The SPAC Bust Has Created Bargains for Investors. How to Play it.

The hottest market in history for special-purpose acquisition companies, or SPACs, has slowed down markedly in recent weeks. That’s being felt both in the relative dearth of new SPACs filing to go public and in the stock-price performance of already listed SPACs. The pullback has opened up numerous arbitrage opportunities for yield-seeking investors.

SPACs list on a stock exchange in an initial public offering just like any other company. However, the so-called blank-check companies don’t have any business operations when they list. SPACs are just publicly traded cash shells with backers—called sponsors—responsible for identifying and negotiatinga merger with a private operating company, usually within two years. Cash raised in the IPO sits in a trust earning interest.

Once the companies merge, the operating company takes over the SPAC’s stock-market listing—the ticker symbol usually changes—and puts the SPAC’s cash toward investing in the business, buying out existing investors, or other uses. SPAC shareholders and sponsors both get a stake in the combined company.

SPACs exploded onto the scene in 2020 after spending more than two decades asrelatively obscure vehicles with less-than-stellar performance. Nearly 250 SPACs raised some $83 billion in IPO proceeds last year, according to SPAC Insider, with another 298 raising $97 billion just since the start of 2021. More credible sponsors, rock-bottom interest rates, and the market’s insatiable appetite for new public companies have fueled the SPAC boom.

Companies including QuantumScape (ticker: QS),Playboy(PLBY),Utz(UTZ), and DraftKings(DKNG) have all taken the SPAC route to go public over the past year. Those deals have beenhits with investors, and SPAC shareholders have earned a multiple on their investments. But plenty of other recently completed SPAC deals—such as MultiPlan(MPLN),Clover Health(CLOV), or United Wholesale Mortgage(UWMC)—have flopped.

Betting that a SPAC’s sponsors will complete a well-received merger is an inherently speculative exercise. It requires investors to put their faith into the team’s connections, negotiating skills, and ability to judge the prospects of a potential target business. The frothy SPAC market for most of the past year has been happy to take that bet, with the vast majority of SPACs trading at a premium to their trust values—until a few weeks ago.

The average SPAC’s market pricepremium to its trust valuehit a high of 26.9% in early March, according to data from theAccelerate Arbitrage Fund’s(ARB.Canada) Julian Klymochko. But just as rising bond yields have deflated valuations in many growth stocks and more speculative companies, they’ve helped prompt a correction in the SPAC market. The average SPAC premium had declined to about 3.5% by the end of March.

Numerous SPAC shares now trade for less than their per-share trust value. That opens up a much simpler and less speculative arbitrage strategy for investors in the sector thanbetting on deal makers’ abilityto close a deal with an attractive target company. Arbitrage investors swoop in when the price of an asset temporarily diverges from its underlying value and pocket that difference. This trade is similar to the arbitrage strategy employed by investors in closed-end funds, which involves buying or selling when the market price diverges from the net asset value per share.

That’s applicable to SPACs thanks to a unique right that their investors have: At the time of a SPAC’s merger, shareholders can redeem their stock for a proportionate share of the SPAC’s trust cash instead of participating in the deal. A SPAC that reaches its deadline without completing a merger automatically liquidates and returns its trust cash to shareholders.

Take Spartacus Acquisition(TMTS), a technology, media, and telecom-focused SPAC that raised $200 million in an IPO last October and a deadline 18 months later on April 20, 2022. The SPAC’s stock traded around $9.90 on Monday, versus a trust value per share of $10.15,according to its IPO prospectus.

Investors can effectively buy $10.15 worth of cash for $9.90, and still have the potential upside of a well-received deal if Spartacus’ sponsors deliver. In the case of a dud, investors can choose to redeem and get the $10.15 trust value plus whatever interest is earned meanwhile. That’s a guaranteed minimum yield of 2.5% to be received between now and the SPAC’s deadline about a year from now. Compare that to the 0.06% yield on the U.S. 1 Year Treasury bill.

Here are 20 SPACs that were trading at meaningful discounts to their trust values on Monday.

SPAC Arbitrage Opportunities

Not all SPACs on the market are available at such relative bargains. Vehicles frombig-name backers or serial sponsorscan still command hefty premiums. Pershing Square’s Bill Ackman -backedPershing Square Tontine Holdings(PSTH) was trading for about $24.90 on Monday, versus trust cash of about $20 per share. Shares of Chamath Palihapitiya-sponsoredSocial Capital Hedosophia Holdings IV(IPOD) andSocial Capital Hedosophia Holdings VI(IPOF) were trading at about $11.15 and $10.70, respectively, above their per-share trust values of around $10 each. Same goes forGS Acquisition Corporation Holdings II(GSAH), backed byGoldman Sachs(GS), which has a trust value per share of about $10 and was recently trading at about $10.50.