The Basics of SPAC Extension Financing

SPACs have a limited time to find a company to acquire and complete the acquisition. Depending on the SPAC, this typically ranges from 12-24 months.

Some SPACs have built in extensions, where they can invest additional capital monthly or quarterly into the trust to extend their duration. If a SPAC does not have built in extensions or must extend past their extensions, they can request that their shareholders approve their extension.

Due to the large number of SPACs seeking targets, it has become increasingly more difficult and time consuming for SPACs to complete their business combinations.

If a SPAC sponsor team is unable or reluctant to provide the capital to extend themselves, they turn to outside investors to raise extension financing.

Learn more about how we guide SPACs through their transactions. Learn more ►

Who provides SPAC extension financing?

Investors tend to fall into a number of baskets, including hedge funds, family offices, high net worth individuals, and other opportunistic investors.

Extension financing provides investors with high returns, but is highly risky as well. If the SPAC is unable to consummate a transaction and must liquidate, the investor will likely be unable to recover their investment.

When can a SPAC raise extension financing?

SPACs typically range extension financing when the risk of transaction non-closure has been mitigated, such as when the SPAC has signed a definitive agreement with a target, the transaction terms have been finalized, and the target’s minimum cash requirement has been met.

SPACs can raise extension financing earlier in the lifecycle, but it will likely be more expensive capital. Without meeting the aforementioned criteria, the risk of complete loss of investment will likely be too high for most investors.

What is the downside for investors?

Even at the point when deal terms have been finalized and the minimum cash requirement is met, external factors can cause the transaction to derail. These can include pushback from the SEC, macro economic and geopolitical events, issues with the target company’s performance, and more.

Required Criteria to Qualify for SPAC IPO (DeSPAC Merger)

With an abundance of SPACs seeking targets, there is tremendous opportunity for qualified companies. When compared to an IPO, SPAC mergers are:

Less Costly: the costs to go through the merger process are very low relative to an IPO
Faster: the entire process can take as little as 4-5 months
Less Risky: unlike an IPO, the company’s valuation is negotiated at the start of the process

To qualify for a SPAC merger a company should ideally meet the following criteria:

Reasonable Valuation of at Least $250M

From a practical standpoint, SPACs typically acquire companies that are valued at a minimum of 3X the amount of cash in the SPAC. This is due to the dilutive effect of the sponsor’s carry in the SPAC. If the valuation of the target company gets too close to the amount of cash in the trust, the dilution associated with the sponsor’s carry becomes too large relative to the overall transaction size.

As most SPACs are $100M+, with a few exceptions under $100M, we recommend companies only pursue SPAC mergers if they are able to justify a valuation of $250M or greater.

Ability to Justify Valuation

Anyone can provide a number they think their company is worth, but to get market acceptance the company must be able to justify its valuation. This can be done using comparable companies’ valuations, relevant metrics, etc.

If a company is unable to effectively justify their valuation, it is likely the transaction will have very high redemptions and the stock will fall post-close.

Must Have a Clear Use of Proceeds

If a SPAC transaction is successfully completed, the target company receives a large influx of capital. The company must be able to show a clear use of proceeds and benefit from this capital.

Given the large number of SPACs seeking targets, there is tremendous opportunity for qualified targets. Let’s determine if your company is a fit. Get in touch with our team ►

Must Have Excellent Growth Prospects

SPAC mergers are best suited for companies experiencing or on the cusp of experiencing high growth.

Management Expertise

Management must be public market palatable, have industry/domain experience, M&A experience, and public company experience.

The following items are not required, but are helpful:

Ability to Bring Strategic or Financial PIPE Investors

Most SPACs line up a PIPE to close simultaneous with the merger. This protects against redemptions by ensuring that the company has the minimum amount of cash required to close the transaction.

If a company is able to bring PIPE investors to the table, it can speed up the process and increase the attractiveness of the company to potential SPAC targets.

SPAC Experience

While not a requirement, having management or board members with prior SPAC experience can assist with the transition from privately held company to publicly traded company.

Let’s discuss how we can guide you through your SPAC transaction. Get in touch with our team below.