Frequently Asked Questions (SPACs and CEFs)

What is a special purpose acquisition company (SPAC)?
A Special Purpose Acquisition Company, also known as a blank check company, is a company formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring (or merging with) one or more existing private companies. SPACs generally have 18-24 months to complete a business combination.
What is the difference between a SPAC and an IPO?
One key difference between a traditional IPO and SPAC IPO process is that the SPAC IPO is much faster. From the decision to proceed with a SPAC IPO, the entire IPO process can be completed in as little as eight weeks and without much of the financial reporting, due diligence and disclosure involved in a traditional IPO. However, the later SPAC step of merging with the target company involves many (but not all) of the same requirements that would apply to an IPO of the target business, including audited financial statements and other disclosure items. In other words, the SPAC process back-loads the documentation requirements to the latter stages of the process, sometimes referred to as "De-SPACing."

SPACs typically have a window of 18 to 24 months to find a suitable company to merge with after the IPO; otherwise, the SPAC will dissolve, and the remaining funds in the trust account are distributed pro rata to its current shareholders.
What are the benefits of SPACs?
1. Access to SPAC sponsors who can source unique acquisition opportunities and have a proven track record of value creation at public and private companies
2. Net proceeds from the IPO are placed in a bankruptcy-remote trust account providing dissenting investors with the right to redeem
3. Equity exposure through cash investment
4. Low correlation with traditional equity and fixed income markets
5. Liquidity through publicly traded securities
6. Access to the private markets
7. Ability to invest early alongside institutions rather than being forced to wait post IPO
What is the the lifecycle of a SPAC?
1: Prospectus Filing
The first stage in the SPAC lifecycle is the prospectus filing. This filing includes disclosure of the terms and structure of the SPAC offering and the target industry or segment focus of the SPAC.

2: IPO Marketing
During the IPO marketing stage, the underwriter arranges the roadshow, for the sponsor group to present to potential IPO investors. This roadshow is less extensive than that of a traditional IPO.

3: IPO Pricing
Today’s SPACs are based on a number of standard characteristics. One of these characteristics is the IPO pricing. The IPO units are priced at $10.

5: Proxy Filing
After a Definitive Merger Agreement is signed and the business combination is announced, the SPAC files a Proxy Filing with the SEC disclosing the terms of the merger and seeking stockholder approval.

6: Stockholder Marketing
After filing the Proxy Filing, the SPAC management and SPAC IPO underwriters market the proposed transaction to the SPAC stockholders and other investors.

7: Closing or Liquidation
If the closing conditions are met, the Business Combination is closed. If not, the SPAC liquidates and returns the funds to stockholders.
How to Invest in SPACs?
Investors can invest in SPACs either by selecting individual securities or by investing in a SPAC ETF.

Selecting individual SPACs allows investors to focus on the opportunities that seem most promising while also having some downside protection due to the structure of SPACs.

Because SPAC IPO proceeds are invested in government bonds until a merger is closed, shareholders have the opportunity to exit the SPAC either through liquidation or by selling shares in the secondary market.

Investors that participate in the SPAC IPO receive both common stock and a warrant. A strategy often pursued by hedge funds is to sell the SPAC after the IPO and keep the warrant that could increase in value if the SPAC stock approaches or exceeds the strike price at which the warrant could be exercised for common stock shares of the SPAC.
Why invest in pre-merger SPACs?
Buying SPACs before the merger announcement and selling it after could be an opportunity to generate alpha.

SPACs usually go up substantially after the merger announcement, yet trade near cash value before, creating a opportunity to provide total return while minimizing downside risk.

Management is incentivized to purchase an exciting company to drive up the stock price.
What is a closed-end fund?
Closed-end funds are professionally managed investment companies. Closed-end funds generally issue a fixed number of common shares that are listed on a stock exchange or traded in the over-the-counter market. Once issued, a closed-end fund’s common shares typically are not purchased or redeemed directly by the fund but instead are bought and sold in the open market. Typically, the underlying holdings of these funds (the funds’ NAV) have a greater value than the fund’s market price. For example, if a fund has an NAV of $100 based on the underlying value of its securities, but is priced at $90, it is selling at a 10% discount. Although the market eventually corrects the pricing discrepancy, identifying the discount before the correction provides a classic, “buy low, sell high” opportunity.
Why invest in a closed-end fund?
Closed-end funds (CEFs) are designed to provide an attractive income with an opportunity for total return. Like mutual funds, they offer investors professional investment management and diversification, but unlike mutual funds they can be bought and sold intraday offering more control over buy and sell decisions. There are over 600 closed-end funds across a variety of strategies that can help fill a vital role in an investor's portfolio providing both capital appreciation and distribution of income. CEFs trade at a discount or premium to their net asset value, therefore they may offer the potential to purchase the funds’ underlying portfolio at an attractive, discounted price, which can lead to enhanced returns.
Why do some closed-end funds sell at a discount/premium?
A closed-end fund's share price is based on supply and demand among investors. Market conditions can influence the price of a CEF being above (at a premium to) or below (at a discount to) it's NAV. Some of the factors that may impact whether a fund trades at a premium/discount are the fund's performance, yield, or name recognition of a fund's manager. Discounted closed-end funds offer investors the advantage of buying the fund's underlying assets at a discount, which can lead to enhanced returns.
How many closed-end funds are there?
According to Investment Company Institute data, as of the end of March 31, 2021 there were 484 closed-end funds. The total assets held by closed-end funds was $2387.14 billion.