SPACs Return: Natural Story Formation

SPACs Return: Natural Story Formation
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By Alex Gavrish, SPAC Index; author of “Story Investing

Recently we have noticed an increase in the SPACs market. SPAC is an acronym for Special Purpose Acquisition Company. It is a black-check company that conducts an IPO and raises capital. The purpose of SPAC is to effect a merger or acquisition with an operating business. For example, if the target of SPAC is a private company, by merging with SPAC vehicle it becomes public.

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Historically, SPACs were a small and opaque niche of the market. Many of them performed unsatisfactory. Some hedge funds used to focus on a technical or arbitrage-type of investment into SPACs: they purchased units at the IPO with the intent to receive warrants for free. However, we believe both of these are about to change.

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First, there is an increase in SPAC IPOs lately. You can even find positions in SPAC vehicles in portfolios of such high-profile hedge fund managers as Seth Klarman of the Baupost Group, Paul Singer of Elliott Management, Daniel Loeb of Third Point and many others.

Second, as the amount of SPAC transaction increases, investors will do more fundamental research on them.

Third, investors will appreciate the fact that merger or acquisition by SPAC vehicle of an operating business represents an important corporate event. Similarly to spin-off it becomes an important turning point in company's story.

Despite being more risky (in our view), SPACs possess some positive characteristics similar to spin-offs. They are new companies and, overtime, sell-side analysts will start to provide research coverage and market can revalue these companies after some initial period. Large companies might be added to a major market index. In addition, SPAC founding investors and management team have a large incentive to increase market value of the company, for the benefit of all shareholders.

We have launched the U.S. SPAC Index with the assumption that similarly to spin-offs, interesting investment opportunities could be found in SPACs segment as well. The objective of the index is to provide investors with information and exposure to U.S.-listed Special Purpose Acquisition Corporations )SPACs) that have announced an acquisition or merger with operating business. The index tracks the performance of a representative portfolio of SPAC vehicles that have an enterprise value of at least $1 billion.


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