SPACs are being forced to fund deals with more expensive financing, like issuing convertible bonds, due to cash from institutional investors drying up
Context & Ripple Effects
This report lands mid-boom but reads as an early crack in it. The prior coverage traced a friendly arc: SPACs gave targeted companies improved terms and a lower cost of capital than traditional IPOs, and by January 2021 hundreds of blank-check vehicles were competing for tech startups, inflating deal values. That competition only worked because institutional investors were willing to fund the trusts.
What changed with this story: that funding base started pulling back, forcing sponsors to fill the gap with convertible bonds and other pricier instruments. It foreshadows the unwind documented later — July 2022 became the first month in five years with no new SPAC raises after the March 2021 peak of over $36B — and compounds the structural drag identified in the analysis of sponsors' and warrant holders' cuts, which already made SPAC deals expensive for targets.
First-order effects
- Targets being acquired by SPACs now bear a higher effective cost of capital, since convertible bonds add dilution and interest expense on top of the sponsor and warrant take already embedded in the structure.
- SPAC sponsors lose their cheapest funding lever — committed institutional cash — so getting a deal signed requires stacking costlier securities rather than simply announcing a merger.
Second-order effects
- As financing costs rise, the bidding war among the hundreds of SPACs chasing startups cools, deflating the inflated valuations that cheap trust money had sustained through early 2021.
- Institutional investors who do still participate gain negotiating leverage over terms, squeezing the sponsor economics that Bloomberg later flagged as the core flaw in the vehicle.
Third-order effects
- If the pattern holds, the SPAC model proves to be a fair-weather structure: it functioned on abundant low-cost capital, and its erosion points toward the issuance drought and wave of post-merger bankruptcies the later coverage documents.
- Sustained expensive financing invites scrutiny of where the costs land — target shareholders versus sponsors — pushing regulators and markets to reprice who actually pays for the warrant-and-promote economics.
The trend: The SPAC boom is meeting a normalizing cost of capital, converting what was pitched as cheaper IPO access into one of the most expensive ways to go public.