Underwater SPACs Could Net Investors $1.1 Billion

About 300 special purpose acquisition companies (SPACs) launched during the first three months of 2021 could theoretically net investors big bucks, Bloomberg reported on Monday (April 5).

Underwater SPACs are trading below their public offering and will face liquidation deadlines if they do not make any deals. The average discount was roughly 1.22 percent as of the end of last month, according to Bloomberg data. With some SPACs trading at 96 cents on the dollar, all told, investors could potentially net $1.09 billion.

“It’s creating mark-to-market losses, but also an extraordinary opportunity,” Steve Katznelson, chief investment officer at Radcliffe Capital Management, told Bloomberg.

SPACs usually go public at a price of $10, on the premise that a startup deal will be made within a predetermined amount of time. If no deal materializes, that results in the SPAC being liquidated and investors getting refunded, minus expenses.

According to the data Bloomberg compiled, it would cost around $81.4 billion to buy all the SPACs trading below $10. 

Jay Ritter, a University of Florida finance professor who tracks initial public offerings, told the news outlet that investors would yield an annual return of roughly 9.3 percent by purchasing a SPAC at the initial offering price and selling it at the time of the merger. He analyzed data from January 2010 and October 2020.

“No one loses money on this investment strategy,” Ritter said, per Bloomberg. “Worst you can do is redeem. It’s free lunch sitting there for years.”

Ritter told the news outlet that he foresees a rise in liquidations due to the oversupply of SPACs. Of the SPACs going public from January 2010 to May 2018, about 15 percent never reached a deal. With the over-supply that’s happening right now, he anticipates that about 50 percent will liquidate and give investors their money back.

According to the PYMNTS SPAC Tracker, 11 businesses in financial services were considering plans to go public, either traditionally or via a SPAC. In a PYMNTS interview, Thomas Mason, senior research analyst, S&P Global Market Intelligence, said SPAC deals in the FinTech space are “hot,” especially in the insurance tech space.