SPACs: a listed company looking for a business
The sponsor gets a large stake for almost nothing and only if a deal completes. That makes doing a bad deal better for them than doing none.
See the incentive structure, because it explains the outcomes.
How SPACs: a listed company looking for a business works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
Why the debt is the engine
Put in 30, borrow 70, secure the loan against the company you are buying. A 30% rise in the business doubles your money. The same arithmetic works in reverse, which is why buyouts fail loudly.
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The structure, plainly
A sponsor raises money into a shell that holds nothing but cash, lists it, and then has a deadline, typically two years, to merge with a real private company. Investors are buying a promise and a person.
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The sponsor's incentive is to do a deal, not a good deal
Sponsors typically receive a substantial stake, often around a fifth of the shares, for a nominal sum, and only if a merger completes. If the deadline passes with no deal, they get nothing.
So a mediocre deal is enormously better for the sponsor than no deal, while for you it may be considerably worse than getting your cash back.
Whenever incentives and outcomes diverge this sharply, read the outcomes rather than the pitch.
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Dilution is the hidden cost
Between the sponsor's stake, the warrants and the money raised to complete the deal, the shares outstanding can expand dramatically. The company you end up owning a piece of may be a much smaller piece than the headline suggested.
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The record is poor, and it is not close
Post-merger performance of SPACs has, on average, been substantially worse than the market. That is an average, so exceptions exist. It should nonetheless move your prior a very long way.
You can state the sponsor's stake and what they receive if no deal happens.
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The sponsor gets a large stake for almost nothing and only if a deal completes. That makes doing a bad deal better for them than doing none.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.