How to bet on beaten after-sales services for stable and tax-efficient returns

  • PSPCs are under pressure as performance deteriorates and investors withdraw funds.
  • Veteran investor David Sherman explains why he is now betting on the battered asset class.
  • It breaks down its PSPC strategy that enterprising retail investors can execute on their own.

Once the darlings of Wall Street, ad hoc acquisition vehicles are now seen as a sore area of ​​the stock market. But a three-decade investment veteran is going against the grain by launching a

strategy now.

David Sherman, the founder of CrossingBridge Advisors’ $ 2.8 billion, first invested in a blank check company more than 15 years ago. The market was tiny then. To put it in perspective, there was only one PSPC that raised $ 36 million in 2009, according to PSPC Insider.

Beginning in 2017, Sherman began to notice a steady increase in PSPC issuance and capital raised. In total, 34 SAVS raised more than $ 10 billion that year. But nothing could have prepared it for the market boom in 2020, when 248 PSPCs raised $ 83 billion. The frenzy spread in 2021 as 445 PSPCs raised more than $ 128 billion, according to statistics from PSPC Insider.

While many investors launched funds specifically to capture the growth of SPACs during this period, Sherman wanted to wait. As the market started to cool in March, he believed PSPCs were getting back to normal.

“A lot of asset classes have anomalies. You had the dot-com bubble, but that didn’t change the fact that when it burst, internet business was a real industry and a real market,” said Sherman to Insider in an interview.

Likewise, market speculators may have formed a PSPC bubble that appears to have burst, but they also introduced PSPCs as a new way for companies to go public and raise capital and for investors to broaden the types of stocks they can hold, Sherman explained.

“I think the PSPC market may continue to decline from its peaks in January, February and March this year,” he said. “But I also think that it has generated enough interest, that it is an asset class that is becoming more and more common and acceptable, and that the size of the asset will remain sufficient for we can continue to pursue a dedicated strategy. “

Of course, SPACs continued to be the subject of intense regulatory scrutiny. The SEC reportedly asked major audit firms to more strictly account for PSPC shares, potentially complicating their public listing. This came after the agency reported in April that SPACs were required to account for their warrants as liabilities rather than equity, which slowed the flow of transactions as some SPACs had to restate their financial statements. He also cautioned investors against investing in PSPCs based solely on famous sponsors.

Breaking your PSPC strategy

Sherman’s company has invested in SPACs at various stages of its existence. For example, CrossingBridge is one of the institutional investors participating in Buzzfeed’s $ 1.5 billion PSPC merger with 890 Fifth Avenue Partners Inc.

Its recently launched CrossingBridge Pre-Merger SPAC ETF (SPC) is a more retail-friendly strategy that aims to provide stable, low-risk returns similar to those produced by a fixed income strategy.

Its strategy, which is similar to one of the iterations of the SPAC arbitrage strategy, involves buy after-sales service at or below a trusted value and sell the shares within 10 working days of the completion of a business combination approved by the shareholders.

The strategy works because of the asymmetric risk / return profile of SPACs.

Since the IPO capital that the SPAC raises goes into a trust that holds low-risk, short-term treasury bills, if a transaction fails to complete within the required time frame, the SPAC is usually liquidated within two years and investors get their shares for $ 10 plus interest. back.

“You have over $ 65 billion in PSPC trust money trading at a liquidation yield significantly above 2%,” he said, citing data from subsidiary PSPC Informer. “Where are you going to get money for a year or a year and a half at 2%, 3%, or 3.5%? And your credit risk is the US Treasury.”

On the rewards side, if a PSPC announces a deal that the market perceives as favorable, investors are likely to get a pop after the announcement where stocks are skyrocketing, he added.

On top of that, if the strategy is executed correctly, investors could end up holding a SPAC for more or less than 12 months. In either case, investors could be eligible for a reduced rate of long-term or short-term capital gains. This would make the strategy more tax-efficient than fixed-income products, which are typically taxed at regular tax rates, according to Sherman.

How retail investors can invest in PPCS

Retail traders were a big part of the PSPC boom, but many pulled or bought back their stocks plus interest once PSPC’s performance deteriorated.

The average PSPC redemption rate jumped to 52.4% in the third quarter, from 10% in the first quarter and 21.9% in the second quarter of the year, according to the Financial Times citing data provider Dealogic.

Some day traders have taken another route, rushing to SPACs with the heaviest redemptions and the highest short-term interest in hopes of squeezing professional investors. This memes-like movement on PSPCs resulted in sudden spikes in PSPCs, including Arqit Quantum (ARQQ) and Offerpad Solutions (OPAD) this month, according to the Wall Street Journal.

“I think it’s trade and speculation,” Sherman said of short-term squeeze attempts. “I’m not sure the best thing.”

For investors looking for a stable return at lower risk, he recommends that they start by taking stock of the entire universe of PSPCs listed in the United States, assessing fundamentals such as teams management behind PSPCs, as well as staying on top of redemption dates. and announcements regarding their business combinations.

“There are lots of PSPC databases that will give you the tools,” he said, “but you still have to do your due diligence.”

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