A special purpose acquisition company (SPAC) is a 'blank check company' that raises money from investors through an IPO for the sole purpose of acquiring an existing private operating business within a specific period of time (generally up to two years). Proceeds raised through the IPO are held in a trust account and typically invested in U.S. government securities until a business combination is consummated or the liquidation date of the SPAC is reached. A SPAC shareholder vote is required to approve a business combination. Upon approval, the SPAC common stock shareholders have the option of moving forward with the transaction and receiving equity in newly combined entity, or submitting a redemption request to receive their pro rata share of the trust account. Should the shareholder vote be unsuccessful, the SPAC will continue to seek another business combination until liquidation date. Should no business combination occur by liquidation date, the proceeds of the trust account are distributed to SPAC common stock shareholders.

There is no shortage of news focusing on the risks and poor performance of SPACs. However, generally when the media refers to SPACs in this way, they are referring to SPACs post-merger or business combination, where the ‘de-SPACing’ event has already occurred and investors are purely making a speculative equity investment. In contrast, the fixed income nature of pre-merger SPACs provides shareholder-friendly features that present an arbitrage opportunity for SPAC common stock shareholders. Given that SPAC shareholders have a full redemption right to their pro rata share of the collateral trust account that is typically invested in U.S. government securities, the downside risks of pre-merger SPACs are significantly limited while also presenting the shareholders with potential equity upside.

The CrossingBridge Pre-Merger SPAC strategy focuses on purchasing shares of common stock and units of SPACs that are trading at or below their pro rata share of the collateral trust account (i.e. trading at par value or at a discount), with the intent of disposing of the shares prior to, or at the time of, a business combination. We look at ourselves as ‘renters’ of SPACs, not owners. In other words, we aim to capture the fixed income nature of pre-merger SPACs, along with the equity upside that they present, but we have no interest in being an equity investor post-business combination, which presents a much different risk/return profile akin to a traditional equity investment.

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