Investment Case for Defiance’s SPAK:The First SPAC ETF

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What are SPACs?

Special Purpose Acquisition Companies (SPACs) are “blank check” or shell companies with no commercial operations, which are established solely to raise capital from investors for the purpose of acquiring one or more operating businesses. The SPAC becomes a publicly traded company What are SPACs? (it “IPOs”), thereby giving retail and institutional investors the opportunity to own a stake in its vision – a commitment to acquire or merge with a private company within two years – or receive their money back. If the SPAC fails to merge with a target company or the investor does not support the choice, they can simply redeem their shares and back out of the deal, leaving the SPAC to absorb the costs.

How do SPACs work?

SPACs have surged in popularity over the past year. 2020 saw more capital (around $80bn from 237 deals in 2020, up from around $13.5bn from 59 deals in 2019) raised through SPACs than in the previous ten years combined. BlackRock CEO Larry Fink even suggested recently that SPACs could come to replace the traditional private equity model of buyouts,1 as they streamline and democratize the process of becoming public, brining benefits to both the investors and the companies ready for the next level. For example, 2020 saw Diamond Eagle pledge $400m it raised from its SPAC to a deal with Draft Kings, a digital sports entertainment and gaming company that blurs the line between sports betting, fantasy gaming and esports. Since the deal, Draft Kings stock rose over 170% from around $19 to around $52.2

The average size of a SPAC in 2020 was $335 million, nearly 10 times the amount in 2009. 3

Indeed, as high-worth, talented and credible sponsors like Michael Klein, Bill Ackman, and Solamere Capital continue to pour into the SPAC market, its integrity in the wider investment community grows. Take Former Facebook vicepresident, Chamath Palihapitya for example. His SPAC conglomerate Social Capital Hedospohia has formed 6 technology-focused SPACS, each raising between $350m and $1bn via individual $10 shares. The first pledged over $720m and merged with Richard Branson’s space tourism venture, Virgin Galactic, whose value has since risen over 38%.4 The second raised $360m to merge with OpenDoor, now valued at $4.8bn. Termed the “future Amazon” of the property market,5 OpenDoor has risen over 85% since the deal was announced in September 2020. The third Hedosophia SPAC completed its merger with Clover Health in January 2021, indicating a move towards healthcare technology that assists in decision-making. Palihapitya’s other SPACs are yet to finalize their target deals. Other SPAC giants include Bill Ackman’s largest ever $4bn Pershing Square Tontine Holdings Ltd launched in July 2020. It has yet to declare its target merger company, but has already committed to improved investor terms and security, by limiting its sponsor’s right to withdraw compensation until the merged company trades 20% above the offer price.6

Individual retail investors are attracted to SPACs as they give them access to major deals involving up-and-coming companies, access that was denied in a traditional IPO process. But what is in it for the SPAC sponsors and the target companies? What market conditions support these deals? What is incentivizing growth in this space and suggesting that SPACs are far more than a passing fad?

A graph showing market share by number of US listed SPACs vs all US IPOs

A range of factors have coalesced to propel the SPAC market forward. Firstly the macro-economic context of very low interest rates makes the SPAC a low opportunity-cost option for cash-heavy investors seeking alpha. Their cash is stored in treasury bills, providing security in case the SPAC does not find a target company within the required timeframe, or the invest or decides to withdraw their funds. Secondly, the Covid-19 pandemic made the roadshow and meetings of the already cumbersome IPO process even more awkward. SPACs make the move to public status quicker, cheaper, more transparent, flexible, accessible and perhaps even more lucrative to the target company given the large sums being raised by SPACs. Their success also indicates that public markets can do a better job of appreciating long-term, big idea opportunities than private ones. Thirdly, SPAC sponsors have realized the importance of credibility and fairness in their costs and terms for investors. This has led to plenty of self-regulation, to avoid the dilution of the target company shareholders’ stake when the sponsor used to be awarded around a 20% share. Morgan Stanley’s new SPAC structure, for example, the “Stakeholder Aligned Initial Listing (SAIL)”, limits the sponsor’s equity to a percentage of the post-merger capital appreciation of the capital that the SPAC brought to the merger, not the total value of the company. This avoids the dilution described above and links returns closely to company performance.8 The result is a cost-benefit structure less biased towards the sponsors and more favorable to investors. Lastly, the positivity surrounding SPACs has made them an effective way to raise significant investment capital. This means that the pool of target companies could even include large, “unicorn” businesses with proven records of success. The combination of a financially-strong, credible sponsor and an established target company mitigates risk and thereby enhances the SPAC appeal.

A graph showing the number of special purpose acquisition company IPOs 2009 to 2021

Diversified exposure to the SPAC space –
What does an ETF offer?

Not all of the 237 completed SPAC deals from 2020 have seen the success of Draft Kings or Virgin Galactic, and it is not always possible to predict which are the best SPACs to buy. That is where a SPAC ETF can add value to a portfolio by offering diversified exposure to the most liquid potential in the SPAC space. An ETF includes a range of companies usually grouped around a specific theme or sector. While it trades as a single entity on the stock exchange, its value is linked to an index of the composite stocks, which fluctuates according to their individual value. So an investor buying a SPAC ETF gains exposure to a number of SPAC deals, while avoiding the risk of committing all their capital to one specific SPAC.

Why the Defiance SPAK ETF?

The Defiance Next Generation SPAK ETF, the first SPAC ETF, tracks a rules based index that considers a list of SPACs and selects the most liquid, compelling and innovative companies. SPAK gives investors exposure to the entire IPO flow, from the pre- deal blank check companies (the Special Purpose Acquisitions Corporations [“SPACs”]), to the ex-warrants and initial public offerings (“IPOs”) derived from the SPACs. The Index has an aggregate weighted allocation of 60% to IPOs derived from SPACs and 40% to SPACs at the pre-deal stage. Defiance’s SPAK ETF holds stocks for two years postmerger, ensuring investors gain the full benefit of the deal and subsequent development. The risk of any new SPAC not succeeding is mitigated by its weight in the index (never more than 12% for a single security and no more than 45% to be comprised of securities that each constitute over 5%). The index is passively managed, which contributes to its low expense ratio (0.45%), while its constituents are reviewed monthly to ensure that the ETF captures the potential dynamism of the SPAC space.

SPAK allows both financial advisors and retail investors to participate in an IPO private equity style of investing which is usually only available to large financial institutions.

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1 “Year of the Spac, Fink sees a ‘tsunami of change’, US-China climate fight,” November 18, 2020.



4 “Virgin Galactic dealmaker defies IPO lull with $720 million blank-check deal,” Joshua Franklin, April 21, 2020.

5 “Opendoor Is the Future Amazon of the $1.6 Trillion Real Estate Market,” Luke Lango, InvestorPlace Senior Investment Analyst, October 29, 2020.

6 “Blank Check IPOs, the Status Symbol of 2020, Have Raised $32 Billion This Year,” Crystal Tse, August 27, 2020.

7 Data Source: SPAC Research

8 “SPACs, an IPO Alternative, Explained,” January 6, 2021.