ETF Trends CEO Tom Lydon discussed the SPAC and New Issue ETF (SPCX) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
SPCX is an actively-managed fund that aims to provide a broad exposure to Special Purpose Acquisitions Corporations (SPACs) and newly-listed firms.
According to Tuttle, the most appropriate strategy for managing a portfolio of SPACs is through active management as it can be more flexible in reacting to market events. This is no place for an index fund based on a rigid set of rules. When looking at investing in a SPAC, focusing on the management team is key.
Unlike a private equity fund, if disagreeing with the management team and what the company bought, an investor can redeem their shares which is a major positive. Another positive of investing in SPACs is that it allows individuals to get a chance to experience the best fund managers they may otherwise not have access to. For example, not everyone can invest in Bill Ackman’s hedge fund. With a SPAC, they can gain shares and access to his expertise as a professional money manager.
SPACs have been around for decades. They’ve become more popular in recent years, attracting big-name underwriters and investors and raising a record amount of IPO money. Blank-check firms are hot as the IPO process is institutionalized, cumbersome, and inflexible, especially in adapting to the Covid-19 reality where virtual roadshows are less effective.
Blank Check Companies
With SPAC, there’s an alternative route for a company to go public, which can be cheaper, quicker, more transparent, and involve agreements and processes within greater purview and control of the company. Because of this, they are called blank-check companies. They are generally formed by investors, also called sponsors. Sponsors usually have experience and expertise in a particular sector, and it is assumed that the acquisition targets will be companies in that sector. Many sponsors are seasoned private equity investors.
As an alternative to the traditional initial public offering (IPO) process, SPAC IPOs witnessed an acceleration in popularity in 2020. Through December 8, there have been 217 SPAC IPOs over 2020, with gross proceeds exceeding $74 billion. That compares to 59 SPAC IPOs in 2019 representing $13.6 billion in gross proceeds.
For example, in 2020, 26 mobility tech companies merged with SPACs (or are in the process of doing so), representing a combined valuation in excess of $100 billion and generating an average return of 63.8% since their announcement dates according to PitchBook data. The blank-check activity is being powered by public investor demand, the capital needs of these R&D-heavy startups, and broad tailwinds for electric vehicles. Arguably, there has never been a better time for makers of unprofitable and often unproven technologies to go public.
The SPAC market has traditionally been hard to access for all but a small group of institutional investors. As there is limited information on publicly-traded SPACs, selecting the right SPAC in which to invest can seem like a difficult task. While the IPO pipeline looks robust for 2021, the SPAC market is a rapid change and opportunity.