The year of the SPAC
Special purpose acquisition companies (SPACs) have been around for years, so why are they now becoming HYPED in 2021? In 2020 SPACs, make up most of the growth in the US IPO market compared with previous years. SPACs raised over $79bn in gross proceeds from 237 counts, far surpassing the record in 2019.
This 462% year-over-year jump in funds raised by SPACs in 2020 outperformed traditional IPO's, which raised $67 billion in 2020. SPACs in 2020 made up over 50% of the market share, which certainly validates they are a booming prospect. SPACs have already beaten their record year in 2020. In Q1 2021, they have outperformed the entirety of 2021, with over $96bn already raised.
SPACs are essentially shell companies, set up by investment professionals, high net worth individuals, or wall street veterans, with the sole purpose of raising money through an IPO to eventually acquire another company. They have no commercial operations, make no product, and sell nothing. When a SPAC raises money, the people buying into the IPO don't typically know what the eventual target company to be acquired will be. This is why they are also known as 'blank check companies' and set up by investors with solid reputations and track records. Once the IPO raises capital, usually priced at $10 a share, the money goes into an interest-bearing trust until the SPACs team finds a private company looking to go public through an acquisition. The SPAC team will set a deadline, typically two years after the IPO, to find a suitable investment. Once an acquisition completes, the SPACs investors can either swap their shares for shares of the merged company or redeem their original shares, returning their investment, plus any interest accrued for the duration the money is held in trust. If no deal is found within the two-year timeframe, the SPAC is liquidated, and investors get their money back with accrued interest.
SPACs have become more popular in the last 12 months primarily due to the speed of execution compared to traditional IPOs or direct listing. Another key driver has been the volatility present in equity markets as a result of the global pandemic. High-profile companies that have gone public VIA SPACs include Virgin Galactic, Nikola, and DraftKings. These companies represent a class of ambitious growth riding long-term secular trends of Space exploration, electric vehicles, and sports betting. Goldman Sachs were quoted saying this trend of SPAC IPOs could only work in an environment where investors are focused on growth over value.
SPACs have previously been coined 'the poor man's private equity funds' as they offer the ordinary investor a chance to participate in the purchase of hot companies before they go public. The private equity world is largely unavailable to 'the poor man,' reserved as a perk for the uber-wealthy. Hedge funds are still playing in this field, but the ordinary investor has made up for about 40% of SPAC trading on BofA Securities Inc's trading platforms within this recent boom. This shows us that with increased retail participation, this recent hype has no signs of stopping.
As with any asset class, when the hype becomes so large it's impossible to avoid, and we see a colossal uptake, this will capture the regulator's attention. In the past 12 months, we have seen over 700 SPACs flock to New York stock exchanges, aiming to raise over $225bn of capital. US regulator's concern is growing that risks posed to shareholders in SPACs are hitting dangerous levels as the bubble inflates to unprecedented levels.
"Lately, we have seen more and more evidence on the risk side of the equation for SPACs as we see studies showing that their performance for most investors doesn't match the hype," Acting Securities and Exchange Commission Chair Allison Herren Lee said Thursday.
The SEC has issued letters to major firms at this point, but it is simply a fact-finding operation; however, the concerns of something more formal looms over the asset class. This looming risk has caused a selloff in SPACs. The IPOX SPAC Index, which tracks special-purpose acquisition companies, extended its selloff into an eighth consecutive day. The gauge is still up 45% since the end of July 2020, compared with a gain of 20% for the S&P 500 Index.
The most considerable concern we have is that as more and more SPACs sell shares, fewer viable companies will be available for them to acquire. With the two-year deadlines to find a good merger and the 20% incentive to the team post-acquisition, this could easily result in not enough due-diligence undertaken pre-deal and an overlooking of a companies actual value as the pressure mounts to get a deal done. This could leave investors holding the bag.
Opportunity of the week - SRAC
The pullback discussed above has created many technically solid opportunities within the asset class. Irek covered all of his favourite's in our most recent Insights episode, 'Buy the Dips P2'. One of the main standouts was SRAC.
Stable Road Acquisition Crop (SRAC) is set to do a reverse merger with Momentus in early 2021. Momentus, founded in 2017, a space company that plans to compete with Sir Richard Branson's Virgin Galactic. They plan to offer in-space transportation and infrastructure services and are already partners and customers to NASA, SpaceX, and Lockheed Martin. The SRAC SPAC raised around $172.5m in its IPO back in November 2019 at $10 a share. We've seen price reach highs of $29 before now falling back to near its IPO price of $10.
Analyzing the technicals, the weekly has broken out and now seems to be finding support back at the weekly 50EMA, developing a higher low. The daily chart also finds support at the $12.50 level, forming a triangle pattern that looks ripe for a bullish breakout after creating a triple bottom.
AUDCAD TA +3.77% Profit
In TMC HYPE 2 weeks ago, 'This is the end', we covered several AUD and NZD opportunities that aligned both fundamentally and technically. One of the entries we covered was a position I, Jonny, executed short on AUDCAD. Price continued to fall into profit over the past weeks, and I trailed my stop loss down, locking in profit, which we tapped out last week. I ended up banking +3.77% profit on this move in total, adding to a strong, profitable month for March.
Currencies: The best-looking technical setups on our radar include looking for short-term bearish momentum in EUR and NZD. We also have our eyes peeled for a continuation of bullish momentum for USD, although some development may be needed beforehand.
Crypto: After a much-needed pullback across the board, led by BTC, the crypto market is ripe with opportunities as the bullish momentum seems set to continue.
Equities: Most hype stocks (within the innovation space) from the start of Q1, are currently forming daily double bottoms at significant support levels, looking for continuation plays.
TMC CLUB - Another one
The main focus for a lot of traders is increasing their capital. There are many routes for growing your capital, and a popular current route is getting funded through a prop firm, leveraging their capital to increase your return, profiting from your skills. Once you have developed a skill set such as trading, all that is left is to employ capital to increase your profits.
We have reported several traders within our community that have got funding, increasing their AUM, at the beginning of 2021. Another member joining the exclusive funded club is Alicja Matuszkiewicz. Alicja's trading journey started back in March 2020 where she joined a free 14-day trial we were offering. We wish to congratulate Alicja on becoming funded. What a fantastic achievement only 12 months into her journey!
What's happening this week?
Mon, Mar 29th @ 1pm PDT
Market Update w/ Jonny Godfrey
Wed, Mar 31st @ 1pm PDT
Market Update w/ Irek Piekarski
Thur, Apr 1st @ 11am PDT
Chronicles LIVE w/ Irek Piekarski
TMC Diamond access required
Fri, Apr 2nd @ 9am PDT
Insights w/ Jonny Godfrey
All the best for the week ahead- see you in the club!
Jonny Godfrey & the TMC Team