Robinson Capital unveils active pre-merger SPAC ETF

Jul 1st, 2021 | By | Category: Alternatives / Multi-Asset

Robinson Capital Management has unveiled an actively managed ETF investing in pre-merger Special Purpose Acquisition Companies (SPACs).

Robinson Capital unveils active pre-merger SPAC ETF

James Robinson, CEO and CIO of Robinson Capital Management.

Listed on NYSE Arca, the Robinson Alternative Yield Pre-Merger SPAC ETF (SPAX US) seeks to provide investors with total returns in excess of cash equivalents and short-to-intermediate-duration fixed income while seeking to protect investors’ capital.

SPACs, also known as blank-cheque companies, are companies with no commercial operations of their own that are established solely to raise capital through an initial public offering (IPO) for the express purpose of acquiring an existing operating company.

A SPAC typically has two years to complete an acquisition or merger (called a ‘business combination’) or face liquidation. In the intervening period, while a SPAC is searching for a deal, assets are typically invested in US government bonds, money market instruments, and cash, all of which is held in a ring-fenced trust account.

Robinson Capital sees a huge opportunity in pre-merger SPACs owing to three core features which are a function of their structure: in-built downside mitigation, upside return potential, and almost zero correlation with traditional fixed income markets.

For context, SPAC investors have an option to redeem their shares at the initial IPO price (typically $10) if they do not wish to become a shareholder of the combined company or if the SPAC fails to complete a deal in time. This mitigates the potential for capital loss. The upside return opportunity comes by way of warrants that are typically attached to SPACs. These stand to benefit from a successful acquisition. Combined, these attributes help to reduce the overall correlation with traditional fixed income markets.

James Robinson, CEO and CIO of Robinson Capital Management, said: “As a 40-year veteran of fixed income trading and management, I have never seen a more attractive vehicle than the pre-merger SPAC structure. It has the credit and interest rate risk of a T-Bill portfolio; a base case return profile of the high-yield bond market; and the upside potential of a strong equity market.”

Investment strategy

The underlying strategy of the fund is, essentially, to purchase SPAC shares below trust value in order to generate a positive yield and higher overall returns while also seeking to identify SPACs that have a higher probability of completing a successful business combination.

Specifically, the fund will invest at least 80% of its net assets in common stock and warrants of US-listed SPACs, with a focus on small-capitalization SPACs, defined as companies with market capitalizations below $2 billion.

The fund may seek to sell warrants that it receives in connection with the purchase of SPAC units in order to generate additional returns for shareholders, and it intends to sell out of positions (common shares and warrants) prior to the completion of a business combination.

The fund may invest up to 20% of net assets in cash, cash equivalents, or short-term instruments such as commercial paper, money market mutual funds or short-term US government securities for cash management purposes or due to a lack of suitable investment opportunities.

The portfolio management team will utilize both qualitative and quantitative analysis in determining its investment decisions.

The qualitative analysis involves assigning a likelihood, or probability, that a SPAC will be successful in identifying and completing a business combination. Qualitative factors include the deal-making track record and pedigree of the SPAC sponsor, its management and board, as well as the SPAC sponsor’s history in allocating capital, securing financing, managing public companies and background in the industry or business where the SPAC is searching for a business combination.

The team will also consider the voting power of certain stockholders, including stockholders affiliated with the management of the SPAC, in evaluating potential SPAC investments.

Quantitative factors include the implied yield-to-worst of the SPAC common shares (i.e., the trust account value divided by the current share price which is then annualized based on the remaining time left to complete a transaction), as well as the value of any attached warrants to the SPAC units.

Robinson Capital maintains a real-time model that tracks all publicly traded pre-merger SPAC common stock shares and units. The model ranks the attractiveness of all pre-merger SPAC common shares based on the quantitative and qualitative factors identified above.

The firm believes that SPACs with a higher likelihood of completing a business combination, all other things being equal, offer greater upside potential (without any offsetting decrease in downside protection) than SPACs with a lower likelihood of completing a business combination.

When ranking SPAC units with attached warrants the likelihood of completing a business combination has an even greater impact on the firm’s analysis. This is chiefly because warrants may have minimal market value if no business combination is completed.

Weightings of individual SPAC common shares and units in the portfolio will be a function of relative attractiveness and market capitalization of the SPACs.

Robinson Capital has partnered with Tidal ETF Services to bring SPAX to market.

“We are excited to bring this timely alternative solution to yield-starved fixed income investors; and wrapping the strategy in an ETF provides greater tax sensitivity and intraday liquidity,” added Robinson.

The fund comes with a net expense ratio of 0.85%.

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