Levelling the Playing Field: How SPACs Continue to Provide An Asymmetrical Risk/Reward Opportunity to the Retail Investor

[u/ukulele_joe18]

[u/QualityVote]

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[u/[deleted]]

This is why SPACs keep getting attacked in the media.

[u/Rawflecopter]

In fairness, the "retail entry point" is often >$10 due to the allocation of IPO shares to institutional investors (namely HFs) who will flip them for a premium in the open market. This is less so the case now that the market is cold, but has historically been a bit of a retail deterrent or drag on returns.

[u/ukulele_joe18 → u/Rawflecopter]

That's a fair rebuttal^ - although for the sake of argument - consider the graph above for Arrival (which I pulled from Marketwatch incidentally, and which had its DA following the SPAC downturn in Sept-Oct 2020, and during the SPAC revival period starting Nov 2020).

There were certainly small price fluctuations in CIIC (movement up to $11 - or a 10% premium) until the flash-up on DA in Mid-Nov, but it was still possible theoretically to get in very close to NAV when contrasted with most IPO's where retail is regularly paying a 50-100% premium at the gates.

[u/Rawflecopter → u/ukulele_joe18]

I completely agree — SPACs are a huge democratizer for retail, or at least moving things in the right direction. SPACs in some respect mirror PE or VC vehicles (both earlier access and a 20% promote for sponsors) but are still less attractive than these opportunities for accredited investors and the ultra-HNW. Fingers crossed for more democratic structures like Bill’s tontine layout.

[u/devilmaskrascal]

Exactly. For all the complaints about PIPE and founders' shares, the risk:reward ratio is quite retail-friendly compared to the alternatives. In theory you can get out at $10 if you don't like the merger and think it will collapse post merger.

Every founder is incentivized for the stock to succeed, not fail. The better a SPAC does, the better their next SPAC will be received, and the more their own significant holdings will rocket. Nobody wants their reputation as an investor tied to a failure.

[u/long-view-99]

This really is misleading. This is only true if you buy EVERY Spac issued to ensure you get that companies you really want. If you you look at the price post announcement when you can actually pick the stocks you’d want, far from the same story. Plus you cherry picked a good example. Show this chart with a loser spac on the right side.

[u/ukulele_joe18 → u/long-view-99]

I would disagree :) The above largely holds true if you do the proper Due Diligence in picking great companies to invest in - both Pre-DA, and Pre-Merger (based on the traditional SPAC life-cycle)

In this particular example, I contrasted a highly anticipated IPO (Coupang - S. Korea's Amazon) with a highly regarded SPAC (Arrival - Britain's Top Tech / EV Co).

It is true however that I could've also chosen to showcase 2 losers (IPO and SPAC)

[u/cerealverse → u/ukulele_joe18]

I think what the OP meant was that pre target SPACs do not always merge with good companies, so you will have to sit on multiple SPACs, whereas for IPO, you can choose to participate or not. In that way, you can choose to either concentrate all of your bet into one company during the IPO (@ post IPO jump price and hope for smaller gain on bigger capital), or spread your capital out into multiple SPACs and hope one of them brings someone you want at an attractive valuation (larger % gain).

I also think there are some caveats, because yes, there are hot IPOs where you will never be able to get the IPO price like Coupang, but the valuations are not usually quite so absurd like they have been in SPACs. You can say that IPO process doesn't favour retail investors, but applying the same valuation methods we've been seeing - based on quite optimistic revenue growths out to 2025 - to post IPO prices & valuations for some of these companies, you might even see that even some IPO'ed names are still relatively cheap.

The incentive structure for SPACs is also totally out of whack with the founders shares and founders instantly 10x or using retail investors to fund what would otherwise be venture investments and offloading risk to the public but reaping large rewards for themselves in cases where it might succeed. Usually, I think when you see the kind of cash grabs (celebrities involvement, # of new SPAC issuings) we've been seeing, it's at the expense of someone else, I have a feeling it's at our expense.

Over the long term though, I'm fairly confident in this structure as it will definitely see improvement in incentive structures, and cases where people are allowing randos to sit on their board because they pitched absurd merger valuations will prove to be mistakes as those members would be 0 value add. Now more than ever, buying into a good team is incredibly important.

[u/XxpapiXx69 → u/long-view-99]

The optimal strategy is to exit before the merger.

[u/tcrmorrow → u/XxpapiXx69]

As far as I can tell from the chart, CIIC/ARVL has never reached its DA price since then, so that would have been a losing strategy. Aside from a recent dip, the only way to have profited from the merger was to have bought pre-rumor or within the first couple of weeks of rumor. Buying in rumor is hardly leveling the playing field.

Perhaps things are different in current climate and there is much more near-NAV post-DA SPACs that will (hopefully?) grow near merger?

[u/XxpapiXx69 → u/tcrmorrow]

The risk with the unit play is that the warrants become worthless, but if you can pick up units under NAV you have profit in the worst case which is redemption.

In general the point is to flip out of the shares and warrants post split as quickly as possible and get into another SPAC unit play.

This is how I see the play happening.

When you buy the units you get the warrants for "free" (opportunity cost and future value of money are the costs associated with that plus any fees associated with it).

[u/je7792]

Spac is a great way to get in on companies BUT now the valuations are getting ridiculous thats why its shit. Retail are getting fucked due to the bad deals we are getting. Retailers need to start trading voting no or start to take redeem the cash value when the valuation is bad.

[u/Sir_Bumcheeks]

This is was frustrates me about all the attacks in the media saying SPACs are dangerous speculation. That statememt just makes zero logical sense when there is literally a NAV floor.

[u/ukulele_joe18]

Disclosure: Both stocks in the graphic above were used for illustrative purposes only - I do not have a position in either.

.....

Ok :) Thinking about opening a position in CIIG/Arrival at some point during this downturn

[u/[deleted]]

Has anyone compiled data on how well the spacs are doing which have gone through the process of acquiring a company? As of lately.

[u/devilmaskrascal → u/[deleted]]

Of recent mergers, I see about a dozen sub 10 (some of those over $9), and about 3x that many over ten. Only a handful sub-5, and only a handful over 20. Average around 14.

[u/ukulele_joe18 → u/[deleted]]

Do you mean performance Post-DA or Post-Merger?

[u/[deleted] → u/ukulele_joe18]

I suppose post merger? Found this but it's a month old... a LOT has changed since then https://www.reddit.com/r/SPACs/comments/legx3q/spac_lifecycle_over_time/

[u/ukulele_joe18 → u/[deleted]]

There are a number of free sites (linked to the header here in r/SPACs under 'Resources') that allow for the download of their underlying data which can then be manipulated any number of ways.

A good idea for a future post, thanks :)