Hedge Funds Clash Over Special Purpose Acquisition Companies

Special purpose acquisition companies (SPACs) have taken the IPO market by storm. SPACs are blank check companies created as shells to merge with an actual company, taking it public in the process.

Bill Ackman, chief executive officer of Pershing Square Capital Management LP, speaks during a … [+]

Last year, of the $166.4 billion raised in initial public offerings, $83.4 billion came through SPAC mergers. The trend has continued in 2021, with 56 new SPACs brought to market just in the first three weeks alone.

Hedge funds have been taking notice of the SPAC trend, and many have revealed positions in various SPACs. Most funds are bullish on the trend, although at least one thinks SPACs are in a bubble.


North Rock’s Kelly Perkins said they are bullish on SPACs, describing them as “a key component of North Rock’s Capital Markets business.” In the fund’s fourth-quarter letter to investors, he said they take a proprietary approach to SPAC investing differentiated by their fundamental approach to the business.

Instead of taking an arbitrage position by buying and then flipping SPAC shares, North Rock supports sponsors it believes “have a high probability of executing accretive transactions.” Perkins didn’t say which sponsors they supported during the fourth quarter, but he did say that SPACs contributed about 3% to the fund’s return in 2020.

Corsair Capital has been writing about SPACs since at least the third quarter. In their fourth-quarter letter to investors, the fund’s management highlighted a handful of SPACs. Danimer, which was previously Live Oak Acquisition Corp, was one of Corsair’s most significant contributors during the quarter as its stock doubled. Shareholders unanimously approved the merger between Danimer and Live Oak, which the Corsair team described as “the plastic industry’s Beyond Meat.”

Corsair also took a position in Pershing Square Tontine Holdings, a SPAC started by Bill Ackman. The company was another one of the fund’s top contributors during the fourth quarter. Its stock jumped 22% during the fourth quarter.

Like North Rock, Corsair has been looking for SPAC IPOs where they believe the management can buy a strong business. They also want SPACs where the management can add value to the company they merge with and sponsors with a lot of skin in the game and very little compensation.

Unlike North Rock, the Corsair team can see some SPACs as quality long or short opportunities. They noted in their letter that many articles had highlighted the seemingly very high valuations given to SPACs, especially those merging with electric vehicle companies.

However, the Corsair team sees SPACs as “spin-ins,” which are similar to spin-offs where a company “may be at an inflection point in its corporate growth due to an infusion of capital, new management or a new singularity of corporate purpose.” They believe SPACs can be good long opportunities with valuations that don’t reflect their new future or short options with valuations that are too high and projections that are too rosy.

Sabrepoint Capital is short SPACs, according to its fourth-quarter letter to investors. Portfolio Manager George Baxter said they see SPACs as “one of the best opportunities on the short side since our inception.”

He is so bearish on SPACs because of the lock-up period that typically follows their merger with a company. Baxter explained that most of the SPACs merged in 2020 are subject to lock-ups that will hit the market at an accelerating rate starting in March. When the market is flooded with shares in those SPACs, he expects it to overwhelm investor enthusiasm.

Baxter also said they’ve been finding “numerous” short opportunities connected to the “EV/ renewable energy bubble.” Of note, many SPACs have been merging with EV makers.

It’s no surprise that hedge funds have been taking note of the SPAC trend. We expect more and more hedge funds to highlight their views of these vehicles in future letters.

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