A portfolio manager who has invested in SPACs since 2007 recounts their evolution from 'financial backwater' then to 'feeding frenzy' today — and shares how to identify attractive ones, including 3 on his radar

  • Evan Ratner is a portfolio manager specializing in SPAC at Easterly Alternatives.
  • He started investing in SPACs in 2007 and witnessed how they have evolved into a "feeding frenzy."
  • He shared the key to finding attractive SPACs, including three 'blank-check companies' on his radar.
  • Visit Business Insider's homepage for more stories.

Evan Ratner never thought he'd see the SPAC boom of 2020. 

"SPACs used to be a backwater as a way for guys to easily raise pools of capital," said Ratner, who started investing in Special Purpose Acquisition Companies in 2007. The so-called "blank-check companies" are created solely to raise capital through an initial public offering and acquire an existing firm.  

More than a decade later, the SPAC narrative has completely flipped on its head, Ratner said.

According to SPAC Insider, 248 SPACs raised a total of $83 billion in proceeds last year. The boom is showing no signs of slowing down in 2021 as 59 SPACs have already raised $16.9 billion during the first three weeks of the year. 

The momentum behind SPACs is set to continue, with Goldman Sachs estimating that SPACs could drive $300 billion in mergers and acquisitions over the next two years. 

While surprised by its rapid evolution, Ratner thinks the SPAC boom has its merits. Specifically, the key features of SPACs make them well-suited for an arbitrage strategy. 

SPACs raise funds by offering investors units of securities, where each unit is comprised of one share of common stock and a fractional or full warrant.

The units, typically priced at $10 each, are held in a trust account until the SPAC completes a business combination,  usually within two years. If it fails to combine with a business within that timeframe, the SPAC liquidates and investors can redeem their units plus interest. 

"When a SPAC sponsor announces a transaction, if the market receives it well, the SPAC trades up to $12 or $14, and you can sell and make a 40% return," he said. "If the market doesn't receive it well or you don't think it's a good deal, you can sell your stock either in the open market, or you can redeem with the SPAC sponsor and get your $10 back."

SPACs — then and now

While SPAC arbitrage has risen in popularity as an investment strategy, Ratner said his team sticks to a value-oriented approach to SPAC investing instead of trying to execute a quick strategy.

"I can buy units today and sell them tomorrow to pick up some profits. Instead we're saying there's a bigger market misperception," he explained. "This is a business that actually traded down just because it came out of this SPAC and everybody's made 10% or 20% and they are selling it. We are saying that the market doesn't fully grasp the value of this new company, and we're going to acquire."

The value approach was also taken by SPAC sponsors back in the day, but it has shifted along with SPACs' 2020 boom, according to Ratner. 

"From 2014 to 2016, SPAC sponsors would come out and try to buy value companies," he said. "When the SPACs would IPO, their units would trade at $10.03 or $10.05. Then they split the units into the warrants, and common shares would trade at $9.60, $9.7o, or $9.80."

He continued: "It was a great opportunity because no one really figured this thing out. You were creating a yield where you're buying at $9.60 and you can generate a 4% or 5% return. If you're going to redeem or sell to the market upon deal announcement, you could wait to see what they do."

Today, because of increasing new entrants and capital in the space, SPAC units priced at $10 would open anywhere between $10.30 to $11.20 after an IPO, Ratner observed. 

"So you're seeing things trade up 3% to 12% on day one and they're just cash alternatives," he said. "What that's doing is creating a feeding frenzy or this feedback loop where everybody's saying I want more SPACs because the SPACs trade up, and there's so much demand, it's like there's no downside if I can get in on the IPO."

Venture investing for retail investors

Ratner worries that the SPAC space could get too big for its own good and collapse under its own weight, but that is a long-term concern. 

He believes that SPACs are still a great vehicle for investors to participate in the late-stage venture capital round of private companies, which have become more reluctant to go public the traditional way. 

He used the example of billionaire Chamath Palihapitiya's Social Capital Hedosophia Holdings Corp V, a SPAC that announced its merger with the fintech company SoFi in early January.

"If I told you you can invest in SoFi last year, it would have been some crazy valuation, you wouldn't have had access," he said. "If you found access somehow, you would have to pay a tremendous amount of fees. Now you are able to partner with somebody and you're able to buy into it via a SPAC."

That also gets at the key of selecting SPACs, which is essentially a bet on the right sponsor. 

"You're making a bet on an individual, but you're hoping that individual is able to basically buy a company or bring to public a company whose valuation isn't fully mature," Ratner said, "and you can capture more of that value in the public market as opposed to it being captured in the private markets."

SPAC due diligence 

Over the last five years, Ratner and his team have participated in more than 100 SPACs with a cumulative deal size of over $31 billion.

"It's more of a patience game than anything," he said. "Because once you make your investment, you have to wait for it to happen."

And that's why comprehensive due diligence is the key to successful SPAC investing, Rattner said, adding that every investor should listen to the SPAC sponsor's conference call, read their presentation, and make their own judgment.

"What you want to look at is first of all, is this a viable business. Is this a sector that I think is either going to grow or shrink in the future," he said. "And then why is this becoming public and is there some sort of special sauce or additive value that the sponsor team is bringing."

He shares three SPACs on his radar: (1) Qell Acquisition Corp. (QELL) (2) CC Neuberger Principal Holdings II (PRPB), and (3) Conyers Park II Acquisition Corp. (CPAA) which was de-SPAC'ed in October by merging with sales and marketing services firm Advantage Solutions.

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