Jonathan Browne from Robinson Capital joins Boardroom Alpha's David Drapkin to talk about SPAC arbitrage. Robinson Capital's SPAX ETF launched in June of 2021 and is an actively managed exchange-trade fund (ETF) that invests in Special Purpose Acquisition Companies (SPACs), also known as blank check companies. SPAX seeks to provide total return while minimizing downside risk.
Jonathan Browne Biography
Jon serves as a Portfolio Manager and member of the investment management team at Robinson Capital. He jointly oversees the day-to-day management of the Robinson Funds, including its investment strategies and processes, risk management, regulatory compliance, asset allocation modeling, external manager due diligence and selection, and trading. He is also responsible for overseeing the continued growth and advancement of the firm’s CEF and SPAC research efforts, which includes managing Robinson Capital’s proprietary valuation systems.
Hey everyone, welcome back to no who drives returned the podcast brought to you by boarder mouth. I'm David drapkin. Today we're delighted to be to be joined by john Brown. JOHN is a portfolio manager and a member of the investment management team at Robinson capital. He overlooks the SPAC product for Robinson. JOHN, thank thanks so much for joining us today.Jonathan P. Browne (Robinson Capital):
Yeah, thanks for having me, David, I really appreciate it.David Drapkin (Boardroom Alpha):
Right. So just to start off, how about a little bit of introduction on you? And your role at Robinson?Jonathan P. Browne (Robinson Capital):
Yeah, so I've been portfolio manager and director of research here at Robinson Capital for probably the last seven years. Yeah, for those not familiar Robinson capitals, a boutique fit alternative fixed income manager, that that has around 850 million and a u m, right now. And our primary focus is on alternative fixed income products. And so that, you know, format, primarily, we're focusing on, you know, the closed end fund space, but also SPACs, as well as a interesting alternative fixed income solution for investors. Great. And so obviously, we're mostly here to talk about SPAX today. And so, you know, the popular theme in the SPAC boom, in the last year and a half, two years, have been more about the the high flying names, you know, specs that have, you know, jumped 20, 30, 40% pre-deal. You know, as I understand it, you're focused on on sparks from from a bit of a different angle, can you talk talk a little bit about the approach you're taking, particularly as a as an alternative fixed income provider, versus, you know, what some of the public might do as, as more of a SPAC trade? Yeah, so we're all familiar with, you know, how these, the SPACs initially got marketed by mainstream media was a way for retail investors to participate in, in, in IPOs, with, you know, the institutional players, you know, Said another way, the ability to participate in the next Amazon, Tesla IPO, etc, right. And, and while that's exciting to talk about, you know, how we're viewing the SPAC space, isn't really so different than how a lot of the hedge funds have also been approaching the space, whether it's via, you know, looking at it through an absolute return type lens, or, in our case, you know, we're looking at it as an alternative fixed income lens. And so, you know, what we're really looking at and focusing on is is solely the pre merger SPAC market. And, you know, as you familiar, you know, a SPAC is essentially just a T-bill portfolio that the proceeds are sitting in a trust you know, it has a you know, so it has a trust value or redemption value or a par value, you know, it has a stated maturity and in based on that it has a, you know, yield to maturity as well, all the all the same things that a bond has, right, so it's a pre-merger SPAC, in our, our opinion is, is simply a, a fixed income instrument that quite honestly has, has significant upside potential when a when a market friendly deal is announced. And so, you know, instead of sort of chasing those high fliers, or or focusing on on post merger SPACs, which are just equities, at that point, we're really focused on the pre merger space as, as we believe in the current environment, we're able to purchase these at a, you know, two and a half percent sort of yield to worst. You know, and that yield to worst is assuming that any SPAC that we own, doesn't find a merger, a merger target, right. And so we're just redeeming our shares at the end of the end of the life, you know, that two and a half percent may not, you know, seem incredibly exciting, you know, especially to an equity type investor. But, you know, when you look at where rates are across the fixed income spectrum right now, that sort of two and a half worst case scenario is pretty attractive, especially when you're looking at, you know, the Barclays AG, for example, which is yielding one and a half percent. You go and you look at anything that's shorter duration, and it's well inside of that. And so we think of worst case scenario of two and a half percent, versus traditional fixed income is extremely compelling. You know, you couple that with the fact that there is this equity like upside opportunity or optionality and we think that you have one of the most attractive risk, risk reward profiles that that I've ever seen in my investment. career. Right? And, and two things on that. So maybe for some of the folks that aren't as savvy in, in fixed income land, so you mentioned two and a half percent call it on a on a on a yield to worst situation which would be a backward, you know, completed slide without finding a deal. What happens if they do find a deal? What happens to that yield? Yeah, so, so two things. One, if a when a deals announced, you know, if the market likes it, you may see a pop in the share price, you know, 2, 3, 5, 10, 20%, whatever it may be, you know, they're that upside is, is attractive. And, you know, we may be able to sell out of that, you know, immediately and lock in our, our proceeds and then reinvest that in another SPAC that hasn't announced the merger target. The other option is, you know, that perhaps this back announces a merger target that the market doesn't particularly find attractive, and so there's no share, share pop, right? Well, that's still a good outcome, because instead of, for example, maybe there was 18 months remaining to earn that two and a half percent. Well, once, once a SPAC announces a merger target, the average time from announcement to completion is is roughly around six months. So what that simply does is allows you to earn that sort of two and a half that you were going to earn over the next 18 months, you know, pull that forward, and you're going to earn that two and a half percent over the next six months, perhaps. And so both outcomes in our our opinion, are, are positive for this type of strategy.David Drapkin (Boardroom Alpha):
Right. Right. And it's essentially a risk free trade. You know, the redemption feature of SPAC, which I find to tend, is one of the things that the general public is least educated about the actual mechanics of the spec vehicle itself, being, you know, a literal, if you will, barring, you know, nefarious behavior, a literal risk, riskless trade, you know, given given the redemption feature.Jonathan P. Browne (Robinson Capital):
Yeah, and that's, you know, that's critical to what got us into the space in the first, you know, and, you know, in the first place, you know, given that, you know, valuations on equities are are extremely lofty spreads in the fixed income market are as tight as they've ever been, you know, it's not apparent that that this is the environment where you want to be reaching for risk, right. And so knowing again, that you have this sort of, you know, risk free again, a SPAC is just, you know, the proceeds are held in a trust account that are invested in T-bill. So, you know, essentially no credit or interest rate risk, but that sort of guaranteed two and a half percent type return as worst case scenario, knowing that you also have this equity, like upside on, you know, any SPAC that announces a positive merger target, you know, again, that risk reward profile is pretty compelling, especially an environment where valuations, you know, may be considered stretched and stretched, it spreads extremely tight.David Drapkin (Boardroom Alpha):
Right, right. I want to talk a little bit about your security selection process. So obviously, as an alternative fixed income product, we're, we're you're focused very much on on getting yield. Does that mean you're literally just buying, you know, the cheapest stocks out there? Or are there features of SPACs or SPAC sponsors that go into your security selection process for, for what you're buying for the fund?Jonathan P. Browne (Robinson Capital):
Yeah, no, that that's one component of what we look at, or that that we look at with within our model, um, you know, obviously, as a alternative fixed income product, you know, we do find that quantitative statistic to be, you know, extremely important in understanding what our sort of downside scenario is, right. But, you know, just as importantly, you know, it it's, it's important to understand what sponsors you're you're looking at, you know, do they have a history of, of successfully completing, you know, mergers in the SPAC space? Are they professional allocators? For example, if they haven't launched any SPACs prior? You know, what have they done? Have they been on any boards or that were they running and allocating capital for a private equity or venture capital firm etc. And you know, what's their track record look like there and so, obviously, we try to place probabilities on the likelihood of of a sponsor, you know, completing a deal, but also looking at, you know, sponsors who we think have a higher probability of completing a good deal, you know, is is is just as important if not, if not more important. So you know there's there's a, there's several things that we look at it's, you know, it's definitely we're going to look to look at the yield to maturity and then then we're really going to dig into the sponsors themselves to try to, again place a probability on the likelihood of successful merger.David Drapkin (Boardroom Alpha):
Right? And then as part of that decision making process, you know, the likelihood of they bring a good deal, I assume you're also taking into account maybe a probability or the likelihood of a fast deal. You're just given given the nature of the yield, correct?Jonathan P. Browne (Robinson Capital):
Yeah, absolutely. All that goes into the calculation. You know, the, the, you know, the time left to complete a merger. Perhaps more importantly, how how long, you know, has it been since they've IPO, we generally have a good idea of, you know, what a rough estimate for how long it takes to find a merger. merger is so we'll take that into account and in terms of, you know, some of the different SPACs that we're looking at, but But yeah, ultimately, we're looking at the past performance of any of these repeats or to SPAC issuers and, and taking that into account placing a probability that a good deal is made and in a timely deal. Cool. And we'll we'll get to your thoughts on what's going on from a broader perspective, which was back over supply and shifting a little bit to just back IPOs. There was a time earlier in the year where investment managers hedge funds, were clamoring for any IPO allocation, they can get, you know, do a quick trade, everything's gonna pop that that market is obviously shifted a lot today. You see most things trade down. We're seeing you know, sponsors give up economics, we're seeing sponsors be forced to overfunded trust, how are you guys viewing the IPO market? Are you active in the IPO market? Get some of your thoughts there? Yeah, so depending on on what's available, we have been active in the IPO market. We recently were active in an a, SPAC IPO, but, you know, it's been less so as of late given that these, you know, I think it's 90 some percent of these are trading, trading below trust value. And, and so when you look at the the units, you know, if you think that an IPO is going to trade down? Well, you know, the rationale is why participate in the IPO. And so we've been able to, you know, get get access to these units below the sort of IPO price in the secondary, and so we've been doing that lately. But we aren't opposed to participating in in an IPO as attractive sort of terms. And, for example, you know, lately we are recently we participated in one that, you know, had an overfunded trust of $10.10, a 12 month, sort of life, and then also was had a full warranty. And so we thought that that was an attractive IPO to participate in and, you know, I guess the market would agree, you know, looking at it now, it's trading, you know, well above that, that $10, sort of IPO price. So, we do, and we are active in the IPO market. However, as of late, it's been less so just because we're able to, you know, sort of get better economics in the secondary.David Drapkin (Boardroom Alpha):
Right, right. And so, just one more thing specifically for you guys. So you're obviously focused on pre-deal SPACs. Does that mean you're not holding anything post close, whether it be equity or warrants?Jonathan P. Browne (Robinson Capital):
Yeah, that's that's correct. And so, you know, again, once a SPAC de-spacs are complete, so a merger it's no longer a SPAC. It's it's an equity and so you lose those bond characteristics that that we place a, you know, high level of importance on right, you lose that downside protection. And so, you know, just based on our strategy, we are only focusing on the pre-merger SPACs, and in our ETF that we are pre merger ETF that we manage, which is ticker SPAX, we've gone as far as to to actually sticker in the prospectus language that that says we cannot own spax after they've completed a merger, right, right. You know, we recently spoke to SPAC fund manager who said that the best thing that can happen to what we're seeing in the stock market is what's currently happening. You're taking into account the oversupply and some of the trading down that we're seeing. Do you agree with that? And what do you think can help bring some positivity back to pre-deal SPACs sort of maybe not as crazy hysteria, as we were seeing, you know, earlier last year, but maybe a more normal cadence of, you know, pre-deal SPACs trading up on what should actually be, you know, excitement about a good deal instead of everything, not everything, but you know, the majority of things that we're seeing today, sort of trade fighter down. Yeah, you know, I think that, that this is good in terms of the evolution of SPACs, and the progression of SPACs, you're seeing a lot of sort of self regulation. In the space, you're seeing the SPACs that have proven sponsors, and board members who, you know, are expected to bring good deals, you know, sort of to the market, you're seeing them, you know, get a premium to those that, you know, maybe have no capital allocation experience, and really have no business, you know, being in the SPAC space, other than it was, you know, you know, what, 6, 12 months ago, you know, anyone could launch a SPAC, and it was sort of seen as a way to get free money, right? Well, it's good to see that the space is, is sort of self regulating here. And that, that you're hopefully going to, you know, crowd out those that those sponsors that should not, you know, be in the space to begin with. And so I think, ultimately, from a longer term perspective, you know, crew, forcing those types of SPAC sponsors out, should hopefully allow for the higher quality sponsors to really sort of rise to the top and bring good deals, you know, to the market, which ultimately, you know, I think will lend itself to, once again, seeing larger, larger pops as opposed to just bring any private company public. Right, Right. And one more question on that back to sponsors a little bit, just because, obviously, your dynamic is a little different, not owning post close, post closed back. So you maybe you're not as focused on, you know, what's going to happen? Post close, but how focused Are you guys on alignment of sponsors, and in general investors, vis-a-vis things like, earn out shares? And, you know, not automatically getting a promote just because you price the deal? Is that something you pay attention to? And is that something that you see, you know, being almost a forcing function to change going forward for sponsors? Yeah, I think that's absolutely critical for the longevity of of the SPAC market to continue, quite frankly, and, you know, it is sort of perverse incentives to just get 20% just because you made a deal, regardless of whether it was a good deal or not, you know, it's misaligned is misaligned, quite frankly, and so, you know, as we see more of these, you know, sponsors tie in earn out structure or a multi year lock up to their, to their deals, you know, I think you're gonna you're, you're only going to strengthen the case, for SPACs to be a, you know, a ba, ba, a primary option for private companies going forward. And, you know, that's going to lend itself to, you know, bringing more capital into the space because you're, you're aligning those incentives with the investors directly. So, you know, I think we're already seeing some of that take place, I think we have a long ways to go to get to where we need to be. But I wouldn't be surprised to see more and more alignment with sponsors and sort of long term shareholders, Right. 1010 to fully agree with you there have to ask it. Any thought on on the craziness with some of these gamma squeeze trades out that we've been seeing, although today as of this recording, maybe that trade has gone away? But any thoughts on what's going on there? You know, the Reddit crowd, you know, the meme-ification of stocks? Yeah, you know, I think I think you're always gonna have those types of pockets that are gonna pop up. You know, when when things get a bit goofy, right. And so when you see 95%, type redemption numbers, there's clearly an opportunity for, you know, a contingency to step in and try to ARB that type of situation. It's hard to say whether we're going to continue to see that going forward or not. You know, I think the hope would be that, that that becomes less and less obviously, having such high redemption rates. is is is a negative sort of headline for the for the SPAC market in general. So, you know, you really don't want to see those types of redemptions occur on a regular basis. So, so hopefully, we we see less and less of that, but um, you know, I think you're still gonna see that on occasion.David Drapkin (Boardroom Alpha):
Yeah, just seems a little counterintuitive for first SPAC to had, you know, 95% redemptions, you know, trade up, 50% on the news. So, you know, it's another one of those things where, you know, reality is a little disjointed from, you know, what's actually going on behind the curtains, but if nothing else, at least entertaining on my side to, to watch that all go down.Jonathan P. Browne (Robinson Capital):
Yeah, it's it, you know, it's definitely a trade, it's not a long term investment. So you're gonna, you know, like many other things, you could see short term sort of dislocations like that. But, again, I wouldn't it envision that sort of persisting in the long term.David Drapkin (Boardroom Alpha):
So how has SPAX been performing?Jonathan P. Browne (Robinson Capital):
You know, we've been performing fairly well, we've been, we've, we launched around three months ago, obviously, the SPAC space as a whole has has traded down, you know, but looking at us versus the other, you know, three or four spec ETFs are out there. You know, we've we've, we've outperformed, you know, all of the other ones, so we're quite happy with, you know, with with how we've performed, you know, relative to the other SPAC options out there.David Drapkin (Boardroom Alpha):
Awesome. Congrats, congrats on the launch. I'm sure a lot of work went into it. So, you know, it's fun to watch. But aside from SPAX, what else you focus on?Jonathan P. Browne (Robinson Capital):
Yeah, so we we've been focusing on the closed end fund space for over the last, you know, 10 plus or so years, as you know, we look at it somewhat similar to SPACs is that you're able to buy an asset, sort of at a discount to its true, true value. And so, you know, one of the things that we've done with our other mutual fund is, is we've, we understood that from investors that, you know, they may like this back opportunity as an alternative fixed income play, but they still need some sort of, you know, income to go along with that. So what we've done is we've we've married a portfolio of closed end funds, with SPACs to produce a, a interesting, you know, core product that has roughly has a yield, that's roughly 2x, the the Barclays AG, with similar credit in less interest rate risk. And so we think the combination of closing funds and SPACs, you know, should produce, you know, higher yields and hopefully significant outperformance over over time.David Drapkin (Boardroom Alpha):
Right. Well, you know, Jon, thank thanks so much for, for taking the time, I think you provided a lot of clarity on, you know, have a pretty attractive space that may not be getting as much coverage as as it should given, the more popular story in the stock market. So really appreciate having you on.Jonathan P. Browne (Robinson Capital):
Yeah, thank you for having me. And, you know, I think there's definitely a sort of reeducation that needs to happen and, and how investors should be viewing this backspace versus what, you know, mainstream media sort of portrayed it over the last, you know, year, year and a half. So, thank you very much for having me on. I appreciate it. Of course. Talk again soon.David Drapkin (Boardroom Alpha):
All right. Talk to you later.