SPACs as Bond Alternatives 💵

The SPAC frenzy of recent years has cooled, but the market has an attractive offering for investors looking for cash alternatives trading at a greater rate than U.S. Treasury bonds.  According to a recent Wall Street Journal article, special-purpose acquisition companies have a different reputation than the ones lauded by day-traders looking for speculative investments; they’re using them as alternatives to bonds in what’s known as SPAC arbitrage.

How It Works
In a typical SPAC deal, investors pay $10 to buy a unit of the SPAC, and that unit is held in a Trust, invested in Treasury bills where it’s pretty much guaranteed the return of a typical bond. To entice investors, SPAC sponsors will sometimes put “extra money into the company’s trust–for example, 20 cents for every $10 unit, promising an additional 2% cumulative return.” The modest gains generally happen when a SPAC announces its merger with shares often rising to 1.5-2.25% above their purchase price. Investors will often choose to sell at that point to make some profit. Compare this scenario to a two-year Treasury note’s yield of about .32%, and you can see why this idea is a popular alternative.

Who Is the Target Investor?
As opposed to the day-trader-induced SPAC frenzy, this bond/arbitrage strategy is for investors who are on familiar terms with risk and who seek a better alternative to short-term bonds. CrossBridge Advisors has been a big proponent of the strategy, allocating 15-20% of its fixed-income mutual funds to it.
Other fixed-income mutual funds are joining, alongside hedge funds and individual investors.

Upcoming SPACs Seeking Targets


                                                                              Courtesy of SPAC Informer

Upcoming Mergers
Autonomous vehicle company Aurora plans to begin public trading in early November with its merger with Reinvent Technology Partners Y (RTPY), led by LinkedIn cofounder Reid Hoffman and Zynga founder Mark Pincus. We profiled Aurora here. 

The financial technology firm, Hyphen Group, is in the advanced stages of going public via merger with Provident Acquisition Corp (PAQCU). The company is backed by Hong Kong billionaire, Richard Li, who operates a private investment group after starting his career founding pan-Asian TV network, Star TV.

SeatGeek will go public via a merger with Redball Acquisition Corp (RBAC.N). The company is backed by “Moneyball” author and baseball executive Billy Beane. The ticketing company partners with sports teams, leagues, and theater districts worldwide to provide easy ticketing for events.