SPAC'ing Private Equity

Every time one thinks we have reached a peak of financial innovation, something new pops up and makes one realize how foolish it was not to think of it earlier. One such recent financial innovation has been 'SPAC'. SPAC stands for 'Special Purpose Acquisition Company'. The purpose of a SPAC is essentially acquiring some company - may or may not be a public listed company. Most interestingly SPAC are companies without any balance sheet and therefore most regulating stock exchanges didnt allow SPAC to be listed, however, this has changed now - with the first listing of SPAC in July 2007. Just recently both the Nasdaq and the New York Stock Exchange have announced plans to allow listing SPACs in 2008 as 'Blank Cheque' companies.

Why SPAC (and difference from Private Equity)?
SPAC companies are formed particularly for the purpose of acquiring another company(ies). What makes it different from a Private Equity deal is that SPAC is essentially a bet on Listed company (though not always). Unlike private equity the philosophy is not to build a company, however, is to better manage the company. More so, SPAC is a like a buy-out fund in terms of its characteristics. However, as SPAC is a listed entity by itself and it goes to its investors to seek approval for investing in target companies; a Private Equity GP or a Buy-
Out manager doesnt do that. This, most importanly SPAC provides transperancy to the investor regarding the location, size and liquidity. Hence SPAC provides an investor who cant invest into private equity an alternate route to earn potentially similar returns with limited risk on transperancy and frauds by PE funds. Also the lock-up for a SPAC is not as long as private equity and exit for investors is very easy as these SPAC shares are traded on exchanges.

Mechanism of SPAC?
SPAC units are sold as a combination of a share and a warrant to acquire shares in a 'Blind' target. The money raised by the SPAC is held in a trust which essentially invests in Government bonds or other such low risk instruments. The SPAC signs a letter of intent to acquire a company within, typically, 12-18 months of raising money. If these proceeds are not utilized during the said period, the SPAC shall dissolve automatically and the investor would be returned his money + interest accrued on investments made in govt bonds. The SPAC managers typically operate on a private equity / buy out philosophy to look for undervalued companies and acquiring such companies at a reasonable rate. The management team of a SPAC typically receives 20% of the equity in the new entity at the time of acquisition, locked-in for 2-3 years which is very typical to the performance fees paid for Private equity and Buy-out funds.

Is SPAC the future of private equity investments?
Though a vanilla SPAC structure is different from direct private equity investments, variants in SPAC structures are able to mimic private equity funds in a more transparent and easy way. Essentially a SPAC cannot be thought of as an 'Angel investor' and this part of the private equity business will always be the same (again I may think 2 years down the line - how big a fool i was not to think of something which could replace angel investing). However, with all due-respect to private equity firms, I believe SPAC is the future of all private investing. Gone are the days where investors preferred lock-ups, gone are the days of seeking exorbitant returns from private equity funds; investor now prefers liquidity, more so, tranperancy. Investments are becoming more and more liquidity driven rather than performance driven, cost of exit has gone incredibly higher and more interestingly now, a known devil is certainly becoming better than an unknown god.

Comments

Anthony Lorizio said…
Thanks for taking the time to provide such a clear view of the SPAC environment.
These entities could be a perfect vehicle for many of the Baby Boom private company owners with revenues between $200 MIL and $1 BIL to exit.
As a fellow observer of the SPAC space, they need to become more proactive in finding and screening targets in order to meet their objectives. With just an eighteen month window to get a deal under agreement, the old reactive model of finding targets will not work.
Keep up the insightful commemtary.

Anthony Lorizio
Hamilton Wright

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