Wall Street rarely finds itself at a loss for new investing trends.
One of the latest has been investors’ penchant for special purpose acquisition companies, which are essentially blank check entities set up to merge with private companies hoping to go public.
SPAC activity has exploded this year, with proceeds topping $50 billion, shattering previous records, according to Renaissance Capital.
Naturally, there is now an ETF tracking the SPAC craze. Launched on Oct. 1, the Defiance Next Gen SPAC Derived ETF (SPAK) seeks to capitalize on the theme’s growing popularity, Defiance ETFs President Paul Dellaquila told CNBC’s “ETF Edge” on Monday.
“What we’re providing investors is a combination of those pre-IPO SPACs, the biggest, the most liquid ones that are in anticipation of doing a deal, as well as those post-IPO SPACs that have merged, and those companies that have already IPOed like a DraftKings or a Clarivate,” Dellaquila said.
The breakdown is about 80% companies that have already merged with SPACs in the last three years such as DraftKings and 20% pre-IPO SPACs, those shell entities in search of public market hopefuls.
The ETF’s top five holdings are DraftKings at over 15% of the portfolio, Clarivate at 12.5%, Vertiv Holdings at 10%, Vivint SmartHome at 5.5% and Open Lending Corp. at 5%.
One of SPAK’s key selling points has to do with the sometimes obstacle-prone initial public offering process, said Dellaquila, also his firm’s global head of ETFs.
“The IPO traditional process is a very closed ecosystem,” he said. “So if you’re an underwriter, if you’re Warren Buffett, if you want to buy Snowflake, you’re in at an $120 price. But once Snowflake actually hits the real market, the secondary market, I’m paying $240 a share or essentially 100% premium on that stock that just a day ago was at 120. So, I think there is a little bit of a closed-off environment to other [registered investment advisor]s, to retail investors, to be able to access those types of investments.”
Moreover, companies looking to go public typically do road shows to garner interest and capital ahead of their debuts, but that can be costly and, with Covid-19 travel restrictions in place, somewhat unattainable, Dellaquila said.
“With this process through a SPAC, and especially these bigger players like Bill Ackman stepping up to the plate with $4 billion pool of capital, that is a very appealing item, for a private company to be able to negotiate with one partner, come up with the terms and usually have quicker access to the public markets,” he said.
Tom Lydon, CEO of ETF Trends and ETF Database, emphasized in the same “ETF Edge” interview that this product launched at a particularly opportune time.
“There’s a lot of pent-up demand. The number of companies going public are only a third of what we saw 10 and 20 years ago,” he said. “Especially with innovation, … this pent-up demand and being able to institute this SPAC program is really, really helpful.”
While there’s inherent risk in not knowing which companies the ETF could include in its portfolio, it’s still “on the cutting edge” of one of the hottest trends in the market, Lydon said.
“I love that SPAC ETF because we’re going to be able to invest in companies pre-IPO and there’s a huge amount of demand there,” he said.
WallachBeth Capital managing director Andrew McOrmond attributed the SPAC frenzy to people wanting “new access” to companies entering the public market after seeing the success of stocks such as Peloton.
“If DraftKings is the next Penn Gaming, well then OK, I want to get access to that,” he said in the same “ETF Edge” interview.
“The [ETFs] that have been most successful were ones that offered a wrapper and a package of convenience to investors that otherwise could not get the asset class, and that is exactly what Paul has created here,” McOrmond said. “He has given people access to this and I only think it’s going to further the craze.”
For Dellaquila, the next step will be to keep a close eye on this growing space, particularly with uncertainty still abounding. Year to date, 124 SPACs have launched that still have no target, and 27 that were launched last year are still seeking targets.
“There is going to be a maturation to the SPAC market,” Dellaquila said. “We think this product is very indicative of where the market is today and as it expands and as it matures, you’ll see the ETF evolve as well.”
