Trading SPACs

When a SPAC first goes public, it trades as a unit. This unit is designated on the ticker symbol as ending in -UN, -U, .UN, .U, or some other variation, depending on the platform. The unit generally consists of a share, priced at $10/share, and anywhere from 1/4 to 1 warrant, depending on the SPAC. The warrant allows the holder to purchase a share at $11.50. More recently, some SPACs have gone public with no warrants.

At some point after going public, generally in under 90 days, the SPAC unit separates into the share and warrant. This will be represented as three separate tickers for the SPAC. For example,

• Unit: ABCD-UN
• Share: ABCD
• Warrant: ABCD-WT

The proceeds of the SPAC IPO are held in a trust and invested in treasuries. At the point of business combination, the holders of the shares are given two choices. They can get their investment back, or convert their investment into shares of the company merging in. In the SPAC is unable to consummate a business combination after the set period of time, the SPAC is liquidated and the holders will receive their $10/share back with interest.

As a result, SPACs have low risk for investors. In the worst case, investors receive their $10 back with interest.

In our opinion, the most important factors in evaluating a SPAC would be:

• Sponsor team and their domain: is the sponsor team connected within the segment they are targeting?
• M&A, and public company experience: does the management team have prior experience? Have they worked together on M&A or public transactions previously?
• Prior SPAC experience: does the management team have prior SPAC experience? It’s not a necessity, but can increase the likelihood of a successful business combination
• Sector focus: does the sector have a large number of potential, appropriately sized target companies for the initial business combination?
• Investment by sponsor: does the sponsor sufficient “skin in the game” to motivate them to work towards a business combination?

Most SPACs tend to trade around the same when they first go public. The most notable increase is when a business combination is announced, or when they are rumors of a business combination. In most cases, the price remains elevated throughout the merger process, until the business combination is complete.

Once the business combination is complete, the price tends to drop. Additionally, investors no longer have the protection of the proceeds of the IPO in trust post-business combination.

An example of the stages a SPAC goes through is visible below.

There are two key strategies for SPAC IPO investors that mitigate nearly all risk.

Sell Shares, Hold Warrants

You buy a unit for $10 when the SPAC goes public

You sell your share for $10 (or more) when it becomes separately tradable, and you keep the warrant.

You have paid $0 (or collected a bit of money), and now you have a free option to buy potentially valuable shares of a future public company.

Hold Shares, Sell Warrants

You buy a unit for $10 when the SPAC goes public

You sell the warrant for $1 when it becomes separately tradable, you keep your share, and when the SPAC announces a merger you redeem the share for $10. (Or you sell it in the market for $10 or more before that.)

You have collected risk-free profit. If the SPAC is unable to consummate a merger, you are given your $10/share back, plus interest.

The photo below shows how each strategy is applied to the graphic above.

Some of the materials on this page were adapted from Bloomberg.