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July 29, 2019
Welcome to the SPAC Research weekly newsletter.

Where Do SPAC Returns Come From?
In the past, we've measured SPAC returns from IPO through business combination using filters like trust account size at IPO and unit structure. Those studies gave a nice approximation of the annualized return realized by SPAC investors since 2015 - a number that came in around 7.6% and has crept up over 8% since our last study, due to a combination of a few very successful deals and an increase in average interest earnings on trust accounts.

In last week's newsletter about warrant tender/exchange offers, we casually noted that warrants were a huge part of how SPACs have achieved their impressive return profile over the past few years. But just how much is attributable to each of the pieces of SPAC units: warrants, rights and common shares?

For this week's study, we used the same quantitative strategy as in previous studies, assuming an investor buys $10 units at IPO, redeems for cash-in-trust at liquidation or closing of business combination (unless common shares are trading above cash-in-trust), and sells any derivative components at the closing date. To make things simpler for this component analysis, we calculated the net return over the life of each SPAC IPO unit (rather than the annualized return). SPACs that are still active are calculated to present value of components. Then we weighted each SPAC by the amount raised at IPO.
The weighted average SPAC unit return from IPO has been 11.8%. That is, the average SPAC has returned $11.18 to an investor who held from IPO through deal closing (or present day for active SPACs). Warrants contributed 6.05% and common shares contributed 5.40% beyond the original $10.00 cash-in-trust level. Rights represent a much smaller 0.38%, largely because they have mostly been included in smaller IPOs so their cap-weighting is diminished. Note that this number may under-represent the eventual return profile because of the 113 SPACs to IPO between 2015 and 2018, 55 are still pursuing a business combination (and earning interest on their trust account).

Next, we performed the same cap-weighted net return calculations, but we limited the sample to SPACs that have completed business combinations or liquidated.
The weighted average net return for SPACs that have completed deals or liquidated is 16.6%. Warrants contributed 7.89% and rights contributed 0.39%. The common stock component contributed an 8.32% net return. What's fascinating is that the vast majority of the common stock contribution came from SPACs which traded at a premium to cash-in-trust at the time of closing.

Out of 58 SPACs from this data set, 17 traded above cash-in-trust at closing. While individual investors' returns may vary, its pretty clear that if you missed out on many of those 17, it would have been challenging to achieve the returns of the group. A handful of the top performing SPACs delivered truly outsized results on both their warrants and their common equity. If a SPAC can find a deal strong enough for the common equity to trade at $12+ before closing, its warrants are going to perform pretty well too.

Here's a look at the top 10 net returns during the focus period. For clarity on the calculations below: Silver Run I's common stock traded at $15.86 on the closing date back in 2016, and its warrants traded at $5.42 (leading to warrants contributing 18.1% since its units contained 1/3 warrant).
At some point in the future, we hope to examine the actual return realized by sponsors on at-risk purchases and sponsors' promote. But it shouldn't be particularly surprising that almost the entire top 10 list decided to come back for a sequel SPAC after these success stories.


News From the Past Week

IPOs and S-1's
  • Switchback Energy Acquisition Corporation (SBE) raised $300mm for an acquisition in energy in North America. Switchback is the second SPAC sponsored by NGP Energy Capital Management. The first such SPAC, Vantage Energy Acquisition Corp., raised $552mm in April 2017 and liquidated earlier this year after its proposed acquisition of oil and gas assets in the Williston Basin from QEP Resources fell apart. Switchback is led by former RSP Perman Inc. executives Scott McNeill, Jim Mutrie and Josh Rosinski, all of whom were unaffiliated with Vantage. Goldman Sachs and Citigroup are "joint senior book-runners" and Credit Suisse is an additional book-runner.
  • Fellazo Inc. (FLLC) raised $50mm for an acquisition in the health food/supplement industry in Asia. Fellazo is led by Nicholas Ting Lun Wong, an entrepreneur with various consumer and investment experience in Asia. Fellazo offers a structure similar to other recent Asia-focused SPACs with units that contain a right and a half-warrant. The company initially tried for warrant-only units but rights were later added in an amended S-1 filing. Maxim is sole book-runner.
Deal Announced
  • Pensare Acquisition Corp. (WRLS) announced a deal to acquire Computex Technology Solutions, an IT service provider focused on helping customers transform their businesses through technology. In addition, Pensare has entered into a non-binding LOI to acquire a leading developer of Unified Communication technology. Pensare’s strategy is to build a leading national Cloud-Managed Unified Communications and IT Solutions Provider. To that end, Pensare has also joined AT&T Partner Exchange which will allow it to bundle and resell AT&T network, mobility, IoT and cybersecurity solutions with its own services. The two transactions are worth approximately $115mm combined, although we don't know what portion will come from cash, stock, or assumed debt. The announcement came the day before the redemption deadline for Pensare's 7/30/2019 extension meeting, a move whose timing suggests it was aimed at convincing some public shareholders not to redeem. Despite that, Pensare's sponsor isn't making any more contributions to the trust account. A high redemption count seems assured, with the company likely headed for a PIPE to finance the cash component of any transaction consideration.
  • KBL Merger Corp. IV (KBLM) announced a definitive agreement on Friday 7/26/2019 with CannBioRx Life Sciences Corp., a drug development company at the intersection of the biotech and cannabis industries that is focused on treating inflammatory diseases. At closing, KBLM will acquire 100% of the outstanding equity of CannBioRx in exchange for shares of KBLM valued at $175mm. The original term sheet for the deal from May anticipated a $40mm minimum cash condition, but this week's agreement came with only a $5mm minimum cash condition. KBLM will use best efforts to raise at least $10mm through a PIPE or from its trust account, but the company has entered into a backstop agreement with Tyche Capital LLC to backstop at least $5mm if KBLM cannot do so, at whatever price KBLM common stock closes at on the day before closing (but no less than $4.23).

Subscription Agreements
  • Capital Investment Corp. IV (CIC) shareholders approved the company's transaction with Nesco on 7/16/2019. On Monday 7/22/2019, the company announced subscription agreements with CIC's sponsor and Nesco's primary shareholder for $55mm worth of common stock at $10.00 each. In addition, Nesco agreed to reduce the available cash closing condition from $265mm to $200mm. The subscription and available cash modification just about covers the difference between Monday's disclosed 26.1mm public share redemptions and the recent maximum redemption scenario. An intended $10mm modification to the company's underwriting and advisory compensation looks to make up the difference. The deal still appears to be waiting on satisfaction of closing conditions in order to close.
Charter Extensions
  • Gordon Pointe Acquisition Corp. (GPAQ) shareholders approved a charter extension through 10/31/2019 with 1,446,461 public shares (11.6%) redeeming for $10.34 per share. Approximately $115mm remains in the trust account after the sponsor's $0.10 per share contribution associated with the extension. The sponsor can contribute $0.033 per share for each of up to three more optional one month extensions. GPAQ is still seeking a definitive business combination target.
  • TPG Pace Holdings Corp. (TPGH) filed to extend its charter through 12/31/2019. The purpose of the extension is to allow TPGH more time to complete its previously announced business combination with Accel Entertainment Inc. No date has been set for the meeting, and no contribution to trust was included in the initial filing. TPGH common stock closed the week at $10.30, slightly above SPAC Research's estimated cash in trust value of $10.28.
  • Social Capital Hedosophia Holdings (IPOA) filed to extend its charter by three months through 12/18/2019. No sponsor contribution to trust was included. IPOA has a pending business combination with Richard Branson's Virgin Galactic. IPOA common stock closed the week at $10.47, twelve cents above SPAC Research's estimated cash in trust value of $10.34.
Approval Meeting
  • Leo Holdings Corp. (LHC) will hold a shareholder meeting Tuesday 7/30/2019 to approve its proposed business combination with CEC Entertainment (Chuck E. Cheese). The deal carries a minimum cash condition of $250mm and after the company's $114mm private placement, the most recent proxy includes a maximum redemption scenario of 6.4mm public shares (32%). The redemption deadline for public shares was Friday 7/26/2019 and shares closed the week at $9.22, so it's possible the company may be looking at an adjournment and/or additional alternative financing.
Disclosures: Site administrators are long FLLCU, WRLSR, KBLMR, KBLMW, CIC, CIC/W, GPAQW, TPGH, TPGH/W, IPOA, IPOA/W, LHC, LHC/W and may trade in or out of positions in these or other SPAC securities at any time. Nothing on spacresearch.com is a solicitation to buy or sell any investment.