Friday, January 29, 2010

1 Year Later: SPAC Returns

Last January we (Hedge Fund Solutions) wrote an article for's RealMoney that discussed the no-downside risk of investing in Special Purpose Acquisition Companies - SPACs.  In the piece we highlighted 19 SPACs trading at an average 5% discount to their trust value.  All 19 companies needed to buy an operating company within 12 months.

(quick recap: Funds for SPACs - commonly known as blank check companies - are raised through an IPO.  Proceeds are held in interest-bearing trust accounts until a target company is identified.  If a deal is not consummated, usually within 24 months of the IPO, shareholders are entitled to get back the trust value + interest.  If a deal is consummated, but the shareholder doesn't like the looks of it, they are still entitled to redeem their shares for the entire trust value + interest. i.e. no-downside risk.)

Since we focus our investment research exclusively on activist investments, we analyzed each SPAC where we knew an activist investor had taken a sizable ownership position.

(additional recap: If more than 20-30% of shareholders vote against the deal, the SPAC is usually liquidated.  Hence the activist investing angle.  Activists looking for a faster return would buy a blocking position in a SPAC trading at a significant discount to trust and demand the fund liquidate sooner rather than later.)
Here are the summarized results for the 19 SPACs we highlighted in the article: 

December 2008
Average number of days to liquidation: 260
Average discount to trust: 5%

December 2009
# Deals Completed: 4
# SPACs liquidated: 13
# Still Pending: 2

Average return on investment: 7.6%
Annualized return on investment: 9.7%
Return on investment where activists held positions: 7.0%
Annualized return on investment where activists held positions: 9.0%

Conclusion:  Who knew the market (SPY) was going to return 28% in 2009?  Although the SPACs we highlighted didn't fare as well, only returning an annualized 9.7%, since there was zero downside risk associated with making the investment, the return - adjusted for risk (i.e. 0) still looks pretty appealing! 
Download the summary analysis here.

Ian Manchel, who was an analyst with HFS in 2008 & 2009, provided the analysis for this update.