By Nicholas Skibo, CFA, CAIA, a co-founder and Managing Partner at Gritstone Asset Management.
SPACs: A History of Asymmetric Returns
Given the high-volume of SPAC IPOs in Q1 2021, and the resulting media coverage following their spike in issuance, most institutional investors are likely familiar with the basics of special purpose acquisition companies (“SPACs”).
However, it may not be common knowledge that SPACs have occupied a corner of the equity markets since the 1990’s, and that the SPAC structure as we know it today rose out of the tumult of the global financial crisis of 2007-2008.
Ample research exists on the history of the SPAC structure, so this report does not cover all the changes to the structure after 2007-2008. However, one of the key changes worth highlighting is that since 2010 (when the first of the post-crisis SPACs were raised) it has become market standard for SPACs to fund trust accounts so that the initial trust value per share equals, or even exceeds, 100% of the IPO price. For example, the typical SPAC with a $10.00 IPO price usually contributes $10.00 per share into a trust account immediately following the IPO. This change, coupled with existing redemption rights, resulted in a structure with the ability to generate asymmetric returns. For example, assuming an investment at IPO, a SPAC offers investors potential bond like returns (resulting from the SPAC trust invested in government securities and redemption rights) as well as further potential equity-like upside returns in the event the SPAC originates a compelling business combination opportunity. Figure 1 below illustrates theoretical returns of the SPAC structure[i].
While the current SPAC structure now has more than a decade of history generating asymmetric returns, much of the available research focused on “SPAC performance” has focused on the performance of operating companies after they completed a merger with a SPAC, or has combined both SPAC-period and post-merger period performance together. Once a SPAC completes a merger with an operating company, it becomes an operating company. Conflating SPAC performance with the performance of operating companies that have merged with a SPAC is analogous to combining the returns from a venture capital investment exited at IPO with the return of an investment in the same company made at the time of its IPO: the results may be interesting to debate, but they would hardly be a good way to determine how well the venture capital investment performed. Until recently, limited research has focused on SPAC performance from their IPO up to the close of a business combination.
One aim of this paper is to answer the question: how have SPACs performed from their IPO to the close of an initial business combination (or liquidation if a business combination is not closed), a period Gritstone calls the SPAC “lifecycle”.[i] Before considering lifecycle returns, it is important to remember two key facts: (i) the changes to the SPAC structure after the global financial crisis of 2007-2008 with the current structure emerging in 2010 as discussed above, and (ii) SPACs are an event-driven opportunity with returns generated by the perceived quality and timing of initial business combinations.
To account for these issues, SPAC lifecycle returns within this analysis are presented for all SPACs raised since 2010 and listed on a major U.S. exchange. Additionally, returns are presented for SPACs by their status: active SPACs (those either seeking business combinations, or with a pending, but unconsummated, business combination), and full lifecycle SPACs (those with either a closed business combination or liquidation after failing to close a business combination). Aggregate lifecycle returns for U.S.-listed SPACs since 2010 are presented in Table 1 below.
Even more compelling than the historical absolute returns is the asymmetric nature of these returns. As noted previously, since 2010 it has been virtually a market standard for SPACs to place at least 100% of their offer price per share into a trust account. Further, a key component of what makes a SPAC a SPAC is the ability for investors to redeem their common stock for a pro rata portion of the trust at the time of an initial business combination close (or the liquidation of the trust and a return of proceeds to common stockholders in the event a business combination is not closed).
These components taken together allow investors to manage potential downside risk (assuming that SPAC securities are only purchased at prices that are equal to, or below, per share trust balances). In effect, for prudent investors, SPAC trusts and redemption rights can be used to hedge against potential losses when investing in SPAC securities. As illustrated in Figure 2 and Figure 3 below, since 2010, SPACs that have worked through their full lifecycle (from IPO to the close of a business combination or liquidation) have generated returns which are asymmetrically distributed, with significant, positive skew.
Figure 4 above details the return attribution by security type for all full lifecycle SPACs. Figure 4 is often of interest to investors contemplating allocations to SPACs. However, it is important to note that multiple additional factors should be considered to fully understand the drivers of SPAC returns. For example, one could interpret the positive return attributed to stock rights in Figure 4 as an indication that stock rights contribute positively to SPAC returns. While this is true on an absolute basis, stock rights have historically been negatively correlated with lifecycle returns. Put another way, SPACs with stock rights as part of their unit composition generally had lower lifecycle returns than SPACs without stock rights. Similarly, additional factors should be considered when contemplating the impact of different warrant ratios and historical SPAC returns (SPAC units with ½ a warrant compared to units with a full warrant for example).
The rapid rise and then fall in SPAC issuance early this year has generated many headlines and likely many more questions from investors. Recent press on the SPAC market has varied from articles highlighting the poor performance of select operating companies following SPAC mergers[i], to others bluntly asking “Are SPACs just for Suckers?”[ii], to yet others noting that SPACs are “now trading at deep enough discounts for even skeptical investors to consider”[iii]. Additionally, significant research and press has highlighted the conflicts of interest between SPAC sponsors and investors inherent in the SPAC structure.
Adding to the confusion, many “SPAC” discussions conflate issues related to SPACs with issues related to operating companies acquired by SPACs.4 While the performance of “de-SPAC” companies has certainly varied, with some performing well and others performing poorly, it is not clear that they have had markedly different performance than companies completing traditional IPOs. From 1980 through 2019, the average 3-year returns for companies after IPO have lagged the market by significant margins and from 1975 to 2015, almost 60% of IPOs have generated losses over a 5-year hold period.[iv] But this approach to SPACs misses the larger picture: potential risks and returns vary significantly between the SPAC lifecycle and post-SPAC periods. Given this, investors should consider SPAC lifecycle opportunities and de-SPAC opportunities separately. As SPAC prospectuses note, a SPACs is a “company formed for the purpose of effecting a merger”,[v] and once a SPAC completes a merger with an operating company, it becomes an operating company that opted for a different path to a public listing.
Many investors appear to be undecided on the opportunities presented by SPACs, and yet others may be overlooking the opportunity entirely, and understandably so given this backdrop. While the prior section outlining historic SPAC lifecycle returns may get some investor’s attention, it also raises another question: even if SPACs have historically generated compelling lifecycle returns, where does the market stand today?
In late 2020 and early 2021, the wider market appeared to have realized the opportunity presented by SPACs, with new investors and capital surging into the space. This resulted in prices for SPACs with recently completed IPOs (and thus, still in the beginning of their search for merger targets) reaching historically high premiums to their trust balances. High prices for recent IPOs led in turn to greater media coverage and even more demand for SPACs, prompting a flood of SPAC issuance.
However, the frenzy was short-lived and just as quickly the market softened, with prices for recent SPAC IPOs dropping from premiums relative to trust funding levels, to modest discounts. Discounted prices for recently issued SPACs have had a moderating effect on issuance levels. Today, while SPAC IPO activity continues it is well below the peak reached earlier this year.
Discounted price levels for recently issued SPACs continue to persist in the SPAC market and have more recently deepened (as illustrated in Figure 5).[vi] In Gritstone’s view, current levels present investors with a potentially attractive entry point as they create an opportunity to build a diversified portfolio at compelling prices. Additionally, units that trade at discounts to trust levels, ceteris paribus, present opportunities for enhanced returns (via both discounts to trust and shortened hold periods given fixed SPAC timelines).
Even with pandemic-related volatility early in the year, lifecycle returns for SPACs consummating initial business combinations were very strong for most of 2020 and also during the first half of 2021. These returns attracted many new investors to the space, leading to a significant surge in SPAC issuance. However, market prices for SPACs seeking transactions have since softened, with a majority of SPACs trading below their trust balances (and typically IPO prices) following their IPO (as illustrated in Figure 5 above). This repricing of the SPAC market has also carried over to SPACs with announced transactions, with lifecycle returns for SPACs with recently closed transaction below the historically high level reached earlier in the year. However, it is worth noting that SPACs that have closed business combinations during Q3 2021 (through August) have still generated annualized lifecycle returns of 17.0% (as illustrated in Figure 6 below).
While returns are down from the historically high levels attained in the past few quarters, lifecycle returns generated in the SPAC market to date in Q3 have been in-line with long-term historic levels (see aggregate market returns since 2010 in Table 1 above), and returns remain particularly compelling when considered on a risk-adjusted basis.
 SPAC common stock is typically redeemable for a pro rata portion of trust value (subject to adjustments) only under specific circumstances and typically only prior to the initial close of a business combination. Some SPACs may utilize tender offers rather than redemptions to retire common stock. Trust balances per share may be less than the IPO price and/or redemption proceeds may be less than the original IPO price. In the event a business combination isn’t closed, SPAC common stock is typically redeemable for a pro rata portion of trust value (subject to adjustments) and warrants expire worthless. In the event of a business combination, SPAC common stockholders may either redeem, sell, or convert their shares and warrants entitle holders to purchase additional shares of common stock (subject to certain terms and conditions). SPAC investors may have an incentive to redeem common stock upon a business combination if market prices fall below potential redemption proceeds and may seek to hold or sell warrants separately.
 A significant (and growing) body of research exists on the performance of companies after they’ve merged with a SPAC. While analysis of “de-SPAC” performance relative to traditional IPOs is outside the scope of this paper, it is worth noting that like the performance of companies after traditional IPOs (where almost 60% of IPOs have generated losses over a 5-year hold period – Source: Jay Ritter, IPO Data), the performance of de-SPAC companies varies widely, with many examples of both strong and poor results. Following the close of a business combination, SPAC common stock is no longer redeemable and market prices may fall significantly below original SPAC IPO prices, potentially resulting in losses for stockholders that elect not to redeem or sell in connection with a de-SPAC transaction.
 SPAC Rout Erases $75 Billion in Startup Value; The Wall Street Journal; September 2, 2021.
 Are SPACs just for Suckers; MoneyWeek; September 21, 2021.
 The SPAC Bubble is Burst. It May Be Time to Invest; The Wall Street Journal; September 14, 2021.
 Average 3-year buy-and-hold, market adjusted returns for 8,610 IPOs from 1980 through 2019 equaled -15.8%. In addition, 59.5% of 7,963 IPOs from 1975 through 2015 generated 5-year buy-and-hold returns ≤0%; Source: tables 16 and 16e respectively from Initial Public Offerings: Updated Statistics; Jay Ritter; August 25, 2021.
 Churchill Capital Corp. VII IPO prospectus.
 Unit price analysis includes all SPACs that have completed an IPO within the past two months of each measurement period.
About the Author:
This report is excerpted from “The Case for SPACs”, authored by Nicholas Skibo, CFA, CAIA, a co-founder and Managing Partner at Gritstone Asset Management. The full report is available here: https://www.gritstoneam.com/case-for-spacs-sept-2021
Gritstone Asset Management is an investment advisor focused on special purpose acquisition companies. Mr. Skibo has been a Chapter Executive for the Washington DC Chapter of the CAIA Association since 2019. You can follow him on LinkedIn. To access up-to-date analytics for the SPAC market, please refer to Gritstone’s SPAC market dashboard: http://www.gritstoneam.com/spacdata
SPAC Market Historic Return Calculation Disclosures
PAST PERFORMANCE IS NOT, AND SHOULD NOT, BE CONSTRUED AS AN INDICATION OF FUTURE RESULTS AND IS INCLUDED FOR DISCUSSION PURPOSES ONLY.
This analysis includes SPACs, identified by Gritstone, that have completed an IPO since 2010 and originally listed on a major U.S. exchange and does not include SPACs raised prior to 2010 and is therefore not a comprehensive listing of all SPAC returns. Gritstone was established in early 2018 and was not in business during a majority of this time period. Efforts have been taken to create a comprehensive listing of SPACs meeting the aforementioned criteria. While Gritstone believes this listing to be comprehensive, Gritstone does not guarantee its accuracy, completeness or fairness.
Returns are calculated for SPACs grouped by their status as of the date shown. Returns are calculated on a gross basis, and do not reflect any fees, such as management fees, incentive fees or other expenses which may be incurred by a fund and which would reduce returns. Returns are calculated assuming an investment in one unit of every SPAC listed on a major U.S. exchange since 2010 and tracked by Gritstone, from a SPAC’s IPO date until either the date shown (if the SPAC has yet to close a business combination or liquidate) or the final business combination closing date. Lifecycle returns are calculated assuming an initial purchase of a SPAC unit at the IPO price and date and assuming an exit at the higher of (i) market prices for SPAC one week before the close of an initial business combination, or (ii) liquidation or redemption proceeds. For active SPACs, exit prices are based on market prices for SPAC units on the date hereof as reported by Bloomberg L.P. (“Bloomberg”). In select instances where unit prices are not available, or where unit prices are based on limited volume, implied unit prices may be calculated based on prices for the component parts that comprise a unit (common shares, warrants, and rights (if applicable)).
In general, closing prices as reported for a specific date by Bloomberg are used for market prices. However, in select instances, closing prices may not be available or are based on limited volume. In these instances, market prices used to calculate IRRs may be based on other pricing metrics available from Bloomberg. These other pricing metrics may include volume weighted average prices (“VWAP”) for selected time periods (for example, 7-days prior to a targeted date), or the last available closing price. In select instances where (i) market prices are below trust redemption prices, or tender offers completed by a SPAC sponsor, in connection with the closing of a business combination, and (ii) where a material proportion of shareholders participated in the redemption or tender offer, exit prices used to calculate IRRs may be based on a combination of per share redemption or tender proceeds attributable to common shares and market prices for warrants and rights (if applicable). Additionally, in select instances where Bloomberg does not have prices, other publicly available pricing sources have been used (reports filed with the SEC, press releases, company presentations, etc.).
Calculated returns may be based on closing prices, or other pricing metrics, with limited underlying trading volume.
Exit prices used to calculate IRRs for liquidated SPACs are generally based on per share proceeds generated as a result of the redemption or tender offer of a SPAC trust account following the failure of a sponsor to close a business combination prior to a SPAC’s trust redemption / liquidation deadline.
Annualized Returns are calculated using Microsoft Excel’s XIRR formula.
Metrics for the S&P Total Return Index as calculated and reported by Bloomberg using Bloomberg’s Total Return Analysis function and assume (i) a single purchase and sale of the index on December 31, 2009 and August 31, 2021 respectively, and (ii) all dividends are reinvested into the index.
Aggregate SPAC lifecycle returns by quarter of completed business combination are calculated assuming the purchase of one SPAC unit at the time of its original IPO and exit proceeds as outlined above for each SPAC that completed a business combination within a specified period.
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