription – would receive a third at the time of redemption, then a third if the price of the SPAC exceeds € 12, and finally, a final third if it costs more than € 14.
Will the PSPC bubble deflate?
PSPCs are not going to go away. The structure is not new (the first SPAC was created in 1993 by Nussbaum and Miller), and is useful in the sense that it allows access to public capital to companies present at early stages of growth and not necessarily well understood by the market.
As long as PSPCs find operations that make sense, this will be an option for businesses to consider. The losers are the investment banks who receive lower commissions and, to a lesser extent, the institutional investors who do not benefit from the traditional IPO discount but do not suffer the risk of a misallocation.
In the short term, the fashion phenomenon nevertheless seems to be running out of steam, given the popularity on Google Trends which has collapsed in recent months (in the United States) …
… Just like commissions received by banks, which fell in the second quarter of 2021 (banks receive on average 2% in commissions at the time of the IPO and 3.5% at the time of the merger with the target).
The IPOX SPAC index (measuring the performance of the most important SPACs in the United States) has already lost 20% since its peak at the start of the year.
When the tide rises, it lifts all the ships. As the pace of IPOs is in full swing, it looks like the PSPC bubble has already started to deflate.
Didn’t Warren Buffett say “it won’t last forever, but that’s where the money is today”. We must not forget that a PSPC remains above all a promise. And it is when the sea recedes that we see those who swim without swimsuits …
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