The boom in blank-check companies is showing no signs of slowing down. Roughly five special purpose acquisition companies have gone public every trading day this year, according to Goldman Sachs.
This isn't surprising. It seems like almost every day, a celebrity, or big name investor, is making the headlines with the launch of a new SPAC, such as Colin Kaepernick or Shaquille O'Neal.
The legal structure is even making its way into pop culture, featuring in a rap by artist Cassius Cuvée called "SPAC dream", which has over 113,000 views on YouTube.
"If you in the SPAC game you know what I'm talking about. We sick of IPOs day one locking us out," Cuvée said in his song.
Now the spotlight is on hedge funds and their interest in SPACs.
"Hedge funds have embraced the ongoing SPAC boom and so far have been rewarded for that decision," said Goldman Sachs analyst Ben Snider in the February 19 note.
Hedge funds have recently released their fourth-quarter 13Fs, a type of quarterly report that is required to be filed by all institutional investment managers with at least $100 million in assets under management. The documents provide insight into the firms' US equity holdings.
Each quarter, Goldman Sachs analyzes 820 hedge funds equity positions based on their 13F filings as of February 16.
This quarter, the report found that hedge funds were still committed to growth stocks. The same five stocks (Amazon, Microsoft, Facebook, Google and Alibaba) still rank in Goldman Sachs' list of the most popular hedge fund longs for the 10th straight quarter and leverage still remains close to record highs, despite the recent Gamestop short squeeze.
The new addition to this quarter's report is hedge funds' embrace of SPACs and how they are benefitting hedge fund portfolios.
"These SPACs have generated a median YTD return of 8%, an average return of 48%, and only one has posted a decline (just -2%)," Snider said.
One SPAC, Churchill Capital Corp IV (CCIV), even made it into Goldman Sachs hedge funds' very important positions list, which is the top 50 long positions of fundamentally driven hedge funds.
What is a SPAC?
That's a question a lot of investors have been asking. There has been a significant uptick in google searches asking what is a SPAC.
"I'm like a SPAC — what the hell's that? You get in on the ground floor. It paid big, so I searched and then I found more," Cuvée said in his rap explaining the structure.
But more simplistically, a SPAC is formed by a group of investors with a strong background in a particular area. Together they raise money from other investors to acquire an existing private company with the aim of taking it public. Individuals are investing based on the reputation of the investment team and pay $10 a share.
The legal structure became more mainstream in 2020 as big name investors got involved, such as Chamath Palihapitiya and Bill Ackman. Sports betting app DraftKings (DKNG) is one of the most well-known companies to have leveraged the SPAC structure to go public.
SPAC launches in 2020 more than tripled from 2019, according to SPAC Insider. Goldman Sachs analysts said SPACs make up around 59% of total US IPO capital raising in 2020.
This year, roughly five SPACs have gone public every trading day.
On January 27 , Goldman Sachs equity analyst David Kostin and his team provided a report on SPAC issuance and the outlook for 2021. In the report, Kostin said the current pace of five IPOs a day is unsustainable.
So, why the sudden SPAC boom?
Part of the reason both hedge funds and retail investors are flocking to SPACs is the near-zero interest rate environment.
Firstly, investors' money is held in an interest-bearing trust account, usually short-dated US Treasury bills, and can only be used to acquire a company, or to return to shareholders. The rate in the account is between 0 to 25 basis points, which Goldman Sachs economists forecast will be on hold until 2024.
Investors receive a minimal yield on the initial investment as they wait for a sponsor to identify a potential target and then have a put option to redeem their shares with accrued interest if they do not like the acquisition, Kostin said. They can also keep accompanying warrants whether they continue with the investment or redeem shares.
"SPACs can act as a cash substitute with equity upside when fed funds are at the lower bound," Kostin said.
Bank of America echoed these principles in a primer on SPACs on February 19.
"We attribute the market's growth to a number of factors, including institutional investors seeking alternative sources of yield, private companies pursuing an alternative to the costly and time consuming IPO process, and retail investors (with a penchant for risk) aiming to access private assets, which historically have been out of reach," Bank of America cross-asset strategy analyst Michael Carrier said.
Carrier says the benefits for investors as limited downside risk, liquidity, a known time limit and an opportunity to invest in pre-IPO deals. However, he also notes risks for investors range from misaligned interests, to target company quality to sponsor and opportunity cost.
In January, Kostin said in conversations with portfolio managers, many cite the boom in SPACs as an example of exuberant investor behavior.
However, it is not only retail investors who are getting involved. It's hedge funds too.
"To illustrate, take the perspective of a hedge fund that purchased units during the SPAC's IPO. If the share price pops in response to the deal announcement, the hedge fund can sell its shares for a gain, but if the share price declines below the IPO price it can redeem for its share of the cash in the trust account-regardless, it can keep the warrants to retain exposure to the new company at no cost, allowing for potential upside with no downside risk. The ability to redeem is utilized often," Carrier said. "In fact, according to a recent Stanford and NYU Law study(*), a median of 73% of SPAC IPO proceeds were returned to shareholders via redemptions during 2019 and the first half of 2020."
In Carrier's primer, he notes hedge funds and convertible arbitrage funds are some of the largest investors in SPACs. His research shows 10 hedge funds owned more than a quarter of all SPAC securities, as of the third quarter of 2020.
Insider breaks down the most popular SPACs with hedge funds, according to Goldman Sachs, based on 13Fs filed as of February 16.
Hedge funds top picks:
1. Pershing Square Tontine Holdings Ltd
Ticker:PSTH
IPO date: July 22, 2020
Year-to-date return: 8%
Number of hedge fund owners: 37
Source: Goldman Sachs
2. Churchill Capital Corp IV
Ticker:CCIV
IPO date: July 30, 2020
Year-to-date return: 480%
Number of hedge fund owners: 34
Source: Goldman Sachs
3. Foley Trasimene Acquisition Corp
Ticker:WPF
IPO date: May 26, 2020
Year-to-date return: -2%
Number of hedge fund owners: 31
Source: Goldman Sachs
4. Cohn Robbins Holdings Corporation
Ticker:CRHC
IPO date: September 8, 2020
Year-to-date return: 8%
Number of hedge fund owners: 28
Source: Goldman Sachs
5. Artius Acquisition Inc
Ticker:AACQ
IPO date: July 13, 2020
Year-to-date return: 20%
Number of hedge fund owners: 26
Source: Goldman Sachs
6. Jaws Acquisition Corp
Ticker:JWS
IPO date: May 13, 2020
Year-to-date return: 10%
Number of hedge fund owners: 26
Source: Goldman Sachs
7. Foley Transimene Acquisition Corp II
Ticker:BFT
IPO date: August 18, 2020
Year-to-date return: 12%
Number of hedge fund owners: 25
Source: Goldman Sachs
8. E Merge Technology Acquisition Corp
Ticker:ETAC
IPO date: July 30, 2020
Year-to-date return: 3%
Number of hedge fund owners: 24
Source: Goldman Sachs
9. Go Acquisition Corp
Ticker:GOAC
IPO date: August 4, 2020
Year-to-date return: 4%
Number of hedge fund owners: 24
Source: Goldman Sachs
10. CC Neuberger Principal Holdings II
Ticker:PRPB
IPO date: July 30, 2020
Year-to-date return: 8%
Number of hedge fund owners: 23
Source: Goldman Sachs
11. RedBall Acquisition Corp
Ticker:RBAC
IPO date: August 12, 2020
Year-to-date return: 0%
Number of hedge fund owners: 23
Source: Goldman Sachs
12. Dragoneer Growth Opportunities Corp II
Ticker:DGNS
IPO date: November 16, 2020
Year-to-date return: 11%
Number of hedge fund owners: 22
Source: Goldman Sachs
13. CHP Merger Corp
Ticker:CHPM
IPO date: November 22, 2019
Year-to-date return: 4%
Number of hedge fund owners: 21
Source: Goldman Sachs
14. Juniper Industrial Holdings Inc
Ticker:JIH
IPO date: November 7, 2019
Year-to-date return: 33%
Number of hedge fund owners: 21
Source: Goldman Sachs
15. Star Peak Energy Transition Corp
Ticker:STPK
IPO date: August 17, 2020
Year-to-date return: 114%
Number of hedge fund owners: 21
Source: Goldman Sachs