Follow the SPAC Upside

April 3, 2021 by Ted Seides

The resetting of SPAC prices creates an evolving set of opportunities. My portfolio of post-IPO, pre-merger SPACs looks asymmetric and attractive. The 5% premium to cash in Trust has disappeared, and shareholders are left with upside optionality and no downside. Strategically, I selected SPACs that are barbelled by investment style between first-rate venture capital managers and savvy private equity investors. I’ve invested in my business school classmate Rick Heitzmann at FirstMark (FMAC, $9.83), Highland Capital (HTPA, $9.67), and Frazer (FLAC, $9.92) in life sciences. Each gives the opportunity to invest alongside a top venture manager with a positive carry. Even the most highly valued pre-merger SPACs, like those sponsored by Altimeter (AGCB, $10.50) and Ribbit (LEAP, $11.00), have sold off significantly.

As for private equity managers, I’ve leaned into Sam Zell (EQD, $9.94), who is not going to chase hype, Todd Boehly (HZAC, $10.10) – a colleague twenty years ago at J.H. Whitney and one of the smartest deal makers I know, and a subset of others with terrific pedigrees. The challenge with this side of the barbel is that price discipline may decrease the odds of these sponsors completing deals in today’s environment.
More interestingly, SPAC warrants have sold off 50% or more, leaving an attractive opportunity with substantial upside. SPACs go public as a unit of shares and warrants. Seven weeks after the IPO, the shares and warrants trade separately alongside the unit. A typical structure with a SPAC offered at $10 has warrants with a 5-year term and strike price of $11.50. Today, many of these warrants trade around $1, around half the value from a month ago. Take EQD as an example: the shares trade at $10, and the warrant is $0.95 down from $1.80 at the beginning of March. If Sam does a deal worth $10, the shares need to rise 15% between now and September 2025 (4.5 years, or 3.2% annually) for the warrant to have intrinsic value. From there, the upside leverage is

What Ted’s Thinking April 3rd, 2021

extraordinary. If the stock rises 7%/year (35% total), the warrant holder earns 100%; at 8.6% (45%), the gain is 200%. Last I heard, Sam does not get out of bed in the morning for single-digit return opportunities. The warrants seem mispriced when analyzed as an option. The implied volatility of warrants like EQD is around 18%, which is a discount to that of the S&P 500 as measured by the VIX. Many de-SPAC mergers are late-stage private companies with substantially higher expected volatility than large cap stocks, rendering these securities more valuable. My sense is these warrants are not well followed and indiscriminately sold off with deleveraging in the SPAC universe.

The selloff in the SPAC market creates intriguing opportunities to invest alongside venture capital and private equity sponsors and reap potentially large rewards. I have maintained my portfolio of cash SPACs (on leverage) and added warrant positions. The shares are an attractive cash substitute, and the warrants assume risk and duration with the potential for windfall gains. Sponsor selection is key, as history does not shine brightly on the performance of SPACs in aggregate. But I live at the intersection of manager selection and investment opportunities, so I just love it.