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The appeal of the blank-check company to its sponsors is blindingly obvious: free money! The appeal to the real companies merging with them also seems fairly clear: They get to go public—freeing the executives who started them and the early investors who backed them to cash out in whole or in part—with a group—the aforementioned sponsors—who are somewhat less fastidious about things like revenue or growth, on account of the free money they get simply for consummating a deal. The investors may retrospectively dislike it, but by then their only recourse is to litigation, which in a very real sense means they’ve already lost. But that appeal is contingent on the company at hand getting the money sitting in the SPAC at the closure of the deal, and that, it seems, is no sure thing.

According to data I analyzed, the median redemption rate for North American SPAC deals completed in July was almost 50%. In several recent deals, more than 90% of shares were redeemed…./The problem stems from a couple of unique aspects of SPACs. First, investors can vote in favor of a deal yet still demand their money back. So a deal can proceed even though a majority of stockholders aren’t prepared to financially support it.

Second, the risk-averse arbitrage hedge funds who buy SPAC shares at the time of the initial IPO often have no intention of funding it past merger completion — they either sell if the stock is above $10, or they redeem. It requires careful marketing of the deal to replace them with more long-term orientated stockholders. Many SPACs sponsors are flunking that test….

Though sponsors are increasingly having to offer concessions — for example, by linking some of their compensation to post-merger share price performance — there usually aren’t adjustments to their pay for failing to deliver the cash they promised. Typically they receive 20% of the blank check firm shares for free, meaning they can make money even when other shareholders don’t.

Nice work if you can get it. Oh, anyone can? Great.

Hedge Funds Are Demanding Their SPAC Money Back [Bloomberg]

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