What are Special Purpose Acquisition Companies?

To keep it simple, SPACs are “blank check” companies that raise capital to acquire existing (not necessarily) small companies.
Examples of companies that went public through SPACs are: Hyllion (HYLN), Lemonade (LMND), Virgin Galactic (SPCE) and….. Nikola (NKLA). But everyone knows Nikola is a goddamn joke.

How to trade SPACs?
Most of the time, a SPAC has 2 years to acquire and announce a merger with a company that they have decided to acquire. If it did not make a deal within these 2 years, the SPAC is liquidated and the capital raised will be returned to the investors. 

So, here is what I do for a SPAC that I’ve decided to trade. I purchase the SPAC during pre-merger phase. Be patient and wait for a merger announcement, evaluate the to-be-acquired company and decide if I want to sell or hold. Most of the time, I will sell before the merger date. Almost guaranteed profit. It’s very simple.

Are SPACs that simple?
It’s simple but not easy and here’s why: SPACs are simple to me because all you do is park your cash and wait. Once the news comes out, you sell for definite profit (99% of the time). Why do I say so? It’s because SPACs have an actual minimum value of $10 (most case scenarios). This value is called the Net Asset Value (NAV). This is what the share price is when capital is returned to investors if there was no acquisition deal made in 2 years. So no matter what, your shares will always hold this $10/share value. With this fact alone, you start to realise that your risk is very minimal. Let’s say you purchase a SPAC at $10.20/share, your upside potential could be 200-300% but with only 2% risk. Crazy right?

Where do I start?
Here’s what I look out for when trading SPACs:

  1. The management team behind the SPAC – The man who formed the SPAC can give you a lot of information on what companies that are targeted for acquisition by the SPAC. So, knowing who are backing the SPAC and the big names that are already invested in the SPAC can give you big hints.
  2. The acquired company – usually after merger news, a SPAC is sure to spike up. From there, your job now is to do research of the acquired company. You find out if you believe in the business. Decide if you can build conviction and judge if you should sell or hold further. IF you decide to hold, till when? 
  3. Price – This is the key factor in trading SPACs. If you have a low entry point, your profit is almost guaranteed. The question is by how much? If you decide to begin a position in a SPAC after merger announcement, your research done on the acquired company is vital here. From the company business, you can evaluate how much more the price can run. When do you decide to exit? We ALL know after merger happens, the price WILL dip after the IPO date. Will you hold through the IPO and build a long-term position by averaging down? Or will you sell right before merger date?
  4. My personal advice – SPACs can be a low risk risk investing/trading instrument that pays you for being patient. For those of you out there who have a small sum of money stored in your bank account and you feel like it’s such a waste of opportunity? Buy SPACs and hold! Worst case scenario? – your initial capital ($3000) would probably dip by a couple hundreds.. Best case scenario? – Initial capital ($3000) could double or triple. That’s what I call a well-calculated risk because your upside potential greatly outweighs your downside potential.

SPACs on my watchlist and their possible acquisition targets

  1. Pershing Square Tontine Holdings (PSTH) – Bill Ackman’s SPAC. Stripe? Probably not. Bloomberg? Maybe.
  2. Foley Trasimene Acquisition Corp II (BFT) – Acquired target: Paysafe
  3. Fusion Acquisiton Corp (FUSE) – Most probably FINTECH sector.
  4. Artius Acquisition (AACQ) – Most probably FINTECH sector.
  5. Sports Entertainment (SEAH) – Sports betting/gaming sector.

(This article was originally posted on 21/12/2020)


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