Morgan Creek launches SPAC ETF to capitalize on investor thirst for blank check firms

Published Sun, Jan 31 20218:37 AM ESTUpdated Sun, Jan 31 202110:07 AM EST

The third ETF centered around the SPAC boom rolled out last week attempting to capture investors enthusiasm about the red-hot blank check firms. Morgan Creek Capital, in partnership with Exos Financial, launched the actively managed Morgan Creek-Exos SPAC Originated ETF. The exchange traded fund with nearly $19 million in assets under management, will operate under ticker SPXZ . The ETF, which launched on Tuesday, dipped about 5% amid the volatile week for Wall Street. "We think there's a target rich environment for us to pick really great management teams and really great companies to build a fantastic portfolio," Morgan Creek Capital CEO Mark Yusko told CNBC Pro. Special purpose acquisition companies, or SPACs, are an investment vehicle that goes public without having a real business. The goal is to raise funds to finance a merger or acquisition typically within two years. Despite the Covid-19 pandemic, 2020 was dubbed the "year of the SPAC," with involvement from high-profile investors like hedge fund billionaire Bill Ackman bringing more hype to the alternative vehicle. Fifty-six SPAC initial public offerings have already been completed in 2021, raising $16 billion, according to Goldman Sachs. This piggy backs on top of the 229 U.S. SPACs that raised $76 billion in 2020, the firm said. Morgan Creek is capitalizing on the trend, bringing an investment product to the retail investor. "This is the first time Morgan Creek will have a product that people like my mom and dad can buy," said Yusko, former head of the endowment at the University of North Carolina, Chapel Hill. "You don't have to be accredited, you can be a regular investor, anyone can buy this." The ETF joins the ranks of Defiance's Next Gen SPAC Derived ETF (SPAK), the first of its kind that debuted in October, and Tuttle Tactical Management's SPAC and New Issue ETF (SPCX), which launched in December. They are up about 7% and 12% in 2020. The 'superior' way to go public A SPAC is essentially the inverse of a traditional initial public offering. A company goes public at basically cash value, and then investors have a period where they are waiting to find out the deal. Once the merger is announced, an investor can opt out and get their cash back, or stay with the investment based on the quality of the business. "I think the best growth companies in the world are migrating to SPAC IPOs but I think you need to be active in terms of management because not every SPAC will be a good one," said Yusko. Of the three ways to go public: a traditional IPO, a direct listing, or a SPAC merger, the best growth companies and their visionary managers have realized the SPAC IPO is far superior, said Yusko. The "companies of the future" are starting to prefer the SPAC's lower-cost, more flexible model. However, SPACs have garnered criticism for being too flexible during the underwriting process, and therefore more risky for an investor. Three quarters of the SPAC IPOS in 2020 were in areas like space exploration and travel, electric vehicle, e-sports, online gaming, things that are future and technology oriented, Yusko said. Of course, sometimes disruption-oriented equities get ahead of themselves, garnering lofty valuations for financial metrics that could be years away from achieving. Market participants have been wary of the boom in SPACs, wondering if some of the vehicles deserve their valuations. "The current environment is one where it will be incumbent on us to play our best," said Yusko. "Valuations are steep, there are some places where less palatable management teams have been drawn to the space, so its incumbent on us to do our job really, really well." Betting on great management Two thirds of the SPACs in the Morgan Creek-Exos SPAC Originated ETF will have already merged with a business. That leaves one third of the equities in the pre-combination phase, stilling seeking businesses to merge with and take public. Yusko and his team will be betting on elite management teams that Morgan Creek trusts will choose sound investments and help take them to the next level once they reach the public markets. "You always want to bet on great management. A great idea, a great technology, a great business model, can really be devastated by bad management," said Yusko. "On the pre-combination side, its identifying industry experts, serial entrepreneurs, Chamath is a a great example," said Yusko. Tech investor Chamath Palihapitiya announced his involvement in two more reverse mergers on Monday morning. "On the flip side, its relatively easy to identify the group we probably won't migrate towards, former Congressmen for example. You've got celebrities and sports figures...any hot area is going to attract people that probably we're not going to bet on," Yusko said. For comparison, SPAK's portfolio is composed mainly of established companies that have gone public via SPAC such as DraftKings and Virgin Galactic . SPCX, the first actively managed SPAC ETF, generally holds shares of SPACs looking for companies to bankroll. The new ETF's holdings will be weighted equally rather than by market value, a feature designed to minimize exposure to overvalued equities, Yusko told CNBC. Morgan Creek's ETF will have a 1% annual fee.

Mark Yusko, chief executive officer of Morgan Creek Capital Management

Scott Eells | Bloomberg | Getty Images

The third ETF centered around the SPAC boom rolled out last week attempting to capture investors enthusiasm about the red-hot blank check firms.

Morgan Creek Capital, in partnership with Exos Financial, launched the actively managed Morgan Creek-Exos SPAC Originated ETF. The exchange traded fund with nearly $19 million in assets under management, will operate under ticker SPXZ.