David Sherman founded Cohanzick Management LLC in 1996 and CrossingBridge Advisors LLC in 2016 and currently serves as the lead portfolio manager for the CrossingBridge Fund family. He has over 30 years of investment management experience and was actively involved as a senior executive in Leucadia National Corporation's corporate investments and acquisitions and was treasurer of the holding company’s insurance operations.
Russ Prince: Tell me about CrossingBridge Advisors and what investment solutions do you offer.
David Sherman: We started CrossingBridge Advisors in December 2016 as a wholly owned subsidiary of the investment firm Cohanzick Management LLC, which I founded more than 25 years ago now. Together, CrossingBridge Advisors and Cohanzick Management manage in excess of $3 billion in assets.
CrossingBridge has grown to now include 13 employees, eight investment professionals and five working in operations. Every member of our investment team with portfolio management responsibilities has at least 20 years of industry experience. Our team specializes in corporate credit opportunities, with an emphasis on ultra-short and low-duration strategies, which includes special purpose acquisition companies—SPACs.
Our core philosophy as a firm is that return of capital is more important than return on capital. We understand how and where we fit in clients’ portfolios, and especially in a rising rate and volatile environment, our focus is not on trying to stretch for yield, but rather trying to generate a respectable level of yield for a responsible level of risk.
Prince: How are pre-merger SPACs different and what are the benefits of investing in pre-merger SPACs?
Sherman: SPACs have gained a reputation for being risky, get-rich-quick gambles that never seem to work out in investors’ favor. While that can be true for some post-merger SPACs, which are nothing more than speculative small/mid-cap companies that were the result of a SPAC merger, that’s really only half of the story. What far too many investors miss is the other half of the story, which is this: We believe pre-merger SPACs have the ability to be one of the safest investments in your portfolio.
When considering the lifecycle of a SPAC, you really need to break it into two distinct parts—pre-merger SPACs as fixed income instruments and post-merger SPACs as 100% equities. Pre-merger SPACs should be viewed as fixed income instruments because they have a defined liquidation date—similar to a bond’s maturity date. Shareholders are either fully or over collateralized by a trust account that’s typically invested in Treasuries, and, like a “put” feature in some bonds, pre-merger SPAC shareholders have the right to redeem and put their shares back to the sponsor for cash from the trust account.
Prince: What are the current opportunities in pre-merger SPACs?
Sherman: We believe pre-merger SPACs offer one of the most attractive and asymmetric risk/reward opportunities in today’s market. We track the SPAC universe pretty closely, and according to SPACinformer.com, which is an affiliate of CrossingBridge, as of March 10th, there were 613 pre-merger SPACs in the U.S. with a total of $162 billion in combined trust assets.
Those SPACs had a weighted average yield to liquidation—yield to worst in bond talk—of 3.09%, and a weighted average liquidation date—maturity—of 0.93 years. So what does this mean?
The average pre-merger SPAC that is still seeking a deal has a “yield” that is greater than a 30-year Treasury with a duration of less than a year. Using the data as of March 10th, with the exception of some exogenous event, an investor’s likely worst-case scenario is that the SPAC doesn’t find a deal, goes to its liquidation date, and the investor realizes the 3.09% yield to liquidation. And, if the SPAC closes a deal sooner than the liquidation date or if they announce a deal that the market is bullish on and trades above its trust value, that yield would only go up.
Prince: What role do pre-merger SPACs play in a portfolio?
Sherman: Coming off a historic ultra-low—and now rising—rate environment, advisors have been left with few acceptable fixed income options. If an investor wants any acceptable level of return they are typically taking on more credit risk or duration risk. However, pre-merger SPACs solve this dilemma by providing a solution that has the credit risk of a U.S. Treasury, typical duration of 12-18 months, and a yield of greater than a 30-year Treasury or intermediate investment-grade bonds.
Something more to consider about pre-merger SPACs is that they may be taxed on a capital gains basis instead of being considered ordinary income. All this together offers a security in this current difficult investing environment that is fully backed by a trust account typically invested in U.S. Treasuries; has an ultra-short duration with what we believe to be a very strong yield; and, provides an opportunity to participate in potential equity upside. If that’s an attractive option based on portfolio need, then we believe you should give pre-merger SPACs serious consideration as part of an investment portfolio’s core fixed income allocation.
Russ Alan Prince is the executive director of Private Wealth magazine and one of the leading authorities in the private wealth industry. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals. Connect with him on LinkedIn.com.