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COVID-19

Our Response

 

Updated as of September 21, 2020 

We continue to aim to strike an appropriate balance between our commitment to the health and safety of all our employees, and our obligation as a firm and individuals to continue providing essential services to our clients. To that end, and in line with Federal, Provincial, and Municipal recommendations for businesses, we have implemented a Return To Work Plan that, with appropriate and reasonable safeguards to protect them, will see employees work on site and from home on a rotational basis. We have enacted standard health and safety measures such as: avoiding non-essential travel outside of Canada, maintaining physical distancing between workstations, frequent hand washing, and wearing  a  mask whenever physical distancing is not possible. In addition to these standard health and safety measures, we have enhanced the air filtrations system in our offices by adding air purifiers and high grade filters to our HVAC system to boost the air quality throughout the building. RPIA will endeavour to update these efforts as the pandemic evolves and new expert advice becomes available.

Market Conditions & Opportunities Ahead

COVID-19 has and will continue to reshape the global economic landscape. Six months on from the liquidity crisis of March 2020, investors are faced with a difficult challenge. Equity markets have rebounded strongly and valuations sit at elevated levels by historical standards. In contrast, fixed income securities provide a very low yield, with little margin of safety if interest rates rise. A 60/40 blend of equities and bonds may not deliver the return individuals and institutions are looking for.

We believe investors should be looking to credit strategies as a way of addressing this challenge. Credit is often referred to as “equity light” – a way of generating a reasonable return without the downside risk of equity investments. The performance of credit investments has been strong since March 2020. Looking forward, we continue to be excited by the opportunity to invest in corporate bonds at attractive levels. Uncertainty in the market generally leads to volatility, which we believe represents an opportunity for actively managed credit strategies.

Please contact a member of the Client Portfolio Management team if you would like to discuss our market views or strategies in more detail.

Market Insights

Capturing Yield Through SPACs

December, 2021

There is much uncertainty in today’s market environment with concerns about withdrawing monetary policy from central banks, rising inflation expectations, and rich valuations across all risk assets. During these times, investors are reconsidering their portfolio mix as they try to identify where to obtain reasonable yield without sacrificing the stability of their capital. Diversifying your portfolio to include a SPAC arbitrage strategy could serve as a unique alternative to both fixed income and equity returns during uncertain times.

RP SPAC Fund was created just over a year ago as a dedicated solution for our investors to participate in the tremendous growth of the SPAC market and benefit from SPACs’ asymmetric return and risk profile. 

What is a Special-Purpose Acquisition Company (SPAC)?

A SPAC raises money on an exchange in a public stock offering to eventually merge with a private company and take it public. A unit of a SPAC has two components: a common share and a fraction of a warrant (a warrant is a contract that gives the holder the right to purchase more shares of common stock from the issuer in the future at a certain price). Investors who buy units of the SPAC can claim a proportional share of its cash holdings before it merges with a private company or if the SPAC fails to merge within a certain time period.

What makes SPACs a Unique Asset Class?

 

  1. Downside Protection – In a typical SPAC initial public offering (IPO), investors pay $10 to buy a “unit” of the SPAC, which is then put into a trust, where it is invested in Treasury Bills. At this point, we have a guaranteed return by Treasury Bills for the $10. This feature of the structure helps limit the downside risk of return (potential decrease in value).

  2. Attractive Yield – Following an IPO, the two components of the SPAC (common share and warrant) are split and the warrants can be sold. This helps reduce the cost of the SPAC and allows us to generate an attractive yield as we can sell the warrant for more than it is worth. Common shares can also trade at a discount for high-quality sponsors, which can also help lock in gainful returns. A diversified portfolio of SPACs acquired below $10 can generate an attractive and downside-protected yield as discounted prices can help capture gains.  

  3. Upside Optionality – SPACs can offer exposure to the upside (potential increase in value) volatility if we are able to select high-quality sponsors that can announce mergers and potential deals. However, the trick is to exit the position early and never hold a SPAC that does not have the safety of treasury bill protection to preserve the safety of capital while capturing the upside in a prudent and responsible manner. This relationship between optionality and manager selection provides the asymmetric risk/return profile that makes SPACs special. 

 

What does this mean for RP SPAC? 

RP SPAC Fund is positioned to offer investors an alternative solution with the aim of generating returns of 7+% while limiting the downside risk for that capital. Today, the portfolio has an average price of $9.80 and a duration of fewer than 15 months, allowing us to capture gains from discounted prices while also benefiting from the upside optionality.  

RP SPAC can provide positive diversification benefits to investors as it presents zero to negative correlation to both equities and fixed income markets. With lofty equity valuations and macro-economic risks such as interest rate and inflation risks, RP SPAC Fund can exhibit a unique risk/return profile that could help minimize the negative effects of these risk factors in other parts of an investor’s portfolio.

This strategy can offer a unique proposition to investors who are concerned about their portfolios in an uncertain market environment and provides the ability to capture yield through an asset class that is largely uncorrelated to equities or fixed income. 

The investment team at RPIA is excited about the opportunity in SPACs given the current market environment and is very pleased to have generated an ~18% since the inception of the strategy. We believe we are well-positioned to continue to capture the asymmetric returns using our repeatable and disciplined process. 

Please do not hesitate to contact a member of the Client Portfolio Management team to learn more about the strategy and how it can be used to help diversify your portfolio mix.

 

 

 

 

 

 

 

 

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