Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use SPAC Warrants for Asymmetric Returns
Transcript
- Lucas: So we get asked a lot about SPACs—special purpose acquisition companies—and whether they're still a viable tool for high-net-worth families. And the honest answer is: it depends on the stage you're entering. Luna: Right, because the blank-check frenzy of 2020 and early 2021 is a distant memory. Many of those SPACs are now trading well below their ten-dollar trust value. Lucas: Exactly. But one piece of that ecosystem that remains genuinely interesting for sophisticated investors is the warrant component. Not the common shares—the warrants that come attached to SPAC units, and then trade separately. They offer a kind of asymmetric bet that's hard to find elsewhere. Luna: Asymmetric meaning limited downside, potentially huge upside? That sounds almost too good to be true. Lucas: It does, and there are real risks—expiration, redemption, dilution—but structurally, a warrant is a long-dated call option. When you buy a SPAC warrant, you're buying the right to purchase common shares at a fixed strike price, typically eleven-fifty, for a period that can extend five years after the business combination. And if the stock rips higher, the warrant can multiply in value. Luna: Let's use a concrete example. Churchill Capital IV—that's the SPAC that merged with Lucid Motors. What happened with those warrants? Lucas: Great case. Churchill IV warrants traded as low as a dollar sixty at one point before the merger vote. After Lucid started delivering cars and the stock ran into the high twenties, those warrants peaked around seventeen dollars. So someone who bought at a buck sixty and sold at seventeen turned a roughly ten-to-one return. The common shares, in the same period, went from maybe ten to twenty-eight—less than three-to-one. Luna: That leverage is striking. But it cuts both ways, right? If the stock stays below the strike, the warrant goes to zero. Lucas: Absolutely. And many SPACs do exactly that. The median SPAC that completed a merger in 2021 is trading below ten dollars today. Those warrants are essentially worthless. So the asymmetry is real, but you need a strong conviction about the underlying business, and you need to understand the warrant mechanics. Luna: What about the redemption feature? I know some warrants can be called away early if the stock trades above a certain level. Lucas: That's one of the most important details. Most SPAC warrants have a cashless redemption provision. If the common stock trades above eighteen dollars for twenty of the prior thirty trading days, the company can force warrant holders to exercise—either by paying the strike price in cash, or often by accepting fewer shares. That can cap the upside for warrant holders who don't act quickly. Luna: So timing matters beyond just price direction. It's not a passive hold. Lucas: Right. And that's why this is predominantly a tool for families with dedicated capital markets teams or a sophisticated family office. You need to monitor these triggers, know the warrant agreement inside out, and have the ability to act quickly. Luna: Let's talk about the regulatory angle. The SEC issued new guidance in 2021 on how warrants should be classified for accounting purposes. Did that change the game? Lucas: It did. The SEC's staff statement made it clear that most SPAC warrants should be classified as liabilities, not equity, because of certain settlement provisions. That forced hundreds of SPACs to restate their financials. It also made deal negotiations more complex, because warrant terms had to be tweaked to avoid liability classification. Luna: Did that cool down the SPAC market? It seems like issuance dropped sharply after 2021. Lucas: Definitely. But for the warrants that are out there—especially from high-quality sponsors—the market remains active. And because retail interest faded, institutional and high-net-worth buyers have more negotiating power. You can often buy warrants at a discount to their intrinsic value if you're patient. Luna: How do you value a warrant? It's not as simple as a call option because of the redemption features and potential dilution. Lucas: You can use a binomial model or a Black-Scholes variant with adjustments for dilution. But the key inputs are the stock price, the strike, time to expiration, implied volatility, and the probability of redemption. For ultra-wealthy families, the real edge is understanding that warrants often trade inefficiently because the options market for the same underlying is illiquid or non-existent. Luna: So they're buying mispriced optionality that institutional desks may not bother with. Lucas: Exactly. And they can hold to expiration if needed, unlike a hedge fund that might have quarterly liquidity constraints. That long-dated capital is a real advantage. Luna: Speaking of which—if our money conversations have helped you think about a strategy like this, or even just avoid a costly mistake, it's worth mentioning that this show stays independent because of a small group of listeners. They chip in through buy me a coffee dot com slash fexingo, and that's what keeps us ad-free and focused on the details. Lucas: Yeah, seriously—it's a tiny ask for a lot of value. And we don't run any ads, so it's truly listener-supported. Appreciate everyone who's part of that. Luna: Alright, back to the warrants. One risk we haven't touched: if the stock is below the strike at expiration, the warrant expires worthless. But there's also the possibility of a forced exercise at a point that's not optimal. Lucas: Right. The forced exercise risk is real. If the stock is at twenty and the company calls the warrants, you either put up eleven-fifty per warrant or you accept fewer shares. So your return is capped relative to what you might get if you held longer. That's the trade-off. Luna: Let's talk about tax treatment. Warrants held in a taxable account—are they treated as options or as securities? Lucas: They're generally treated as securities, so the holding period for long-term capital gains starts when you buy the warrant. But if you exercise and receive shares, the holding period for those shares resets. That matters for estate planning and charitable giving strategies. Luna: And if they're held in a self-directed IRA or solo 401—we've covered those on earlier episodes—the tax is deferred anyway, so the only concern is the IRA's prohibited transaction rules. Lucas: Exactly. So for a family with a self-directed IRA that already has alternative assets, adding SPAC warrants is relatively straightforward. The custodian just needs to allow trading in OTC securities, since most warrants trade over the counter. Luna: What about liquidity? If you want to sell a large block of warrants, can you? Lucas: It varies. Some warrants, like those from high-profile sponsors—think Pershing Square or Social Capital—trade actively. Others can be very thin. If you're a family office buying a hundred thousand warrants, you need to be prepared for a bid-ask spread that could be wide, and you might need to work the order over days or weeks. That's another reason this is suited to patient capital. Luna: So the profile is: long-dated, leveraged, illiquid, with a need for active monitoring. Sounds like something that should be a small part of a larger portfolio—maybe five percent or less. Lucas: I'd say even less for most families. A two to three percent allocation is typical among the clients I've seen. It's a satellite holding—high-conviction, high-return potential, but with real tail risk. You wouldn't build your core wealth strategy around it. Luna: Let's look at another example: a warrant that didn't work out. Any that come to mind? Lucas: Take the warrants for a company called WeWork, which merged with a SPAC called BowX. The stock cratered, and the warrants—originally trading around two dollars—went to pennies. Anyone who held through zeroed out. That's the other side of the asymmetry. Luna: So due diligence on the sponsor and the target is paramount. The sponsor's track record matters because they set the warrant terms and influence the post-merger governance. Lucas: Huge. A sponsor with a strong reputation, like Chamath Palihapitiya's Social Capital or Bill Ackman's Pershing Square, tends to structure deals with more investor-friendly warrant terms—like longer exercise periods and lower redemption thresholds. That gives warrant holders more optionality. Luna: What about the warrants issued by the SPAC itself versus warrants issued as part of a PIPE—private investment in public equity? Lucas: Good question. The warrants that trade on the open market are typically the ones issued to SPAC sponsors and public unit holders. PIPE investors often get different securities, like convertible notes or private warrants that don't trade. The public warrants are what we're talking about—they're registered with the SEC and trade under a ticker usually ending in 'W'. Luna: So if a listener wants to research a specific warrant, where should they start? Lucas: First, find the warrant agreement filed as an exhibit to the SPAC's S-1 or 8-K. Read the sections on exercise, redemption, and anti-dilution. Then look at the stock's trading history and implied volatility. Finally, check the company's investor presentations to understand the business. It's a fair bit of homework, but the payoff can be substantial. Luna: And if you're not ready to do that homework, you might be better off buying the common stock or a call option instead. Lucas: Exactly. Warrants are a tool for the prepared investor. They're not a lottery ticket. But for the ultra-wealthy families who use them correctly, they offer a unique way to gain leveraged exposure to high-conviction ideas with capped downside—if you buy at a low price. Luna: To wrap, what's one takeaway you'd want our listeners to remember? Lucas: That in a world where many traditional sources of alpha have compressed—merger arbitrage, distressed debt—the SPAC warrant market still offers pockets of inefficiency. But only if you have the patience, the capital, and the operational infrastructure to exploit it. For most families, it's a small slice of the portfolio that can deliver a big impact when the stars align. Luna: Great perspective. Thanks, Lucas. Lucas: Thanks, Luna. And to our listeners—thanks for spending this time with us. We'll be back next episode with another deep dive.