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: Luna, I’ve been looking at something that family offices are quietly rotating into — and it’s not another direct lending fund or a block of multifamily real estate. It’s SPAC warrants. Not SPACs themselves — the warrants attached to them. Luna: That’s interesting, because the SPAC boom of 2020 and 2021 left a pretty bad taste in a lot of retail investors’ mouths. But I’ve heard that some family offices actually cleaned up on the warrant side. Lucas: They did. And the key insight is that warrants, as a vehicle, let you isolate the optionality of a SPAC without taking on the full downside of the common stock. Let me give you the math. When a SPAC IPOs, it typically offers units — one share plus a fraction of a warrant — at $10. The warrants have a strike price, usually $11.50. So if the merged company’s stock stays below $11.50, the warrants expire worthless. But if the stock goes to $15, the warrant’s intrinsic value is $3.50 — a much larger percentage gain than the common stock’s 50 percent move. Luna: Right, so leverage. But aren’t most warrants trading below $1 or even zero after a failed merger? What’s the asymmetric edge for a family office? Lucas: The edge comes from the trust. Before a SPAC merges, it holds the IPO proceeds in a trust earning a bit of interest. If shareholders vote against the merger and redeem, they get roughly $10 per share back. But warrants — which are a separate security — have no redemption right. So if you buy a warrant for, say, $1.50 when the trust holds $10 per share, and the merger fails, the stock goes to $10.10, and the warrant may trade down to $0.10. You lose 93 percent. Luna: That doesn’t sound asymmetric in a good way. Lucas: It isn’t — unless you know the deal structure. Where family offices get clever is with warrants that trade at deep discounts to their intrinsic value based on the trust. For example, there was a SPAC in mid-2021 targeting a green energy company. The warrants were trading around $0.80, but the trust held $10.05 per share. The deal had a high likelihood of closing — strong PIPE, credible management. If the deal closed and the stock traded at $12, those warrants would be worth at least $0.50 in the money — but the stock actually popped to $18, so the warrants hit $6.50. An eight-to-one return on the warrant versus maybe 80 percent on the common. Luna: So the asymmetry is in the probability-weighted payoff. A small probability of a huge gain, but a large probability of a small loss — if you buy low enough. Lucas: Exactly. But there’s another layer — the redemption arbitrage. Some warrants have a cashless exercise feature or a forced redemption clause. If the stock trades above $10 for 20 out of 30 trading days after the merger, the company can call the warrants for redemption at $0.01. The warrant holders then have to either sell their warrants or exercise them. That forced timing can create a scramble. Family offices with a clear model of the call schedule can buy warrants right before the call, capturing a quick pop as the price converges to parity. Luna: But isn’t that just a variant of merger arbitrage? And merger arb has gotten a lot more crowded and less profitable since the SEC started cracking down on disclosure. Lucas: It’s related, but warrants have a different risk profile. In merger arb, you’re short the common stock and long the target to capture the spread. With warrants, you’re long a deeply out-of-the-money option that could go to zero if the deal fails. The key is position sizing. A typical family office might allocate 2 to 3 percent of a portfolio to a basket of 20 to 30 warrant positions, each with a probability of success around 70 to 80 percent. The expected return can be high single digits or low teens on the basket, even accounting for a few total losses. Luna: So they’re essentially creating a diversified options portfolio with a positive asymmetry. That makes sense. But let’s talk about the liquidity problem. SPAC warrants are often very thinly traded. How do family offices get size without moving the market? Lucas: They use block desks at the same prime brokers that handle their other alternative investments. Some family offices negotiate warrant-specific agreements with SPAC sponsors to buy warrants directly from the sponsor’s promote — often at a discount to the public market. That’s where the real alpha is. The sponsor sells a chunk of their promote warrants to the family office at a fixed price, and the family office agrees to hold through the merger. The sponsor gets cash or a guaranteed holder, the family office gets paper at a known cost basis without market impact. Luna: That’s a whole different game from retail traders trying to buy a few hundred contracts on Robinhood. So what’s the riskiest part of this strategy that most people miss? Lucas: The time decay. Warrants have a fixed expiration — usually five years from the IPO. If the SPAC takes two years to find a target and then the merger takes another year, you’ve already burned through three years of optionality. And if the merged company’s stock languishes below $11.50, the warrants are worthless at expiration. Family offices need a catalyst — a merger, a new contract, a buyout — within a defined window. That’s not a passive buy and hold; it’s a structured event-driven bet. Luna: And I imagine taxes complicate it further. Warrants that exercise into stock create a taxable event, and the holding period resets. That matters for a family office with multi-generational tax planning. Lucas: Exactly. Most family offices work with their tax advisors to structure warrant trades in a corporation or a trust, where capital gains treatment is more predictable. And sometimes they’ll pair a warrant position with a put option on the common stock to cap downside. That turns it into a pure volatility play. Luna: It’s really a derivatives strategy disguised as a SPAC investment. You know, for listeners who are curious about how family offices think about asymmetric risk — this is the kind of conversation that we cover every day on The High Net Worth Podcast. And if these detailed strategy discussions have helped you think about your own portfolio, you can support the show at buy me a coffee dot com slash fexingo. That’s buy me a coffee dot com slash fexingo. Lucas: And that support is what keeps the podcast free of ads and focused entirely on the strategies that actually move the needle for sophisticated investors. So thank you to anyone who chips in. Luna: Absolutely. Now, one more nuance I want to dig into: the role of PIPE investors. If a SPAC has a strong PIPE — meaning a group of institutional investors commit to buying shares in the merger — that signals that the valuation is anchored. How do family offices use that signal in warrant trading? Lucas: A PIPE is a huge positive for warrant holders. Because if the PIPE investors are paying $10 per share, and the warrants have an $11.50 strike, the warrant is effectively in the money if the stock stays above $11.50. But more importantly, the PIPE provides a floor. If the PIPE investors do their due diligence and commit capital, the deal is far more likely to close. Family offices will actually buy warrants after a PIPE is announced but before the market fully prices in the increased probability. That’s a repeatable pattern. Luna: Let me ask about the current environment — we’re recording this in June 2026. SPAC activity has cooled from the peak, but it hasn’t disappeared. Are the same strategies still viable? Lucas: They are, but the numbers are smaller. In 2020 and 2021, there were over 800 SPAC IPOs. Today, there are maybe 50 to 100 active shells. The warrants that exist have less time to expiration, so the time decay is more acute. But there are fewer players chasing them, which means if you find a warrant trading at $0.30 with a $10.20 trust value and a credible target, you can still generate a 10-to-1 payoff if the deal closes. The key is patience and a robust pipeline of deals. Luna: So it’s become a niche within a niche. But for family offices that have the infrastructure to analyze warrants, it’s still a source of asymmetric returns that public market investors can’t easily replicate. Lucas: Exactly. And because the equity markets are so efficient, these small pockets of inefficiency are where disciplined capital can really compound. SPAC warrants won’t make or break a billion-dollar family office, but they can add 50 to 100 basis points of excess return per year to a diversified alternatives sleeve. That’s real money over a generation. Luna: And that compounding is exactly what the show is about. Thanks for breaking that down, Lucas. Lucas: Always a pleasure. Next time, we’ll look at something even more arcane — and probably just as profitable.