Short-sellers have ramped up their bets against SPACs. A hedge fund manager breaks down his approach — and explains why he's betting against a SPAC merger that has plunged 25% this year.

  • George Livadas is the founder of the long/short equity hedge fund Upslope Capital Management.
  • Livadas takes a basket approach to shorting SPACs and stocks with questionable businesses.
  • He breaks down why he’s shorting two stocks he says are pretending to be something they are not.
  • See more stories on Insider’s business page.

After a short spell of calm, the market for special purpose acquisition companies is back in the spotlight again, driven by the world’s largest SPAC merger between Southeast Asian super-app Grab and Altimeter Growth Corp.

The mega SPAC merger values SoftBank-based Grab at nearly $40 billion and will see the Singapore-based company debut on the Nasdaq in the coming months. 

But such successful SPAC mergers may be few and far in between.

A total of 308 of these so-called blank-check companies have raised $99.9 billion this year, surpassing the 2020 record where 248 SPACs raised $83.4 billion. However, as of Thursday, 432 SPACs with $140 billion in capital are still out there seeking merger targets, according to SPAC Research. 

The flush of capital competing for targets will cause some accidents, Cathie Wood, the CEO of ARK Invest, warned in a Tuesday market update webinar. 

“I’m always concerned when I see too much money chasing perhaps too few really good opportunities and some of those are going to end badly,” she said. “That’s why research is paramount.”

Wood has bought at least 10 stocks that went public via SPAC mergers, but she said there are also SPACs coming out of the woodwork that she wouldn’t touch. “Our cautionary flag is buyer beware, do your research,” she said. 

ARK Invest is a long-only money manager so it cannot tap into the opportunities of shorting SPACs or stocks, but long/short hedge funds such as Upslope Capital Management have been finding some attractive opportunities for shorts in the SPAC market. 

A SPAC+ short basket 

At first, it was the incentive structure of SPACs, which tends to reward institutional players instead of individual investors, that first caught the attention of George Livadas, a former investment banker who founded Upslope in 2017.

Because SPAC units are comprised of common shares and detachable warrants that allow owners to buy more shares in the future, once a business combination is announced, there is a huge motivation for sponsors to close the deal, according to Livadas. 

“I definitely acknowledge today there are a lot more legitimate sponsors out there,” he said in an interview. “But there seems to be a misalignment of incentives just to close any deal, it doesn’t necessarily have to be a good one.”

But Livadas is not in the business of exposing fraud, he is more interested in shorting stocks that are “overvalued businesses or lousy businesses to begin with.” That makes the SPAC market, where an increasing number of early-stage pre-revenue companies are going public, a perfect place for finding short opportunities.

To that end, Livadas has constructed a SPAC+ short basket, which is a collection of SPACs that merged with questionable businesses. (The plus sign represents what Livadas calls the “cousins of SPACs” or stocks with similar characteristics). 

“I’m taking this basket approach where I’m short on a lot of them and in small size,” he said. “I’m trying to avoid anything that has any sense of even a possibility of being a real decent legitimate business.”

3 SPACs+ pretending to be something they are not 

Livadas shorted his first SPAC when he encountered packaging materials producer Ranpak (PACK), which merged with One Madison Corporation in 2018. 

“Although I think it’s a more legitimate business than almost anything I’m short today,” he said, “back then I remember looking at the company’s investor presentation and thinking to myself, that was the classic example of a company really just pitching themselves as something that they’re not.”

While the company presented itself is a packaging business with “e-commerce exposure, smart home exposure, and millennial exposure,” Livadas recalls that it was hard for him to connect these buzzwords with what the company really does — providing the crumpled-up paper that fills up Amazon packages. 

“They do some stuff that’s a little fancier than that but not much,” he said. “At the end of the day, it was this kind of crumpled paper company that was pitching themselves as an e-commerce play.”

The theme of shorting companies that masquerade as something they are not has become the bread and butter of Livadas’ short book. 

For example, another company he’s shorting right now is Tattooed Chef (TTCF), which was birthed out of the merger between plant-based food company Ittella International and the SPAC Forum Merger II Corporation last October. 

Livadas explains that the company, whose stock has dropped 24.9% this year, had the double effect of both being in “a faddish industry” and also being a beneficiary of the unique circumstances of COVID-19.

“Even though they don’t have any proprietary technology or ingredients or anything, they’ve sort of glommed on to this alternative meat boom, with Beyond Meat and others,” he said. “Then they effectively became public shortly after COVID-19, with everyone going to the grocery store and stocking up their pantries big time.”

Livadas is also shorting Arcimoto (FUV), which did not go public via a SPAC merger but is which he calls “a cousin of SPACs.” The company, whose stock has declined 21% this year, describes itself as a developer and manufacturer of electric vehicles. 

“They make what I would characterize as high-tech golf carts,” he said. “You can go on their website and see what they actually build, and you’d be amazed at the fact that this is an actual public company.”

In the past year, Arcimoto’s stock at one point traded at a billion-dollar market cap. In Livadas’ view, if the company were still private, it could have easily gone public recently via a SPAC. 

“It’s a trendy or faddish business,” he said. “And it’s always about the future. They’ve been around for a while but they don’t have any real revenues and yet the market is ascribing a decent probability to them actually having revenues.”

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