When a sponsor forms a SPAC, they receive an equity carry in the SPAC in exchange for providing the risk capital for the SPAC, and finding a target to acquire. This risk capital provided is an amount typically ranging from 4-7% of the total IPO amount.
Many SPAC sponsors do not provide the entire amount of sponsor capital themselves. Instead, they turn to outside investors like family offices and hedge funds.
Why do family offices and hedge funds invest in SPAC sponsor capital raises?
Investing in SPAC sponsor capital raises is a way to accumulate wealth in a very short period of time. SPAC sponsor capital investors typically invest at an effective price equal to a fraction of the IPO price. As a result, even if the stock does not rise above the IPO price post-business combination, the investors have made a substantial return on their investment.
Family Office Investment in Sponsor Capital Raises
Family offices tend to act as purely financial investors in SPAC sponsor capital raises. They typically do not provide any value beyond the sponsor capital.
Family offices tend to invest at an effective price higher than hedge funds, as they are unwilling to make commitments beyond providing sponsor capital.
Hedge Fund Investors in SPAC Sponsor Capital Raises
While they are more costly, hedge funds investors in sponsor capital raises tend to provide significantly more value than family office investors. They do, however, come with many advantages.
Having a well-known hedge fund in your SPAC sponsor capital raise can be a good signal to IPO investors. It shows that the team and thesis already has institutional acceptance.
Hedge fund investors will often commit to funding a portion (up to 9.9%) of the IPO as part of their sponsor capital investment.
Some hedge fund investors will even commit to funding a portion of a PIPE at the time of the business combination as part of their sponsor capital investment. This can be a great advantage to teams, and makes the PIPE process much easier.
Hedge fund investors will also often provide soft dollar commitments for analyst coverage if they have analysts that focus on the SPAC’s target sector.
Family Office vs. Hedge Funds
While family offices tend to be less expensive SPAC sponsor capital investors than hedge funds, they tend to provide far less value. When we are assisting our clients with SPAC sponsor advisory services and capital raises through our broker dealer, we recommend a mix of both family office investors and hedge fund investors.
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