RedBall SPAC, famously led by Gerry Cardinale and Billy Beane, has the most institutional shareholders of sports-focused special purpose acquisition companies on the market. The 165 funds that own shares or warrants in RedBall handily outpace Alex Rodriguez’s Slam Corp., the runner-up with 120.
The problem is, fund ownership in SPACs isn’t the positive indicator it is for other stocks. Instead, SPACs are saddled with large numbers of arbitrage hedge fund investors. These “arb players” load up on equity early and seek to bail out with profits ahead of deals—leaving SPACs and long-term investors struggling with falling share prices right when they need market interest.
“They’re not betting on management, they’re literally taking a risk-free bet,” said Daniel Johnson, a SPAC investor and contributor to SPAC Track, a data website.
Typically, institutional ownership of equity is a reliable indication that a lot of money is committed to seeing a company’s shares increase in value. It’s especially useful for newly public companies to establish themselves in the stock market.
For example, Endeavor Group Holdings, the UFC parent that went public by traditional IPO in April, has 67 fund investors, according to data from Refinitiv. A Sportico review of the 19 SPACs that are currently seeking sports-specific targets found a dozen with more than that number.
But such high numbers of fund investors don’t necessarily bode well for SPACs.
“The IPOs are frequently funded by arbitrage players who are looking to earn a guaranteed return,” said Benjamin Kwasnick, founder of data provider SPAC Research. That means when SPACs want to merge, or ‘deSPAC’ in market-speak, what should be good news for the businesses involved is the opposite. “The arb players are less likely to take a given deSPAC seriously, so the sponsor knows if they have arb players in the book they’re going to have to turn over those shares to new investors.”
SPACs go public typically offering units for $10, which splits into one share and a fraction of a warrant shortly after the IPO. By rule, SPACs must place their IPO capital in trust and return it to investors on demand or if the SPAC fails to close a merger within in its limited lifetime, with interest. Arbitrage traders take advantage of that feature, originally meant to protect small investors. There is no downside for IPO investors since each share has a claim to around $10 from the IPO, meaning any price they can get for the warrants is pure profit.
That means with SPACs, you can throw the fund ownership indicator out the window.
Horizon II SPAC, for instance, has 108 unique fund shareholders, more than Manchester United, Genius Sports and Dover Motorsports, to cite just three public sports businesses. Yet it failed to close a merger with Sportradar, one of the industry’s most anticipated listings, because of a lack of funds willing to buy equity in the PIPE round. PIPE, or private investment in public equity, is a stage many SPACs need to raise additional cash to close a merger.
Similarly, RedBall’s proposal to take Fenway Sports Group public also foundered in the PIPE stage, despite a roster of investors that includes at least eight billionaire-led investment firms, including Baupost, a hedge fund owned by Seth Klarman, who also owns part of Fenway Sports. (Regulatory filings don’t make it clear if Klarman bought RedBall equity before or after the deal fell apart.) A RedBall spokesperson didn’t respond to requests for comment.
In cases where SPACs can arrange a deal, either by successfully securing PIPE investors or self-funding the merger, arb traders time sales to book profits on investor enthusiasm when a deal is announced, usually hammering share prices lower than where they stood before a deal.
“You see the same names all the time in these SPACs [and] they start selling pretty much when a deal is announced,” added investor Johnson. “In the lifecycle of a SPAC, you have huge fund ownership up front, and then when a deal is announced you’re really trying to transfer shares out of the arbs and into the hands of longer-term investors.”
Even in one of the better-performing sports SPACs with a pending deal, the damage of arbitrage traders is clear: Mudrick II SPAC’s shares rallied to as high as $18.78 on news of a deal to merge with the Michael Eisner-controlled Topps. Shares have lost more than 40% of their value since, slipping under $11 as arbs cash out. The profit-taking isn’t harmless: PIPE investors have tired of entering deals and then finding themselves with paper losses, making it tough for the more than 145 sports-related SPACs to attempt mergers.
“The sentiment turned around in March, and it’s much harder than it used to be,” explained SPAC Research’s Kwasnick. “It’s much slower, and there’s huge overhang of supply. PIPE investors are fatigued and they’ve laid out large capital commitments, many of which might be headed for out of-the-money.”
Still, despite the challenges, SPAC deals are getting done, with recent deals announced between Sports Entertainment and Super Group and Yucaipa and Signa Sports.
“I talk with a lot of retail investors, and people are still genuinely excited by sports SPACs,” added Johnson. “There is demand out there for it, there just hasn’t been a real big volume of deals yet.”