A SPAC that the market has ignored, managed by sexy-investment superstars (and of course, a related YOLO) - LUXA
LUX Capital invests in bleeding-edge tech in its normal VC funds. They have a SPAC, LUXA. Now that the general SPAC bubble has popped, opportunity has presented itself.
LUX Capital is likely not unfamiliar to many fintwit veterans as one of its leaders, Josh Wolfe, is a well known general tech though leader. (Full disclosure, I think the man somehow still follows me despite all the grief I gave him over his support of Bloomberg in the 2020 dem primary, but I don’t know the guy in real life and this writeup does not benefit from any inside baseball). I am not plugged into the VC world but Lux seems to have made a deserved name for itself by betting on moonshots and winning at a higher rate than other VCs, specializing in tech and health tech and related fields. I’m no LUX historian but you can read more at https://luxcapital.com/ or https://www.crunchbase.com/organization/lux-capital - they have apparently done 300 investments over the years and have a substantial amount of prominent exits (including some companies that SPAC’d 👀).
So that’s the background. They invest in exciting companies. They generally do a good job with it. And that’s why I think LUXA presents a very attractive investment opportunity, both for conservative investors and those with a little more (ahem) risk appetite.
LUXA IPO’d in December 2020 to about average fanfare (back then most opened for trading a bit above NAV, perked up quite a bit in the peak of the SPAC bubble in February 2021, and since, as the froth has settled out of the SPAC market, has returned to NAV (or a few pennies below). They are seeking a healthcare/health-tech target. It also has warrants, LUXAW, that are currently trading at a probably slightly above average price of $1.20 and feature typical terms (exercise price $11.50, redemption trigger $18, expires 5 years after IPO).
So, the opportunity:
I think LUX has a far above average chance of bringing a sexy target to market. SPAC DA’s (Definitive Agreements aka having identified a target and entered into the transaction) aren’t what they used to be, and since the bubble burst earlier this year, many DA’s involve little to no pop, which is certainly a risk that I will detail below. But in the entire universe of SPACs (that I follow), I think LUX has a great chance of bringing something to market that gets the people (everyone from Cathie/ARK to the degenerates at WSB) excited about a moonshot to invest in. We may be past the days of companies spiking to $30, $40, $100, but $15 or $20 isn’t a huge ask.
Also, it is worth noting that I think that LUXA is in a pretty sweet spot in terms of size - about $420 million (nice) cash in trust. They can take down a $500m company and buy all of it. (EDIT: I have been reliably informed by someone in the SPAC game that most targets don’t want to sell almost all of themselves - they want the SPAC to buy 20-50% of the, generally. Fair enough. Doesn’t change the idea here.) They can take down a $3b company (with or without a PIPE) and own a meaningful stake of it. So they won’t be buying some aspirational cold-fusion company worth $20m with 2 employees and a pending patent but they also aren’t going after the mega-whales.
Lastly, a comment on timing (which is relevant to the third trade idea noted below) - we are now about 6 months past IPO and I’m sure that Josh and the boys have been hard at work. On this beautiful Memorial Day, I am too lazy to try to find a statistic on the average duration of time between IPO and DA, but 6 months (or 8 months, as important to my July calls) is a decent chunk of time. From having some inside baseball on a couple other SPACs, most SPACs IPO with some general idea of targets they may want to pursue - and of course those targets may be disinterested, the price may be wrong, etc. - but generally, SPACs hit the ground running. I have no indication and I can offer no assurance that DA is coming anytime soon. But we are now in the sweet spot where it becomes quite possible (and in the past couple of weeks it seems like DAs have picked up after a lull following the bubble deflation).
OK, so the potential plays (as always, never advice):
First, one can simply buy the common, which I have done. When buying at NAV, literally all one potentially loses is opportunity cost (as you can redeem shares at the $10 NAV if you do not like the deal). If one has cash on the sidelines because there is lots of silliness in the market right now, parking it in LUXA has a net positive expected value IMO.
Second, one can buy the warrants (LUXAW). Again, it is essentially a call option that expires in December 2025 with a strike price of $11.50 for about $1.20. I’d imagine that it likely has a net positive present value - they’ll eventually find a target and based on their track record, that target has a chance of being exciting and doing well. I personally do not own any at this point because I have focused on a different leveraged trade, as follows:
Third, one can buy YOLO calls. I have (but as always, whatever I do should probably be interpreted as the opposite of advice). I have bought a meaningful amount of July $12.5 calls for $0.05 per contract. (That per contract price is important in the analysis below - one should be careful to never overpay for any YOLO). Here is my never-before-seen description of my thinking on this YOLO:
Here is an indicative analysis that captures my thinking:
You can certainly tweak the variables above, but my general thought process is:
Despite LUXA being in the zone of when SPACs DA, we’ve only got about 7 weeks left between now and July options expiry (and deal activity typically gets lethargic over the summer as Josh and the gang will probably be spending some time in the Hamptons). I give them a 60% chance to get something done - after all, part of this thesis is that I think they are taking their time to find that winning target. So one may certainly think 60% could be 80% and potentially not be wrong.
In the next line, we have the scenario that they find a target and enter into a DA, but there is no pop. I handicap this at 75% of the overall doing-a-DA scenario. Whereas the former may be aggressive, I truly think this is a little bit conservative as I think they’ll hit a homerun, but this also captures the possibility that they *do* find a long-term home-run but the market doesn’t appreciate it before options expiration, and thus LUXA is flat goes to $11 or $12 and the July $12.5 calls lose.
The last scenario likewise has shades of aggressiveness and conservatism. Regarding the former, as noted, not that many SPACs have popped after DA lately - the bubble market enthusiasm just isn’t there. But regarding the latter, if they truly find the next cure for cancer, universal COVID vaccine, fully automated robot surgeon, etc. it could easily pop past $15 especially if the momo/meme buyers buy in.
So that is my line of thinking - on a weighted probability basis, my investment in July $12.5 calls at $0.05 theoretically, hypothetically, based on the odds of each outcome, has a 4x expected return. If it actually happens, it’s a 50x return (options bought for $0.05 worth $2.50). Is that something I would recommend for widows and orphans? Absolutely not. Is that something I would recommend for anyone? Also no. But you know that I’m out here trying to find low-probability, outsized-return bets - and I like this one. And as I teased before, the important part of this trade is paying the bare minimum for the calls - if one buys at 10 cents, the 2x theoretically-expected return is a lot less attractive on a trade that needs a ton of things to go right. So, to anyone reading this tempted to get their beak wet, do not overpay. A core component here is that the calls cost a nickel, not a dime or quarter.
And if they don’t get it done by July I will likely roll to Octobers (which should cost $0.05 or $0.10 at that point) and give it one more shot before I swear off Josh and the gang like I almost did when he was stanning for Bloomberg.
As always, this is never advice, and thanks for reading.
Thank you, Elmer