Special Purpose Acquisition Companies (SPACs) are all the rage on Wall Street. It is an asset class that retail investors are also adopting widely.
However, blank check transactions are not without pitfalls. Investors can mitigate some of this risk through an active fund structure offered by the SPAC and New Issue ETFs (SPCX).
See also: ETF of the week: ETF SPAC & New Issue (SPCX)
According to Tuttle, the most appropriate strategy for managing an SPAC portfolio is through active management, as it can be more flexible to react to changing market events. This is not a place for an index fund based on a rigid set of rules. When considering investing in an SPAC, it is essential to focus on the management team.
A critical part of PSPC transactions is that these transactions often increase the credit quality of the acquiree, but there is more to consider.
“After a merger with a publicly traded Special Purpose Acquisition Company (SPAC), private issuers typically emerge with stronger credit quality, at least initially,” according to Moody’s Investors Service. “They tend to have lower debt and improved liquidity, according to analysis of over 30 corporate issuers we assess that have been involved in a merger with a publicly traded PSPC – known as a transaction. de-SPAC – over the past four years. “
It’s not just PSPC speculation
Blank check companies are all the rage because the IPO process is institutionalized, cumbersome and inflexible, especially to adapt to the reality of Covid-19 where virtual roadshows are less effective. With PSPC, there is an alternative for a business to go public, which can be cheaper, faster, and more transparent. Agreements and processes also fall under the increased competence and control of the company.
See also: A new ETF strategy for the rise of SPAC
âBecause PSPC shareholders can vote in favor of a transaction while choosing to repurchase their shares for cash, called the repurchase rate, the final repurchase rate can have a significant impact on the final amount of cash. available in the PSPC trust, âadds Moody’s. âSPACs can have high redemption rates that force the sponsor to find other investors through private placements to complete the transaction. Thus, the final capital structure will always be within a range of outcomes that may result in significantly higher debt or lower liquidity if the sponsor cannot find private investors to compensate for the high repayment rates.
SPCX is a long strategy, but some professionals still like to bypass blank check companies.
âThe process of a de-PSPC transaction and the immediate reorganization after the transaction closes involves financial and governance risks; the degree of which depends on the issuer, âadds Moody’s. âHowever, a key positive for de-SPAC transactions is that the process of going public through a de-SPAC requires a company to devote considerable time and resources to technical accounting and reporting. This generally results in improved internal controls and provides a greater degree of accuracy around the entity’s financial reporting.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.