SPACs, also know as “blank-cheque companies,”continue to attract strong investor enthusiasm, but the broad SPAC market is down roughly 20% since mid-February. Anthony Okolie speaks with Anna Castro, Senior Portfolio Manager, TD Asset Management, about what’s driving the recent volatility.
- SPACs, better known as Special Purpose Acquisition Companies, continue to attract strong investor enthusiasm in 2021, but the broad SPAC market is down roughly 20% since mid-February. Anna, can you help us understand what's driving this reversal? And has the bloom come off the rose, so to speak?
- Hi, Tony. It's interesting that when the last time we spoke, we talked about pockets of froth in the market, and a healthy correction is needed. And we saw that really quickly.
In the past few weeks, you had the sell-off occur, and it was quite violent. So the question would then be what were the factors that drove this quick repricing? The first one would be that the high bond yields, which rapidly rose from 1% to 1.6% in three weeks, and this caused a rotation from high-growth names in technology to cyclical sectors. And that impacted SPACs because most of them are high-growth with earnings years from now.
The second factor was that through the beginning of the year till now, we've had huge supply of SPAC IPOs, and it ranges from levels of high quality and low quality. So there was a lot of supply coming in the market at the same time.
And thirdly, we talked about, as I mentioned, the areas of froth, and you could see this mostly in electric vehicles sector for the SPACs. You've had a number of them leading up to this, being bid up significantly above the $10 cash interest even before a deal was announced, to even levels to $20, $60. And so when you have such big moves in the market and huge sell-offs-- and some investors actually are levered or have mergers, it can get very painful and disorderly.
And can this violent market repricing or rotation, as you mentioned-- can this be an opportunity to spot some value in the market?
- Yes. And so in this case, where you have more choices-- and a lot of even the high-quality backed sponsors in the SPACs are trading at close to $10, which is equivalent to cash-in trust and still offer you optionality for a good deal-- that is where the value is. So what we've been doing is staying very selective, choosing our management teams based on their track record, and adding to them IPO prices of $10 or even below $10 in the secondary market.
I do want to also mention that despite the sell-off and the prices trading at $10 or closer to what is cash-in trust, that is really how it should be until a deal is announced. That is a more rational and healthy market.
Thirdly, in this situation, you could also have strong management teams still use the opportunity to take advantage and acquire private companies that are attractive to list them in the public markets. And we're seeing that despite the dislocation and the volatility in the past few weeks, you've had interesting private companies come to public or in the announcements brought by experienced SPAC sponsors.
Example would be Matterport, which is a leader in 3D spatial data for property technology-- so that's in the real estate sector-- brought in by the Gores Group, which is experienced SPAC sponsors, and their recent hire from SoftBank Vision Fund.
Another example is eToro, which is a fast-growth social trading platform that is announced by PepsiCo and who is experienced in the fintech sector as an operator as well as a SPAC sponsor. So we're still seeing some deals come in that show that the SPAC can actually still be an attractive IPO alternative for the right targets.
And so as the dust settles from this recent wave of volatility, what should investors take from this?
- So just like any investment, whether it's SPAC or any other common equity or anything that you would invest in, it's very, very important to be selective and do your due diligence. It really boils down to your own personal goals, as well as your risk appetite. For us, SPACs is just one of the hybrid alternatives we incorporate in our portfolio.
We focus on a total portfolio diversification. We look at a variety of strategies. We analyze them and do due diligence to see how they would fit and offer growth and capital preservation across cycles.
Anna, thank you very much for your time.
- Thank you for having me.