Key Points:
- SPACs have gained popularity and are seen by some as a new asset class with potential diversification benefits.
- An analysis of SPACs listed since November 2020 reveals that the performance of SPACs varies significantly.
- During the pre-deal phase, SPACs exhibit lower performance compared to the post-deal phase.
- Volatility of SPACs is higher than that of major equity indexes.
- Pre-deal SPACs offer some diversification benefits, but the correlation with equity indexes increases significantly after the deal is executed.
- SPACs do not appear to be an uncorrelated asset class relative to public equities.
Special-purpose acquisition companies (SPACs) have become increasingly popular and have surpassed traditional initial public offerings (IPOs) in terms of volume this year. Many investors believe that SPACs offer superior returns and diversification benefits compared to other forms of equity. However, a closer analysis is required to determine if these claims hold true.
To assess the diversification benefits of SPACs, a study was conducted on the full sample of SPACs listed starting in November 2020. SPACs are blank-check funds through which investors aggregate their money while waiting to identify target companies to purchase and take public. This period is known as the “pre-deal” phase. Once the SPAC identifies and purchases a target company, the “post-deal” phase begins.
Data was collected on all SPACs listed since November 2020, and the CNBC SPAC 50 index was used to represent a diversified portfolio of SPACs. The CNBC SPAC 50 tracks the 50 largest US-based pre-merger blank-check deals by market capitalization. For the post-deal phase, the CNBC post-deal SPAC 50, which consists of SPACs that have found a target and gone public, was used.
The analysis revealed that during the period from 30 November 2020 to 1 April 2021, the SPAC 50 pre-deal underperformed the SPAC 50 post-deal by about 5 percentage points. The pre-deal phase had a return of 12.15%, while the post-deal phase had a return of 17.61%.
In terms of volatility, both SPAC indexes exhibited higher volatility compared to major equity indexes such as the S&P 500, Dow Jones Industrial Average, NASDAQ Composite, Russell 2000, and the tech exchange-traded fund (ETF) SPDR XLK. The performance of individual SPACs within these indexes also showed considerable dispersion, with the bottom quartile of fund performance averaging -30% and the top quartile averaging 81%.
In terms of diversification, the correlation coefficient between SPACs and major equity indexes was analyzed. The pre-deal phase of SPACs had an average correlation coefficient of 0.43, suggesting some diversification benefits. However, once SPACs went public, the correlation coefficient increased to 0.53, indicating a weaker diversification effect. SPAC performance was found to be most correlated with the NASDAQ Composite during the pre-deal phase and the Russell 2000 during the post-deal phase.
Overall, the analysis suggests that SPACs may offer some diversification benefits during the pre-deal phase but show higher correlation with equity indexes after the deal is executed. The claim that SPACs constitute an uncorrelated asset class relative to public equities is not supported by the data. Therefore, if the goal is portfolio diversification, SPACs may not be the best option.
It is important to note that the opinions expressed in this article are those of the author and do not constitute investment advice. Investors should conduct their own research and seek professional advice before making investment decisions.
