Introduction to Net Asset Value (NAV)
Net Asset Value (NAV) is the net price of a share or an entity. NAV can be calculated by subtracting the liabilities from total assets divided by the total no. of shares. The term NAV is commonly seen used in Exchange-traded funds (ETF) or mutual funds but is also commonly being used in the context of Special Purpose Acquisition Companies (SPACs). SPAC is a shell company whose main purpose is to collect capital from the public through an Initial Public Offering (IPO) and acquire a private company within a specified period of time. Hence the investors will buy common shares generally at a price of $10 per unit. So a NAV is basically a price per share/unit of the fund in a specified day, which could be greater or less than $10. In this article, we will talk about how to calculate NAV and why it is important.
Understanding stock price versus NAV
People get quite confused between stock price versus the NAV. They both look similar yet so different. As we are only talking about SPACs, the stock price would be the price per share on a trading day. The stock price changes every day with change in supply and demand. The point is that if there are more people buying the stock (demand) than people who are selling it (supply), the stock price will rise. Conversely, if the supply is more and the demand is less, the price will fall. Hence, the stock price totally depends on the supply and demand. There are multiple factors that cause the change in stock price every day. Some of them are positive and negative news about the company, ticker change, politics, merger news, etc.
So the price of the stock at a particular trading hour totally depends on the investors. If the investors think that the company is worth investing in, it means the demand will increase and so will the price. But that is not the case when we are talking about SPAC NAV. By the definition of NAV, you will be thinking that it is also the price per share then how it is calculated. So the SPAC NAV is definitely the price per share but it does not change every day. That is, the SPAC NAV is based on the 10Q/10k filing of that SPAC in the Securities and Exchange Commission (SEC).
The 10Q filings are the quarter filing and 10K is annual. These filings provide the actual data about the company that investors need to know. These reports will have data about assets, liabilities, stockholders’ equity, commitments, net income, net loss, warrants, outstanding, etc.
So the factors that affect the SPAC NAV are the actual revenue earned, total expenses, offerings, and dilution. Hence to calculate the NAV, all you need to know is about the cash held in the trust account and the total outstanding. So the cash and the marketable security held in the trust account is the actual cash that is leftover in the bank. And total outstandings are the number of class A common shares. Class B shares should not be considered until they are converted to Class A shares.