Over the last two weeks, two Special Purpose Acquisition Companies (SPACs) raised a total of $497.5M in oversubscribed IPOs. The transactions indicate a growing interest by investors in the obscure, but reviving investment vehicle. The combined amount raised by the two SPACs matched the total amounts raised by the “blank check IPO” vehicles during the entirety of 2010 and 2012, at $503M and $479M respectively. At the current pace, 2013 could see more than $2B raised through SPACs for the first time since 2005. While not the largest source of capital, the IPOs indicate alternative fundraising strategies are starting to become popular again as institutional investors tighten their allotments to private equity.
SPACs are in many ways an alternative to raising a fund for a single acquisition. They’re not business development corporations with ongoing operations, rather they are more like a search fund. With a time limit of between 12-21 months to make an acquisition and a requirement to use at least 80% of the escrowed capital on the merger, the companies must use the money or return it to investors. There are also often requirements that at least 70% or more of the shareholders have to agree to the acquisition target in order for the merger to occur — which can be a challenge in such a limited time period. The model had a heyday in the 80s, but fraud in the space resulted in regulations that shut down the model until it was reintroduced with new investor protections in 2003. They became more popular between 2005 and early 2008, until Goldman Sachs failed offering of the Liberty Lane Acquisition Corp signaled the end of SPACs due to the financial crisis.
According to SPACAnalytics, 66 SPAC IPOs raised more than $12B in 2007. Since then a total of 56 SPACs have raised a little more than $7B. To say the party was over is an understatement. Except that it seems to be coming back, and for many of the same reasons the first party started. The “blank check IPOs” are good for at least three reasons: they give PE firms another way to raise capital, can act as a well-heeled executive’s search fund, and are becoming viable exit shells for private equity portfolio companies.
Private Equity Raising Capital
Over the last few years, private equity groups like the Clinton Group and JW Childs have launched SPACs as a way to raise new funds without being dependent on traditional institutional investors. Since SPACs are offered publicly, nearly all of their capital is raised from hedge funds and other short-term investors. With many pensions and endowments reaching their allocation limits for private equity, investments in new funds have become significantly more competitive. While a few organizations, like the Oregon Investment Council, have recently raised their allocation limits, it doesn’t appear to be a growing trend.
Part of the problem for private equity is that there is still an immense amount of dry powder sitting on the sidelines. After missing Q2 earnings estimates, Carlyle bemoaned the dearth of opportunities for them to put their $50B in dry powder to work. Other firms, including TPG Capital, Terra Firma and Graphite Capital, have secured extensions on the life of their funds in an attempt to find ways to make use of their own uninvested capital. For private equity groups raising capital – there are 223 new funds being raised looking for $221B - institutional investors are harder to find.
SPACs, like the JWC Acquisition Corp sponsored by JW Childs and ROI Acquisition Corp sponsored by the Clinton Group, have allowed PEGs to raise capital from shorter term investors like hedge funds rather than pensions or endowments. While the game is somewhat tricky, as hedge funds occasionally veto all acquisitions in an attempt to claw back the cash plus interest of the SPAC, in the right situations the “blank check” can be the perfect vehicle to acquire a new portfolio company.
Operators Acquiring A Single Firm Without a Fund
While it’s somewhat rare to see operators create a SPAC in order to find a single acquisition, it has started happening more often. Usually the operators are joined by a professional financier who guides the financing side of the transaction. The two most recent SPACs, Quinpario Acquisition Corp and Silver Eagle Acquisition Corp, seem to fall in to the “operator-led” category.
Quinpario is focused on acquiring specialty chemicals companies and is sponsored by Quinpario Partners, a private equity group – if that’s what you call six executives from Solutia Inc pooling their money in one fund with no outside capital. Solutia was bankrupt when the team took over and, between 2005 and 2012, they turned it around before selling it to Eastman Chemical for $4.7B. Now they’re looking for another opportunity and need more than their own capital to make a dent in the market. Their own funds have only been sufficient to hassle Ferro and Zoltek enough to get board seats, but not enough to actually affect the change they’d like to see. The extra $150M could help do the trick.
Silver Eagle is a follow-on SPAC from the same team that brought Global Eagle Acquisition Corp to market in 2011. The previous acquisition company raised $190M for Harry Sloan, the former CEO of MGM, and Jeff Sagansky, the former CEO of CBS, and resulted in the acquisition of two in-flight entertainment companies for $430M. Their new SPAC raised $325M in the largest blank check IPO in seven years. They’re hoping to make entertainment or media acquisitions up to $1B in an attempt to replicate their work on Global Eagle.
As with the latest two SPACs, the vehicle is occasionally used by savvy operators as a sort of search fund for storied executive teams. Rather than finding a target, searching out a sponsoring private equity group, then finding funding, the executives work in reverse to sell shares based on their experience before finding a company.
An Exit Opportunity for Select PE Portfolio Companies
Though still uncommon, the trend of reverse merging private equity portfolio companies into public shells made waves last year when Burger King was given an IPO through the Justice Holdings, a London-listed SPAC. The reverse merger allowed 3G Capital to retain 71% ownership of the new entity, keeping much of the upside growth while also creating liquidity for their investment.
Other, smaller reverse mergers have happened over the last few years including the JWC Acquisition Corp reverse merger with The Tile Company last year, allowing JW Childs and the hedge funds who held the acquisition corp stock to retain 33% ownership of the newly merged entity. Many other SPACs, in the $40-80M range, have closed deals with lower middle market companies over the last half decade, creating an interesting outlet for smaller private equity groups to take their portfolio companies public – replicating some of the upside plus liquidity that 3G Capital experienced with Burger King.
SPACs remain an incredibly small part of the fundraising and private investing arena, but their uptick seems to signal that fundraising is getting more difficult. The appetite in the public markets seems strong, however, as both recent offers were oversubscribed. With a pace towards the 2005 numbers, SPACs could start picking up soon – offering new options for exits and acquisitions in the middle market.