What to know about SPACs as fixed income investments
SPACs, or special purpose acquisition companies, are non-operating publicly traded companies created to acquire or merge with existing companies. Although SPACs have been around for decades, their popularity has grown in recent years, leading to misconceptions about the structure and an oversimplification of the associated risks and benefits.
Recently, ETF Trends Editor Lara Crigger sat down with Jonathan Browne, Portfolio Manager and Director of Research at Robinson Capital, to discuss how SPACs can be used as alternative income investments. and why Browne favors pre-merger SPACs for their attractive risk. /reward profiles.
Robinson Capital specializes in alternative fixed income strategies, offering solutions that deliver higher yield without taking on additional risk for advisors who realize their fixed income portfolios no longer provide the income or security they expect. they used to offer.
Lara Crigger, Editor, ETF Trends and ETF Database: You’re an alternative fixed income store that invests in SPACs. How did you get involved in this?
Jonathan Browne, Portfolio Manager and Director of Research, Robinson Capital: We have always invested in closed-end funds and taken advantage of the irrational discounts they offer. But, as fixed income managers, our goal is always to protect the principles of our clients. What’s unique about [pre-merger SPACs] is that they provide absolute downside protection. Pre-merger SPACs are those that have not yet finalized their merger; all they are is a pool of capital that is raised by a sponsor or management team to eventually go out and find a private company to IPO.
What is unique is that any money or proceeds they raise through a prospectus must be placed in a trust account or an escrow account invested in treasury bonds. Ultimately, whether or not that sponsoring manager strikes a deal, the end investor can redeem their shares for a fiat value, which we’ll call $10 per share.
We know that whether a deal is struck or not, if we can buy them – and right now we can buy them about three, three and a half percent below that $10 confidence value – we know that no matter what, that at the end of the SPAC life cycle, which is usually 12-24 months, we can get $10 back.
So we have this absolute downside protection from pre-merger SPACs. If the market drops 50%, I know that no matter what, I can trade these SPACs for a trust value or a positive return of 3.5%. What other investment have you ever seen where you know your worst case is a positive return?
Crigger: Well, there are obligations, right?
Brown: Pre-merger SPACs are really just a requirement, right? Ultimately, it has a set maturity, just like a bond. It presents the credit interest rate risk of a portfolio of treasury bills because all of that money is just sitting in a trust account that’s invested in tables six months or less so you don’t don’t have the credit and interest rate risk of a corporate bond.
What really excites us is that you have a stock-like upside option – if one of the SPACs we hold announces a merger target that the market finds attractive… You just don’t not have that upside potential in traditional bonds.
Crigger: For a financial adviser looking into this, hearing the argument that you can view these investments as a fixed income investment – it seems like then, by implementing it and executing the strategy, you would pull from your other fixed income allowance and replace with something like that.
Brown: Absoutely. What is also somewhat unique is that it is quite versatile. We approach it as an alternative fixed income because we think it’s an absolute no-brainer, especially if you’re worried about credit or interest rate risk… But we also realize there are advisers who may have an alternative pocket that they have absolute return strategies or mergers and acquisitions type strategies, and that fits perfectly. I can even argue that for someone interested in stocks, this is a much better defensive position in stocks, given that there is an absolute downside.
Crigger: When thinking about the risks inherent in your strategy, what are some of the risks that people need to keep in mind?
Brown: Going back to the pre-merger, the risks are extremely limited. Until they achieve a fusion, [pre-merger SPACs are] just a mass of money waiting to be deployed. And so they’re all sitting in Treasury bills of six months or less. And it is written in each SPAC prospectus that they must be invested in Treasury bonds. Your risk is therefore equivalent to that of a portfolio of Treasury bonds.
Once you pass the pre-merger SPAC and they become stocks, you have 100% downside potential, just like any other stocks in existence. It also means you have the volatility of small cap stocks.
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