We talked to the US investment firm RiverNorth about how it plays the market for special purpose acquisition companies, or SPACs.

Markets move so fast that it’s hard to believe that more than two years ago, blank-check companies, aka special purpose acquisition companies (SPACs), were the talk of the town. Well, they were certainly the talk of Wall Street. Even sports celebrities got into the act. Perhaps that should have been a warning?

SPACs have been around for decades but in 2020 and 2021, the sector exploded because investors saw these vehicles as a quick way to raise funds in companies and achieve exits for privately held firms without the costs and processes of IPOs. The Securities and Exchange Commission, however, fired a warning shot at the market in 2021 because of the sheer volume of deals, and some of the activity faded, accentuated also by the rise in Fed interest rates last year.

A SPAC is a publicly traded firm that has no operations, no assets – other than cash and the sole purpose of buying another company. These entities, which are formed by investor groups, known as sponsors, raise funds from other investors. It is common that SPACs' creators don’t know what firms they might buy. Once money is amassed, SPACs must deploy it or return it to the investors within 18 months. And that means some of these creatures are starting to sweat. 

As the number of SPACs on the street fell, and markets suffered as rates and inflation rose last year, the dynamics of this market changed. At the beginning of 2021 and the second half of 2020 many SPACs traded at a premium to their net asset value. That’s flipped, with SPAC shares more typically at a discount to NAV.

And given the logic, the way SPACs now trade is an opportunity for investment firm RiverNorth, a firm that oversees more than $5 billion in assets under management. Since 2004 it has traded closed-end funds, and says it is one of the largest institutional investors in the space. RiverNorth has been investing in SPACs since 2015. 

“We view SPACs as a similar asset class to closed-ended funds. There is a discount between the cash and net asset value of a SPAC,” Patrick Galley (pictured), chief investment officer and CEO at RiverNorth, told Family Wealth Report. 

To explain the logic of SPAC investment, Galley said that today, a SPAC sponsor must incentivize investors at IPO because the secondary market is trading at a discount to NAV.  To do so, the sponsor puts in 3 to 5 per cent extra cash into the trust to create incentives for investors. 

“We estimate annualized returns in SPACs are approximately 7 per cent today. Annualized discounts are approximately 3 to 5 per cent plus the 3 to 4 per cent in annual interest a SPAC earns from the cash sitting in trust and invested in money market type securities and/or Treasuries,” Galley said.

Given that inflation bites into cash returns and people are focused on returns, such results look appealing.

A number of banks serving high net worth and family office clients have been active in the space, such as Citi Private Bank (see this interview here). We have also reviewed whether SPACs work in the RIA market.

The US law firm Katten has argued that SPACs, according to firms it surveyed, appear to offer a simpler process than standard IPOs. SPAC issuers have additional flexibility with certain disclosures in SPAC transactions compared with traditional IPOs, creating free space for SPAC target companies to tell their stories to investors – an advantage that 74 per cent of respondents cited for SPAC deals. That can be especially advantageous for early-stage companies in industries such as technology and life sciences, which often do not yet have the established financial track records that IPO investors typically look for.

The SPAC phenomenon included its fair share of showbiz/sports glitz, possibly suggesting that the sector was getting overhyped. For example, in October 2022, a SPAC that included a former National Football League quarterback Colin Kaepernick announced that it was liquidating. The entity was called The SPAC Mission Advancement Corp.
 

Risk-return appeal
Holding SPACs is “pretty compelling from a risk-return point of view and there is no duration risk,” Galley said. 

Galley typically buys common shares if purchasing in the secondary market. “If we buy at IPO we are buying units which can be broken apart after a period of time into common shares and warrants that both trade publicly,” he continued. RiverNorth is only interested in SPACs before the merger stage.

To tap into the SPAC trend, RiverNorth launched a SPAC-related exchange-traded fund in 2021 – SPCZ is an actively managed ETF.  

And for all the sharp change in the behavior of SPACs over the past two years, there is plenty of potential for this space if handled correctly, said Galley. “It [SPACs] is a sustainable asset class. There is a need for it in capital markets when firms want capital in an expeditious fashion.”

Spend it or pay it back
As of late last year, there were about 398 SPACs looking at acquisitions and they are all approaching their deadlines for deploying capital.

As fewer SPACs are in the market and many have a deadline to hit in deploying capital, the share/NAV discount will persist, Galley said. Prior to the 2020 busy period, about 15 SPACs went public a year. That number skyrocketed before fading in 2021 and into 2020.

It is possible for SPACs to extend the capital deployment time beyond 18 months, but sponsors have to pay investors to do this, Galley added.