The Size of the Average SPAC Is Rising. Here's Why That's Important for Investors

Brendan McDermid | Reuters

The SPAC spigot is slowing, but that may not spell doomsday for the space.

Special purpose acquisition company issuances amounted to roughly 50% of initial public offerings in June and July, down from 75% in the first quarter. They briefly dipped to 20% of IPO issuances in April, spooking those behind the trade's surge in popularity.

But average SPAC deal size is climbing, sparking hope for SPAC-based ETF issuer Mark Yusko that these new investment vehicles still have legs.

"The size of an IPO, whether it's a traditional IPO or a SPAC, is absolutely a proxy for quality. And the size of the average SPAC has been rising. The size of the average IPO has been falling," the CEO and chief investment officer of Morgan Creek Capital Management told CNBC's "ETF Edge" on Monday.

Morgan Creek helps run the Morgan Creek - Exos SPAC Originated ETF (SPXZ), an actively managed basket with two-thirds of its assets in post-merger SPACs. Its largest holdings are in U.S. Treasury bills, Paya Holdings and MP Materials. It also holds shares of 23andMe, Utz Brands and Virgin Galactic.

The recent slowdown in issuances was likely warranted, Yusko said, adding that SPACs making up 75% of IPO issuances in the first quarter was "a little bit too much" and that 50% was "where ... we should be."

"I think the SPAC merger will become the preferred method of going public for high-growth, innovative companies, or what we call 'companies of the future,'" he said.

"You have a chance to build a portfolio of these companies of the future and have to look over decades, not days or weeks, when you're thinking about that."

ETF investors with a long-term investment horizon have another option in the space, WallachBeth Capital's Andrew McOrmond said in the same "ETF Edge" interview.

He pointed to the Defiance Next Gen SPAC Derived ETF (SPAK), a portfolio of mostly former SPACs now trading as public companies. Its top holdings are DraftKings, Clarivate and Paysafe.

SPAK is down nearly 9% since its September 2020 launch.

"There's a simple reason why that struggles: valuations are too high," said McOrmond, a managing director at his firm.

"We've had a long run in the last 10 years of companies taking too long to go public. So, whether they go IPO or whether they go SPAC, by the time they get there, the valuation's so sky high, especially in the last quarter, that you have underperformance past the merger," he said.

Because of that, those with a shorter-term time horizon may want to consider the SPAC and New Issue ETF (SPCX), an actively managed ETF that trades pre-merger SPACs with the aim of eliminating "single-SPAC risk," McOrmond said.

SPCX is up almost 15% since it began trading in December. SPXZ is down over 26% since it launched in January.


Copyright CNBC
Contact Us