SPACs and investors: how they work together
The SPAC’s founder serves as its sponsor, working with advisors to handle the groundwork for an IPO. In some cases, the sponsor also secures additional funding commitments in connection with the IPO.
One of the biggest advantages for SPAC sponsors is that the IPO process is relatively simple. Because SPACs have a straight-forward, easy to understand business purpose, most can complete their paperwork within three months with little back and forth with the SEC.
Once the IPO is completed, the SPAC can begin evaluating and approaching potential merger targets. When a suitable partner is found, and an agreement is reached and approved by shareholders, the transaction closes and the target company survives as the publicly listed entity.
SPACs provide significant benefits, including:
- Access to high-quality sponsors without a management fee
- Private-equity–like investment opportunities
- Capital protection in the form of redemption rights
- Additional upside through warrants
- Bounded investment horizon — SPACs generally have 18-24 months to complete an acquisition
Transactions evolve as popularity grows
The parameters of many SPAC transactions have evolved as the process has grown in number and popularity. For example, SPACs often involve larger deal sizes, which increases the pool of potential acquisition candidates. The average SPAC IPO has grown to nearly $400 million in 2020, up from approximately $50 million in 2010, and some have raised as much as $1 billion or more.1
In addition, SPACs today receive far more additional capital in the form of forward purchase commitments and credit lines. This backstop funding is used to cover SPAC shareholder redemptions and provide cash to both pre-merger owners and the post-merger company.
Finally, we are seeing a significant reduction in warrant coverage in recent months, reflecting greater confidence from investors that a successful merger can be completed. Warrants have long been included in the SPAC units sold at IPOs as an inducement to attract investors, but they can be highly dilutive for companies whose share prices perform after the merger.