Special Purpose Acquisition Company modelization
With the increase in popularity with SPACs instrument during the last year, what is the best way to model them?
SPACs are listed instrument but issues come with the short historical data from them. It comes from the very nature of the product where SPACs generally survive for a maximum of 2 years before an acquisition is done (or not). It is to say, maybe it's the choice of the proxy that could fixed this situation, but what would it be? Technically it can't lost more that what is invested initially minus expenses, because there is always the option to say no to the deal and redeem his share's portion.
Imma take this one.
SPACs are just shell companies with no real business, until they announce they are buying a real business.
So there is nothing to model until a deal is announced.
How u model for a SPAC?? By looking at Bill Ackman & associates’ LinkedIn network and estimate the probability of them sourcing a target from friends & family??
The reality is that (unless you are a seasonal SPAC sponsor) many targets are sourced by bankers cuz they leech the fees. Your best shot of “modeling” anything is by looking at the S-1 prior to pricing and check if they focus on any industry / vertical and even that is pretty useless. And when they announce a DA the warrants would split already so your upside is only the commons. So no don’t model SPACs cuz u just can’t.
Factually incorrect to say you can't model a SPAC and those saying so probably don't understand what's going on under the hood. The majority of information you need is located in the S1.
First, you need to understand how the SPAC is capitalized - there is founder capital and investor capital. Founder capital is what pays for the ongoing business expense of the SPAC, and as a result founders receive founder shares / the promote / special warrants etc. because they take all the downside risk (zero) if they can't close a deal. The majority of sponsor capital goes to sweep IPO expenses and the underwriting fee. Next there is the investor capital, the capital raised in the IPO. Investors receive Units comprised of one common stock and some form of warrant (1, 1/2, 1/3, or 1/5 generally). Proceeds received from the IPO are escrowed in a bank account and invested in short term US treasuries - usually the 3/6 month and can be the 1 year. The warrants usually have a 5 year term and are exercisable in $11.50. Sometime after the IPO, about 50 days, you can split the unit into the stock and warrant components and trade them freely. The tenor on the Trust is about 2 years, at which point investors can 1) participate in the deal, 2) not participate in the deal and get their money back, or 3) get their money back if there is no deal and the SPAC is liquidated. Over this time, investors accrue interest earned in the escrow account which they receive in addition to the initial principal at time of redemption. If the Company wants to extent the time of their Trust they need to (almost always) have investors vote on it, and sometimes they will make an additional contribution in the Trust to pay for the extension. It is important to read the prospectus because there are almost always carve-outs where the founders can use a certain amount of proceeds from the Trust account to pay for working capital, taxes, or some other expenses. Generally these carve-outs come out to no more than a couple of pennies. Liquidation expenses for SPACs generally range between 50 - 100k.
To actually model the SPAC, the target industry is almost entirely irrelevant other than as a descriptor point somewhere in a spreadsheet. The main point of modeling a SPAC is to arrive at the Trust NAV and estimate NAV at time of expiration, so you need to model interest accrual over however many days are left in the SPACs life. Each Q, the Company releases an updated Trust account figure which makes it easier to track. In the model you need to build in functionality to add in any founder deposits for trust extensions and also sweep liquidation expenses / any other carve-outs to get the most conservative NAV. The point of the model is to ultimately figure out the final NAV and compare to the stock price you can buy the SPAC at, and then calculate the annualized rate of return between the two. This means you're probably figuring out the IRR between buying the stock at $9.98 and selling at a redemption price of $10.05 within the next handful of months. These days you probably don't have many opportunities to meaningfully buy SPACs below NAV, but in better times you could.
The reason we do all of this NAV modeling is because the incremental SPAC buyer post IPO has historically been event-driven and arbitrage hedge funds. They will buy the stock at a discount to NAV and leverage the position to earn a good IRR. Because the Trust account is collateralized by US treasuries, this is a way to earn an excess spread to treasuries with about the same amount of risk. The risk here is mainly human error in not reading the prospectus carefully as being wrong by one or two pennies on the trust can turn a good investment into a not so good one. You can also do arbitrage things with the warrants and units which a lot of these funds do.
However, if you're only interested in buying the SPAC because you really like the sponsor and are betting they will find a good deal, and you're ok with tying your money up for a bit at a very low rate of return, then all you really care about is what NAV you're buying at because that represents your downside if they don't find a deal. This type of buyer is likely less interested in understanding the NAV down to the absolute penny because their risk / reward profile isn't impacted by a penny or two difference as they're playing for meaningful equity upside.
Would echo this comment and stress that for most investors (you're not arb'ing a SPAC below NAV as highlighted above), the most important piece of the analysis (before the target is announced, at least) IMO is to understand the capital structure and what kind of earnouts the sponsors have and what the share count might look like in different scenarios.
Stop wasting your time. Modeling a SPAC based on NAV is useless unless there is an acquisition target because they will naturally trade at a discount to cash because the logical thing to do is to haircut the case they actually buy a good business
Second, modeling a hypothetical scenario where they acquire a given company with any certainty is beyond me. There are so many private companies out there with nuanced growth profiles and prospects whose own information is by definition non public, so trying to model that is not worth it
Best thing to do is to just wait until they announce an acquisition and buy when you have certainty about the business they are buying
Anything beyond that is an exercise in false precision that will likely yield benefit less than it will cost you
Not sure why you got MS - this is how it works in practice. No one cares about your NAV analysis, even more in this market.
Yield to put
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