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Understanding SPAC Benefits With Coming Rate Increases

Economy
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Image Credit: Yosuke Muroya (Flickr)


Fed Tightening Causes Hedge Fund Manager to Consider SPACs a “Best Idea for 2022”

 

Investments that are less understood tend to trade at a discount. As investors come to understand them, and how to value them, the market becomes deeper and more liquid. Knowing that there will be a buyer or a seller to take the other side of a trade is worth quite a bit. Boaz Weinstein is the Founder and chief investment officer of the hedge fund Saba Capital. He believes that SPACs are still misunderstood and undervalued. Boaz also has told Bloomberg that these stocks may be a good sector to consider as the Fed tightens.

Mr. Weinstein gained recognition in the early and mid-2000s when he worked at Deutsche Bank. He is especially known for his credit default swap trading strategies.

At a “Best Ideas for 2022” webinar hosted by Saba on Friday (January 28) Boaz explained that he believes, “SPACs are misunderstood because they’re fixed-income products.”  He explained, special purpose acquisition companies, or SPACS, were popular early in 2021 but their popularity faded as regulators began to scrutinize aspects of their structure.

An attractive part of SPACs structure, Weinstein argues, is they can be bond-like and earn interest on behalf of the owners pre-merger. Another aspect of SPACS is that they are sold with warrants that can have interesting returns either if they’re sold immediately or if the company rises in value.

The IPO and SPAC market doesn’t have the significant tailwinds they benefitted from with their popularity a year ago. According to Bloomberg, the Saba CIO has invested in more than 400 SPACs since October 2021. Weinstein has been investing in SPACs for more than a decade, holding about 7% of the market in 2006, when it was valued at $15 billion. Today, the market is more than 10 times as big as it was 15 years ago, Weinstein estimates he holds about 1% of it.

While analysts debated whether inflation is transitory or persistent, the Saba CIO explained at a Robinhood Investor Conference held last year, “If you were going to buy a 5-year bond because a 75 basis point yield was enough to excite you or a 10-year at 1.45%, you’re taking significant risk that inflation is not transitory or that people fear that it’s not transitory.” Weinstein said warned higher inflation erodes the value of fixed-income investments. Meanwhile, SPACs often trade at a discount to the escrow and earnings on the assets held in trust on behalf of the investors.

 

Suggested Reading



Irrational Pessimism – Why Value Investors Should Research Individual SPACs



Long Term Retirement Money and Fledgling Companies





Optionality – The Different Ownership Paths Before the De-SPAC Period



Analysis of a Special Purpose Acquisition Company

 

Sources

https://www.bloomberg.com/news/articles/2022-01-28/saba-s-weinstein-recommends-spacs-cds-as-fed-tightens

https://www.barrons.com/articles/spacs-boaz-weinstein-hedge-funds-investing-51624308161

http://ill.mbc.mybluehost.me/our-strategies/#spacs

 

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