In the SPAC ecosystem, sponsors and underwriters play distinctly different but equally crucial roles. While both are essential for a SPAC's success, their responsibilities, compensation structures, and risk profiles differ significantly. Understanding these differences is critical for investors evaluating SPAC opportunities and for companies considering the SPAC route to going public.
SPAC Sponsors: The Architects and Operators
Who Are SPAC Sponsors?
SPAC sponsors are the individuals or entities who create, launch, and manage the SPAC throughout its lifecycle. They are the driving force behind the SPAC and typically include:
- Industry Veterans: Former CEOs or executives with deep sector expertise
- Financial Professionals: Private equity partners, hedge fund managers, or investment bankers
- Serial Entrepreneurs: Successful business builders with acquisition experience
- Celebrity Sponsors: High-profile individuals who bring visibility and credibility
- Institutional Sponsors: PE firms or asset managers launching SPACs as a business line
Sponsor Responsibilities
Sponsors wear multiple hats throughout the SPAC journey:
- Formation: Create the SPAC entity and invest initial capital
- Team Building: Recruit board members and advisors
- IPO Management: Oversee the IPO process and roadshow
- Target Search: Identify and evaluate potential acquisition targets
- Deal Negotiation: Lead negotiations and structure the business combination
- Capital Raising: Arrange PIPE financing if needed
- Post-Merger Support: Often remain involved with the combined company
Sponsor Economics
The sponsor compensation structure, often called the "promote," typically works as follows:
Standard Sponsor Economics:
- Initial Investment: ~$25,000 for founder shares
- Ownership Stake: 20% of post-IPO equity (founder shares)
- Additional Investment: Purchase private warrants (typically $5-10 million)
- Potential Return: If $200M SPAC completes a deal, 20% stake worth $40M+
- Risk: Lose entire investment if no deal completed
Sponsor Incentive Alignment
The sponsor structure creates both opportunities and challenges:
- Upside Potential: Massive returns if successful (often 10-20x on investment)
- Downside Risk: Total loss if no merger completed
- Time Pressure: Strong incentive to complete any deal before deadline
- Quality Concerns: May pursue suboptimal deals to preserve promote value
SPAC Underwriters: The Capital Markets Facilitators
Who Are SPAC Underwriters?
Underwriters are investment banks that manage the SPAC's IPO process and help raise capital from public investors. Leading SPAC underwriters include:
- Major Wall Street banks (Goldman Sachs, Morgan Stanley, J.P. Morgan)
- Specialized SPAC underwriters (EarlyBirdCapital, I-Bankers Securities)
- Middle-market investment banks with SPAC practices
- Often multiple banks form an underwriting syndicate
Underwriter Responsibilities
Underwriters handle the technical and regulatory aspects of taking the SPAC public:
- SEC Filing Preparation: Draft and file the S-1 registration statement
- Regulatory Navigation: Manage SEC comment process
- Valuation and Pricing: Determine IPO size and unit structure
- Investor Marketing: Organize roadshow and market the offering
- Capital Raising: Secure commitments from institutional investors
- Market Making: Provide liquidity and stabilize trading post-IPO
- Ongoing Support: May assist with PIPE raises and de-SPAC process
Underwriter Compensation
SPAC underwriting fees typically follow this structure:
Standard Underwriting Fees:
- Total Fee: 5.5% of gross IPO proceeds
- Upfront Portion: 2% paid at IPO closing
- Deferred Portion: 3.5% paid upon business combination completion
- Additional Services: Separate fees for PIPE placement or M&A advisory
- Risk Profile: Lower risk with guaranteed upfront fees
Underwriter Incentive Structure
The deferred fee structure creates interesting dynamics:
- Deal Completion Incentive: Receive deferred fees only if merger closes
- Quality Consideration: Reputation risk from failed SPACs
- Volume Business: Focus on completing many SPAC IPOs
- Additional Revenue: Opportunities for PIPE placement and advisory fees
Key Differences: Sponsors vs. Underwriters
| Aspect | Sponsors | Underwriters |
|---|
| Primary Role | Create and manage SPAC, find target | Execute IPO, raise capital |
| Time Commitment | 18-24 months full lifecycle | 3-6 months for IPO, ongoing support |
| Compensation | 20% founder shares (promote) | 5.5% of IPO proceeds (2% + 3.5%) |
| Capital at Risk | $5-10M+ (at-risk capital) | Minimal (fee-based model) |
| Success Dependency | 100% dependent on deal completion | Partial fees regardless of outcome |
| Post-Merger Role | Often board seats or advisory | Limited ongoing involvement |
Working Together: The Sponsor-Underwriter Relationship
During IPO Phase
Sponsors and underwriters must collaborate closely during the IPO:
- Sponsor Selection of Underwriter: Based on track record, distribution capability, and sector expertise
- Joint Roadshow Efforts: Sponsors present vision while underwriters handle logistics
- Investor Feedback: Underwriters relay market sentiment to sponsors
- Structure Decisions: Collaborate on unit composition and warrant terms
During Search Phase
The relationship evolves during the target search:
- Deal Flow: Underwriters may introduce potential targets
- Market Intelligence: Share insights on investor preferences
- PIPE Support: Underwriters often lead PIPE placement efforts
- Advisory Services: May provide M&A advisory for additional fees
Potential Conflicts
Despite aligned interests, tensions can arise:
- Fee Pressure: Sponsors may negotiate lower underwriting fees
- Timeline Conflicts: Underwriters want quick deals; sponsors need time
- Quality Standards: Underwriters worry about reputation from bad deals
- Competitive Dynamics: Multiple underwriters may compete for PIPE business
Evolution and Current Trends
Sponsor Evolution
The sponsor landscape has evolved significantly:
- Institutional Dominance: More PE firms and asset managers as sponsors
- Serial Sponsors: Successful sponsors launching multiple SPACs
- Reduced Promotes: Some sponsors taking 15% or less to attract investors
- Enhanced Alignment: Vesting schedules and performance earnouts
- Co-Investment Rights: Sponsors investing more alongside public investors
Underwriter Adaptations
Underwriting practices have also evolved:
- Specialized Expertise: Dedicated SPAC banking teams
- Full Service Models: Offering end-to-end support through de-SPAC
- Technology Platforms: Digital tools for investor outreach
- Risk Management: Enhanced due diligence on sponsor quality
What This Means for Different Stakeholders
For SPAC Investors
- Evaluate Sponsor Quality: Track record more important than celebrity status
- Understand Incentives: Consider how promote structure affects decision-making
- Assess Underwriter Reputation: Quality underwriters attract better investors
- Watch Fee Structures: Lower fees mean more capital for the business
For Target Companies
- Sponsor Expertise Matters: Choose sponsors who add operational value
- Underwriter Capabilities: Strong underwriters help with PIPE execution
- Negotiate Structure: Push for sponsor lock-ups and earnouts
- Consider Long-term Support: Evaluate post-merger commitment levels
For Market Participants
- Quality Differentiation: Market increasingly distinguishes between sponsors
- Fee Compression: Competition driving down both sponsor and underwriter economics
- Regulatory Focus: SEC scrutinizing both sponsor and underwriter practices
- Evolution Continues: Structures adapting to market feedback
The Bottom Line
While sponsors and underwriters both play essential roles in the SPAC ecosystem, they operate with fundamentally different models, incentives, and risk profiles. Sponsors are entrepreneurs taking significant risks for potentially massive rewards, while underwriters are service providers earning fees for their capital markets expertise.
Understanding these differences is crucial for anyone involved with SPACs. Investors must evaluate both the sponsor's alignment and the underwriter's reputation. Target companies should assess what each party brings beyond just capital. And market observers should recognize how evolving sponsor and underwriter practices reflect the maturation of the SPAC market.
As the SPAC market continues to evolve, both sponsors and underwriters are adapting their models to address investor concerns and regulatory requirements. The most successful SPACs tend to be those where high-quality sponsors partner with experienced underwriters, creating a strong foundation for identifying, executing, and supporting successful business combinations.