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.
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.
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Learn more about SPAC extension financing
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