SPAC Investing: Structure, Economics, the 2021 Boom and the UK Regime

A Special Purpose Acquisition Company (SPAC) is a shell company listed on a stock exchange with no commercial operations, created solely to raise capital and use it to acquire a private company within a defined time frame, typically 18–24 months. If no acquisition is completed, the SPAC liquidates and returns cash to investors. SPACs have a long history in the US market but attracted extraordinary attention — and subsequently scepticism — during the boom of 2020–2021.

Capital is at risk. SPAC investing involves material dilution, execution risk and market volatility. This guide is for information only and does not constitute regulated investment advice.

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The SPAC Structure

The sponsor. A SPAC is formed by a sponsor — typically an experienced investor, private equity firm, or industry executive — who provides a small amount of "at-risk" capital (commonly $25,000–$5 million, known as "founder shares") to establish the entity, cover IPO costs, and fund the search process. In exchange, the sponsor receives 20% of the SPAC's post-IPO equity — the "promote" — for nominal consideration. This is a highly leveraged economic stake.

The IPO. The SPAC raises capital through an initial public offering, typically at $10 per unit in the US market. Each unit comprises one share and a fraction (typically one-third or one-half) of a warrant to purchase an additional share at $11.50. The IPO proceeds are placed in a trust account, typically invested in US Treasury securities, earning interest until either a deal completes or the SPAC liquidates.

Trust protection. If shareholders vote against a proposed acquisition (the "de-SPAC" transaction), or if the SPAC fails to complete a deal within its time limit, shareholders can redeem their shares at the trust value — typically $10 plus accrued interest. This creates an asymmetric risk profile for SPAC investors who buy at or below trust value: downside is limited to the small premium above trust (plus opportunity cost), while upside depends on the quality of the eventual target.

Warrants. SPAC units contain warrants that allow holders to purchase shares at $11.50 after the deal completes. Warrants are exercisable after the deal close and provide leveraged exposure to the combined company's equity upside. They become worthless if the SPAC liquidates without a deal. Warrants trade separately from SPAC shares after the IPO, allowing investors to express views on deal completion probability separately from the equity.

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The Sponsor Economics Problem

The sponsor promote — 20% of post-IPO equity at minimal cost — creates a significant alignment concern. Consider a $200 million SPAC IPO: the sponsor receives $50 million in founder shares (worth roughly $50 million at $10 per share) for a nominal investment. The sponsor is therefore highly incentivised to complete any deal, even a poor one, because completing any deal is worth more to the sponsor than returning the trust capital and receiving nothing on the promote.

This misalignment was identified by academics and investors before the 2021 boom but was frequently overlooked in the enthusiasm of the period. Post-completion dilution from warrants and founder shares means that a SPAC investor who holds through a de-SPAC transaction typically finds their economic interest substantially diluted from the original $10 per share.

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The De-SPAC Process

When the SPAC management team identifies a target company, the process works as follows:

1. Negotiation and announcement: the SPAC and target agree terms, typically valuing the target at a specific enterprise value with SPAC shares as the primary currency. The target company benefits from going public without a traditional IPO roadshow.

2. Proxy statement and shareholder vote: the SPAC files a proxy statement with the relevant regulator (SEC in the US) describing the target business, the proposed transaction economics, conflicts of interest, and risk factors. Shareholders vote on whether to approve the transaction.

3. Redemption window: regardless of their vote, shareholders who wish to redeem can do so at the trust value before the vote. This means even shareholders who vote in favour of a deal can redeem — the votes and redemptions are somewhat independent.

4. Closing: if the vote passes and sufficient non-redeemed capital remains (plus any PIPE — Private Investment in Public Equity — financing), the deal closes. The target becomes a public company.

PIPE financing is common: institutional investors commit capital to the de-SPAC deal at a defined price (often $10 per share) to provide additional funding and signal conviction. Large PIPE commitments were treated as validation during the 2021 boom; investors later discovered that some PIPE commitments included heavy discounts or side arrangements not visible to ordinary shareholders.

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The 2021 Boom and Its Aftermath

2020–2021 saw an extraordinary surge in US SPAC activity, driven by:

• Ultra-low interest rates (trust accounts earned near-zero, reducing the opportunity cost of holding SPACs)
• Buoyant equity markets providing exit opportunities for target companies
• Sponsor enthusiasm for the promote economics
• Retail investor participation and social media enthusiasm

At the peak in early 2021, SPACs were raising over $30 billion per month in the US. Notable de-SPAC transactions included electric vehicle companies (Lucid Motors, Nikola), fintech companies, and space ventures.

The aftermath was severe. Many de-SPAC companies — particularly in electric vehicles, early-stage technology and speculative sectors — saw their share prices collapse 50–90% from deal price within 12–18 months. Fundamental analysis had been subordinated to deal enthusiasm. Several de-SPAC companies faced regulatory scrutiny over forward-looking financial projections that traditional IPO rules would not have permitted.

By 2022–2023, SPAC activity had collapsed. Higher interest rates improved the relative attractiveness of the trust (investors could earn 4–5% while waiting for a deal), but also increased the opportunity cost for sponsors and reduced deal valuations.

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UK SPAC Regime: FCA Reform 2021

The traditional UK SPAC structure required suspension of the SPAC's listing when a potential target was announced — which made it extremely unattractive compared with US SPACs. In 2021, the FCA reformed the UK SPAC rules to make the structure more competitive.

Key features of the reformed UK SPAC regime (effective August 2021):

SPACs that qualify for the new regime (minimum £100 million raised, ring-fenced trust, shareholder redemption rights) can complete acquisitions without a trading suspension, making the process comparable to US SPACs.

Shareholder approval of the acquisition transaction remains required.

Ring-fenced trust: proceeds must be held in trust, invested in low-risk assets, and returned to shareholders if no deal completes within two years (extendable to three with shareholder approval).

Redemption rights: shareholders must be able to redeem at trust value regardless of how they vote on a transaction.

Warranted exclusions: sponsor founders cannot redeem their shares alongside ordinary shareholders, aligning the sponsor's interest in completing a deal.

The reform was welcomed but has not generated significant SPAC activity in the UK, partly because UK equity market conditions and the investor base differ from the US, and partly because the global SPAC enthusiasm had already peaked before the rule changes took full effect.

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Evaluating SPAC Investments

For investors considering SPAC positions:

Below-trust premium investing: buying SPACs at or below trust value limits downside to the small premium paid (or gains from trust accrual). The risk-reward is asymmetric if the trust is well-protected.

Target quality: once a target is announced, evaluate the de-SPAC as a business investment. The fact that it is accessing public markets via SPAC rather than IPO should prompt scrutiny rather than reduce it.

Redemption analysis: check the redemption rate on a completed deal — very high redemption (90%+ of shareholders redeeming) signals that institutional investors have evaluated the target and chosen to take trust value rather than hold the merged company.

Warrant analysis: warrants offer leveraged upside but become worthless in a liquidation. They trade at implied volatilities reflecting deal probability and target quality.

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Risks

Founder share dilution: the 20% promote and warrant dilution mean that even a "good" deal may not be attractive for ordinary shareholders.

Target quality: SPAC sponsors face time pressure to find deals, which creates incentive to close suboptimal acquisitions.

Regulatory risk: the SEC has increased disclosure requirements for SPAC transactions, making the process more like a traditional IPO and reducing some of the speed advantages.

Market risk post-completion: once the target is public, it carries all the risks of a newly listed company in addition to the specific business risks.

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How Global Investments Can Help

SPAC investing requires careful analysis of structure, economics and target quality — skills that overlap with both equity analysis and alternative investments. Our team can help you evaluate SPAC structures, assess the trust value and warrant economics, and analyse de-SPAC targets as fundamental investment opportunities. We can also advise on the UK SPAC market and help you access appropriate vehicles through regulated brokers.

Contact us to discuss special situation equity investments.