SPACs Turn to Alternative Funding as Investor Cash Dries Up

Dealmakers looking at taking companies public through special purpose acquisition company (SPAC) mergers are having trouble finding investors, and have been making short-term agreements with alternative asset managers and private equity groups, Financial Times reported Monday (March 7).

The agreements have shown the struggles faced by SPACs — shell companies listed on the stock market that hunt for private companies to buy and take public — to complete mergers, after they fell in popularity after the initial boom in the beginning of the pandemic.

SPACs have faced more regulatory scrutiny, along with scandals and poor performances, which have led investors to pull out.

That has jeopardized possible mergers, with SPACs struggling to fulfill the minimum cash requirements necessary to close the deal.

So companies looking to go public are seeking other sources, at terms highly advantageous to the new investors. Atalaya Capital Management, an alternative asset manager, is one of them, along with Apollo, a private equity group. SPACs have been looking to them for what’s called redemption capital, in which the new investors agree to buy shares from investors looking to withdraw their money.

“It’s a sign of desperation. It’s problematic because it’s pretty hard for anyone but pretty sophisticated investors to understand what’s going on in these transactions and to see how sweet a deal is being offered to select investors,” said Michael Ohlrogge, professor at New York University’s law school who studies SPACs.

Read more: Data: Half of SPAC Startups With Less Than $10M in Revenue Failed to Meet 2021 Financial Targets

In late February, PYMNTS reported that several startups had been seeing diminishing returns from what was expected.

Dozens of ones which had gone public in the stock market frenzy spurred by the pandemic’s chaos have now been in trouble, with almost half of them from 2021 with less than $10 million in annual revenue now failing or expected to fail.