The 2020 SPAC Attack Hits ETF Land

say I'm very mild in my spack knowledge. I the phrase I keep here thinking of my head is spack attack. I feel like I'm being attacked by spacks and spack news um Our associate Morgan Barna did did a little research into the underlying market. It looks like there's over a hundred of them, double from last year, and the market cap or the value is also double, so it's almost like they were in existence before, but they've really blown up this year. And so if it seems like

you're being attacked by SPACs, it's because you are. And of course if there's a new area, you know there's going to be an e t F tracking it. So that's also part of the reason we're covering it, because now there's an e t F that tracks backs in the US and and it's back if you're if you're new to that term, there's a blink check company sort of a thing with that. What what's that about? Eric, Yeah, So for best my knowledge, we'll get our guests to

see correct me if I'm wrong. But it's special purpose acquisition company. And to me, it seems like just a another way to bring a company public that could be easier cheaper than the traditional I p O path. And as somebody who's seen necessity being the mother of invention, this happens a lot. You know, this is just the way capitalism works. So I think SPACs are just a way for for people to bring companies public in a

new way. Um. And that's really it, and you know, and that's why our guess are here to help us navigate these waters. We've got Julian Clamatico, who's the CEO of Accelerate Financial Technologies, and then Joseph Schuster, who's the founder of I p O X Schuster, Eric White. These two guys right, well, Julian to me has been really on this back thing early. I mean, he has a a t F in Canada called the Arbitrage E t F and he has a ton of SPACs in there.

So we wrote a note about two months ago basically saying that you probably can't do an e t F for SPACs. The closest you can get as Julians, which includes some SPACs, because these are very small companies. Their market cap is like two fifty millions to five dred million. There's a couple of big ones, but that's like right on the borderline of microcap. So we E t F needs more liquidity. So I was talking to him when I was doing some research on this, and he's very

knowledgeably as a SPAC monitor. But our call for how you couldn't have a spack ETF was obviously over overwhelmed because like two weeks later they filed for one. I think, you know, being first to market an e t F

for a is very important. That issued Defiance, which has the E t F here in the US, which the ticker s p a K is not on today, but will you know go over the E t F now and then in this But the big thing to know about that E t F of the holdings are pre acquisition SPACs, and are SPACs the companies that SPACs brought public. Will dive into that a little bit later, moving to Joseph. Now, when you think of SPACs, you think I p O So in our research, we've also covered I p O

E t f s and I'm a big fan of these. Uh. The E t F that his index tracks, or the E t F tracks his index is fp X from First Trust and it's been around, I don't know, fifteen years ish and it is blowing away the SMP. It's almost doubling it because they've a couple huge winners and SPACK and I p O E t s to me, do serve a purpose potentially the viewer, the listener can decide because a lot of the times they track companies

that just aren't in the big index as yet. Big index is can be a little uh conservative, and you could take a couple of years for one of these companies to get in there. So to me, they're tracking an area that hardly anybody has any exposure to. Um So we've always thought there was kind of value add but there's not a ton of assets in the space yet this time on Brilliance, I p oing too hard can give you us back at you out of Noba now, Julian,

welcome to Brilliance. Thank you guys, thanks for having me. Glad to be here. Why does the world needs backs, you know all, that's an interesting question and they've really emerged this year as a popular new asset class. And the point of a SPACK and the reason why it

exists is basically twofold number one. It acts as uh structure in order to take a private company public versus say a direct listing or a traditional I p O. Now, SPACs are unique in that the type of companies that they're bringing public are different than what would be used

for direct listing or traditional IPO. For example, on a direct listing, these are typically very large private companies that don't need to raise capital on their growing public transaction than traditional I p O. S have really become exit opportunities for venture capital and private equity firms where they're

looking to offload their steak onto the public markets. We haven't seen the traditional I p O process being used for actually raising growth capital to fund growth businesses, so we've seen the SPACK emerge where you have more earlier stage entities. Many of them are pre profit or even pre revenue, where they're actually coming public and raising a significant amount of capital, which includes cash in the blank

check company. As you guys indicated, they generally raised between two to three million dollars on the spack PO and then with their business combination as a spack combines with the private company to bring them public, they generally include what's known as a pipe financing, private investment in public

equity that can add hundreds of millions of dollars. More So, you can have these early stage companies growing public at say a billion dollar valuation, and raising five hundred million dollars in growth capital to invest in growing that business. So you really haven't seen that opportunity for public market investors to get access to those earlier stage growth entities that are perhaps late stage venture capital type financing rounds, say Series D, Series E, which were usually kept to

the private markets. They are now coming to the public markets through SPACs now on the other side of the coin. One main driver that has led to a massive increase in popularity and number of acts. They're now north of an eighty billion dollar asset class, which is more than tripled since April is the sponsor promote, and by sponsor promote, I'm talking about the equity compensation given to the founder of the spack, which is as high as twenty of

the spack. So say it's bacco is public raising dollars in cash to do a deal. The sponsor or founder of that SPAC could be awarded a forty million dollar stake in the ProForma entity once the business combination closes. So, um, let's go through a real life example, and I the two that I think most people may have heard of if they've been following this at all, or Virgin Galactic and Draft Kings. Those are actually two of the biggest waitings in the spack etf because again at whole, some

of the companies after they've been brought public. Walk us through you can pick either example, but just walk us through there was a SPAC that existed before they actually announced that. How long did and how did they get that company? How do they pick the company, and why does that company go into this back instead of doing attritional IPO. Maybe I guess, you know, walk us through the timeline of of one of those. That's a really good question, and we can start off just by explaining

how the special purpose acquisition company structure works. Typically, they go public and an initial public offering at ten dollars per unit. So SPACK initially consists of units, and after fifty two days they split into common shares plus warrants, so the average unit comes with it could be as low as point to five warrants per unit. It could be as high as one warrant per unit, so that represents additional equity upside for people investors like myself to

subscribe to the initial public offering. So once it's public, they generally have twenty four months to complete a business combination, and if they don't, then they liquidate and they pay investors back their money plus acrude interest. They're not allowed to spend the money on anything. They keep it in trust and they invest that in short term treasury bents. And once you go public, then the quest to find

an attractive private company begins. So specifically, we can talk about one of those, Virgin Galactic, how that process went, and the way that I understand it is Virgin Galactic was pursuing some sort of strategic alternatives process. I'm not sure if they tried to go the traditional I p O route or tried to sell themselves or what. But

they're looking to do something. And Virgin Galactic was a very early stage company revenues many many years away, and so they didn't really fit the mold for a traditional initial public offering as we see them these days. Typically, UH companies growing the traditional route are much much more mature. If you take Uber for example, really at the tail end of their growth stage. And so this back in Virgin Galactics case was Social Capital Head of Sophia one.

There's not actually six of them, and three of them, three new ones, went public last week, raising a stunning two point one billion dollars in capital. But Social Capital Head of Sophia is run by Chamath Pala Hepatia, which is you know, well known VC out in Silicon Valley. So it's first back. Social Capital Head of Sophia one went public in an I p O, raised a few hundred million dollars and went on a quest to do

a business combination. And they're actually getting very close to the tail end of their two years in which they would have had to give money back and lose all the money they invested into it. But you know, luckily this Virgin Galactic deal came along, and that one was really a turning point because prior to that, the spact market was small, didn't get a lot of attention, and the deals were kind of home hump. When Virgin Galactic came out, it was the first one that was this

VC type investment opportunity any where. It was still very early stage. You have revenue way way out there, and I mean the business model is space flight, which is super futuristic, right, So it had this story to it was, you know, Virgin Galactic. It is a story stock because you really need to believe that you can't be looking at the financial statements any sort of fundamentals to be

an investor in that story. So when it came out and the stock just went crazy, I think that was one of the key main drivers in spurring this kind of growth of this new asset class number one and then you know number two. It just shows that if you're successful in one speck, then you just keep bringing these out. And now Social Capital and SMATH is up to six raising well above three three billion dollars. So

that was certainly a really interesting deal. It's still trading very well well above the ten dollar price of its I p O. And that's really how you judge a spack success at least in the short term, is how high above ten dollars is it trading? So Julian, what kind of UM exposure have you had two spacts and how does your et F come into play there? We approach it on a different investment strategy than others. We

look at what we call spack arbitrage. So the way that we approach SPACs is invest before they announce a deal, and we're looking to buy at or below their net asset value, meaning the cash that they have in the bad because the key aspect to a spack arbitrage strategy is you're looking for a guaranteed return, and the way that you get that is that pre deal spacks offer a unique exposure for one main reason, and that is they keep cash on hand so you know it's not

going anywhere and they can't spend it. So you have this guaranteed return of basically treasury bills because they invested in short term treasuries not earning a lot these days, maybe ten fifteen basis points. However, either they don't find a deal in liquidate and you get the yield of T bills, or they do announce a deal, and there's this one key aspect, which is they allow you to redeem your shares for cash plus acrude interest, getting that T bill like payoff. So that's sort of the worst

case scenario. We're looking to bias back at or below its net asset value. And here's where um the upside comes in. We previously discussed the sort of downside scenario where you just earn basically T buills and that discount

if you buy it at a discount to net asset value. However, in the upside scenario, if they announce a great deal that the market really likes, say such as a virgin galactic UH such as a Nicola highly on Lordstown, things of that nature, where the spack just kind of surges and price can go double or triple above the ten dollar range. That's where an arbitrager really can make significant

returns at a very little downside risk. So we're looking to invest in pre deal SPACs at or below their ten dollar plus recruit interest, net asset value, and exit prior to the deal closing. Either we earn a T bill return and sort of exit either through redemption or liquidation.

But in the upside scenario, what we're really in it for is this surge and the share price in what I termed the spack pop. If you look at any of them announcing a deal, especially in these hot spaces such as electric vehicles, biotechnology, things of that nature, if they can do that, then we seek to exit prior to the deal completing and us passing that redemption date. So you're you've effectively found the rare wind win in

finance exactly. Yeah, I call it heads. We win tails, we win big and and you've mentioned the pop there. Can you give us a sense of like, what you know, what kind of range of a pop are are you able to lock in here? And what percentage of them pop? If there's a hundred right now, how many will pop? That's really good question, and that is moving all the time with all the attention coming to the space. It didn't used to be as attractive as it is right now.

So I'm not sure how long this opportunity will last. But if we look at stocks like Nicola, which went north of fifty dollars per share, there's another one called highly on that one was incredibly lucrative. So I think the ones where you're getting triple digit returns in a short period of time, I know, with a percent or above twenty dollars per share, those are say one in twenty one and thirty. However, the ones where we see

a pop in the range, those are quite calm. It we probably see those at least of the time, at least in the current environment. The way you are talking kind of does remind me of the I p o E t F. So I want to bring Joseph in here. We when we study the I p o E t F, which let me go over the tickers real quick, Julian's tickers A, R, B, C N. He's up in Canada. The spack ETF here in the U S is s p a K which holds of these pre acquisition SPACs that you hope pop, and of companies already in the market,

such as Draft Kings. And when we look at the I p o E t F, and we look at these companies that do the traditional route, all you need is like a couple superstars from like to just rocket ship stocks to make up for plenty of dogs. And we found that fp X was really the performance was powered off of a couple of Facebook type companies, but there were a bunch of duds, But you don't it

gets offset. So Joseph, I guess I want to talk about the after they come out, which spack owns and then you own DraftKings, you own once I guess of these talk about these companies after they're out and how they work into the traditional I p O index. So, um, what we are basically doing we start once the I p O is done, so we don't buy it the I p O prisents and get the pop because that's

really not accessible. So what we do is we start with one large underlying universe, which we call the ipoxes composite, and it sees underlying universe. We buy companies on day six and they exit automatically four years. So after four years, it's because we believe that's the kind of maximum of the going public effect, and that's when really the risk and the beta uncertainty about set new listing really gets resolved.

So we have an underlying university in the US of nine plus companies right now reflecting pretty much all the deal flow over the last four years from I p O spinoffs as well and then and specs as well.

And then what we do was the uh we see fp X and the underlying index is the IPOX one is basically on a quarterly basis, we take the top hundred names on the market cap weighted basis in this underlying composite index, and that kind of gives us exposure to the momentum i PO like the soon videos, you know, the facebooks in the past, Svisa, the master cards while through a quarterly rebalance and we're able to kind of get rid of the losers as well, and we hold

them typically as an asset for the first four years of trading. Um. Really originally we developed the index really from a performance perspective. We news as performance aertain the I p O market, but only a certain segment like let's say twenty thirty percent, and many companies will be the crispy crime Donuts of the world. And so that's

where we start. Like we we started with, hey, we want to capture the alpha in the I p O market, not really provide access to the whole kind of spaces as as an equity class um as we're pretty well formed pips up performance and or it was a c SMP Obviously the question is what is what is the

correct benchmark? Obviously, how respects fall in here is if a certain company is large enough, let's say one and a half two billion, it gets an our radar and the IPOX hundred, then it becomes large enough, and then we basically by default have to buy it because we know the good performance is driven by the larger I p O s which can get large by which are large by default or by momentum like teslas or and and really the underperformance story of the IPO market is

driven by small microcap small it pos at least historically. Yeah, I think the I p O fp X in particular, and there's another one called I p O they're both having good years and fp X it's really interesting to me that this thing doesn't have has a billion, so that's not chump change. But you know, given the performance and the fact that you have only four percent of the portfolio of fp X is overlapped with the S

and P five hundreds, so it's very unique exposure. It's almost like you're capturing the toddlers before they get to be teenagers and enter the big benchmarks. Why do you think more people don't Um, is it the PR? Because when I PR doesn't go well gets really dragged through the press. Do you think the PR is a problem here too, that people have bad feelings or that oh all these Wall Street banks are going to make all this money and screw me over? Is that really the

big challenge here? Because the performance, you'd think there'd be more assets. Yeah. I think the assets are now like one point six billion and total around more than two billion in iOS as well as a last fry. I think initially took a long time to get it off the ground. Obviously, I think one drawback is for for for us as we're starting the aftermarket, right, we don't really care as we buy Google that's the I p O price and flip it like you know sixty flip

it at ninety. We care of buying it at hundred twentys and keep it for a long period of time and said it maybe at four dollars, which initially really took a lot of markets in appeal away. Um kind of from from the concept. Um the other opposite challenges, Um, you know what is our benchmark? Were does Morning Stop put it? There's a lot of because obviously we have a rotational kind of cycle where but we don't know how the kind of portfolio looks like in four to

five years. So you know, like I think financial advisor at least historically have had a kind of tough time to know where as they put it right, recently, it really becomes part of kind of event driven strategies. You know, it has kind of started to replace private equity as

well because we hold some of those names. And then another reason is we are just you know, a small innovative firm which you know tries to you know, kind of pioneer the concept of you buy I P s in the aftermarket, you just index and rather than buying it through you know, dealer connections in the immediate you know, bp FO the I P and and flip it make

quick box and that's another challenge. However, obviously we don't speak for themselves, and you know, at fifty eight basis points, there's been a you know, a very attractive product for many financial advisors. So so Joseph, one of the things that Julian said that really struck me was the way he was describing SPACs is sort of like it allows investors to have access to a type of company and those types of companies to have access to public markets.

It sort of seems like the original I p O right with being able to fund companies with public public markets. How permanent of a shift do you feel like this could end up being for the marketplace. I think it's going to be here to stay. You see that. I mean that the big guys, as a big private equity firms are stepping up in that space. It's probably gonna replace private equity to some degrees. Those companies need to

go public. I think it's a great development. It takes away a lot of kind of hurdles which Savings atfully started in two thousand and four. I think it's going to open up a lot of trading, investment strategies opportunities in the long short space. Um, you know, I believe it's here to stay. It's it's it's one way. This is equity capital markets always find a different way to to make it and kind of a symptom of the free capital markets as well, you know, the American capitalism.

So it's an outcrowth of it. And obviously the question is how many of these companies suspects are going to be within US and how many are gonna be losers. The thing is, we really haven't had like a big, big loser in the spect spaces. You know, Nicola came down and so forth. But we don't have the statistics yet.

While we say okay, you know, one of out of training makes it and the rest when significantly underperformer one out of thirty, you know, the more as the underperformers ours and it's gonna go kind of away automatically because people are gonna be cautious about investing in them once it deal consummate. UM and Julian, I want to bring

you back into this. Um. I just talked about how I p O s can at least the ones that don't work out, we'll get dragged through the mud and the press, and that can overhang the whole market a little bit. I've seen some pretty rough tweets about SPACs from some people. I mean, you're on Twitter, you're dealing with that quite a bit. Is there any validity to what they're saying or what are what do they not know? Yes,

the criticism is well founded. If you look at the track record historically a post spack equity performance, it has been poor. They have underperformed and so that's one thing to consider is the data behind it, which is one reason that we don't invest in posts back equities, and I do consider those a different asset class. Well, let me just up you real quick. Is that because the spack when you the announced the deal gets announced, that pop. Is that stealing from the I p O post IPO

future in a way. That is one of the reasons. There are other reasons, and the market has really changed, so this isn't guaranteed to go forward in the future. Historically, say pre twenty nineteen, the spack market was really a space for lesser known entrepreneurs. You don't have the big

name sponsors that you do have these dates. We have Bill Ackman, Apollo, TPG, Social Capital, we have all these big hedge funds, private equity firms, venture capital firms with pretty exceptional deal flow and high quality deals coming into the space. We never had that before. And so if you go back, say five years or ten years, you did have a number of Chinese companies going public through a reverse merger with a spack that ended up being

fraudulent unfortunately. So I think what's changed versus the historical poor performance is the market has become significantly higher quality. However, as you indicated, Eric, the way that we generate alpha or performance is capitalizing on that spack pop, and so by the time the deal closes, you know there's a significant amount of performance built in, and you know, perhaps

they're going to give that up. The other thing that has changed, and one thing that led to poor performance historically, is that if you look at the guys who subscribe to these back I p o s, guys like myself, like hedge funds, liquidity providers that are looking to capitalize

on those prespact dynamics. However, historically, you didn't get as much as a pop, and therefore more and more often they would redeem to get their cash back because the share price didn't go up, and therefore, when these business combinations completed, lots of the cash would go back to investors and they'd end up highly leveraged, and therefore the risk of them failing was significantly higher. What's changed these

days is they're raising significantly more capital. The traditional spack was kind of fifty two hundred million dollars a number of years ago, and now the average is more like three million dollars, So they're more cash. Not just that, but a large amount of business combinations that we're seeing is coming along with these pipe financings UH in the hundreds of millions of dollars, which mitigate that redemption risk that have that used to happen with these deals. So

a lot of things are changing. However, it is important to be cognizant of posts back equity performance performance, and historically they have underperformed. Um, I wanna ask both of you this question, which is you know, we just went over some of the background the industry. These things are now in e T S, which I would argue probably is the way to play them because you go out and try unless you are in the market and can pick this stuff and have knowledge of everything going on,

and E T F will minimize your risk. That said, would you recommend to like your uncle Bob or somebody that they buy aid either your rbt F which has these SPACs in it, or Joseph fp X, like, is this really something a retail investor should should have? I know you're biased, but give me your your take on what you would say. Sure, Eric can take that one. And so what we're all about is offering alternative ets.

So instead of traditional asset classes sixty forty portfolio, we are leaning more towards what we call, you know, the next sixty, which is twenty in which that is a diversified sleeve of alternative asset classes. And with the advent of alternative E t F, s I p O E t F and things of that nature, investors can finally

get access to these institutional caliber alternative strategies. And what we're really looking for in terms of something alternative to your traditional stocks and bonds and something that is uncorrelated or perhaps even negatively correlated, such that in Q one when your stocks are crashing, you know, luckily bonds kind of bailed people out, but with bonds ten years at seventy five basis points, perhaps it may not be there

on the next crash. So it's important to own asset classes within a portfoli you that are uncorrelated and perhaps

good zig while your other asset classes zag. So we ran a study, we run spack index looking at daily performance and in the first five months where things went absolutely crazy, as you know at the coronavirus pandemic our s back in next was actually negatively correlated with both equities and bonds and we all know the great performance of treasuries kind of in the first five months of

the year. However, that's back index that we run outperformed treasuries on an absolute basis with lower risk and lower volatility. I think they declined maybe five six percent at their peak to trough decline. Meanwhile, treasuries declined more like eight percent. And Joseph, let's let's turn you say, you know, your niece comes to you and uh, you're she's in her thirties. Should she buy the I P O E T F. Is that something that should fit into somebody's portfolio? Yeah?

I think absolutely. I think makes sense to invest strategically as an asset all location plan into these companies which have a lot of be transerventy in new listings. I POS spinoff specs are probably one part of it. You know, we have outperformed, you know, from fpx's perspective by almost four d pigs annually over the last thirteen years since the frond launched. Has given you double the performance almost

what's S and P has given you. That makes makes sense to invest in that space, but always maybe ten percent of your your money you're put into the equity market Overall, however, it's obviously important to know you know how much um the individual rates are. I don't believe taking more than ten percent of an individual holding into your portfolio, um, you should not do that. You should be diversified, and you should have the ability to rebalance.

The rebalancing probably should be on a quarterly or senior annual basis so you're able to get rid of losers and and just let's serenas around. So absolutely should part of your should be part of yourset our location um um into that space. Yeah, Julian, I forgot to ask you something earlier, which is how do you get exposure to this stuff? Do you have to write blank checks to someone? In terms of investing inspects, Well, we do

it in a number of ways. We do subscribe to I P O S, which as an E T F I think we're the only one that actually does that. So you need good deal flow and connections at the different investment banks brokerage firms. So that's one way. We also buy in the secondary market, whether they're the the units i e. The shares and the warrants, or even the shares once they split off from the unit. So there's a number of ways um in order to invest

in that. Sometimes we just look at the discount and it's just a straight cash arbitrage as sometimes who are buying these ones at NAV on a unit basis and we think the sponsor could announce a good deal and it's get that pop. So it definitely requires a significant amount of monitoring and trading and uh additionally deal flow. On the I p O side, we mentioned that you were Canadian listed. Are there any advantages to being in

Canada for this? I think there is. I don't know the US regulatory regime super well, but what's interesting in the Canadian regime, it's actually changed dramatically just last year that allowed us to launch hedge fund strategies within Prospectus issued products such as an E t F and by hedge fund strategies I'm talking about leverage derivatives and short sellings are accelerating. Arbitrage. Fund is actually a leveraged fund and not the traditional you know, double lever kind of

daily rebalanced type thing. It's leveraged like a traditional long short hedge fund where you have your longs and your short so you know you do have gross exposure above a pent. So the really interesting structure that we actually invented is you know, getting into the weeds a bit on the E t F side. But we utilize what's called sub custody, So we utilize that custodian as all E t F s do. But we also have a prime broker which hedge funds use that allows us to

sort of short, borrow and leverage the portfolio. So I'm not sure if any U S E t f s actually have individual short positions, but our et F does. And Joseph Um, you know, we've got this. I think there's going to be a spack E t F attack. Um s p a K has taken in flows every day. It's only twenty million, but pretty good for a smaller issue. Where you guys planning to make a spack index, do you do you anticipate a market where there could be you know, three to four spack ets by the end

of the year. I demand can be said we have a spec index. The IPOX spec spec is a tik On Bloomberg. It measures it for form and of the most liquid spects into the consummation of the deal, typically thirty to forty companies. Has been up like ten percent since we launched the end of July. I think there will be more coming on the pre consummation space, but also on the post consummation space only eventually. I think

it really depends on the performance of it. But I think it's just a um the first in a in a number of spects spect focus to E t F s Okay, closing question for you both. It's one that we ask everyone favorite E t F ticker cannot be your own. Julian, I'll start with you, Well, that's a good question. My favorite E t F ticker and cannot be my own? Why I hear one that I believe one of you two guys talk about move for the agriculture e t F. You know that one. That's a

that's a classic one. Joseph over to you. I like a r K K both. The company is fantastic and has been fantastic too. We were just talking about that. Yeah, that that's talk about. That's Cathy Woods actively managed fund. That's just so in the zone like Michael Jordan's in the mid nineties, kind of in the zone right now. Um yeah, not not that that doesn't get mentioned a lot as the favorite ticker, but it gets brought up here and there and move does get mentioned a lot.

I'd say that's probably the most mentioned. Rachel. Maybe that is a Hall of Fame ticker. Yeah, for sure, that that's amount Rushmore. All right, Julian, Joseph, thanks so much for joining us on Trillians. Thank you guys, happy to be here. Thanks for listening to Trillions until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, and wherever else you'd like to listen. We'd love to hear from you. We're on Twitter, I'm

at Joel Webber Show. He's at Eric Baltuna's. You can find Julian at llan Clmacho, where he's also known as the Scat King, and you can find Joseph at Ipox eight. This episode of Trillions was produced by Magnus Hendrickson. Francesca Levy is the head of Bloomberg podcast by