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May 2 2008 | 2:45am ET
Blank check companies, also known as Special Purpose Acquisition Companies, are making noise in the hedge fund community. Activist investors such as Steel Partners, Trian Fund Management and Bulldog Investors have all launched their own SPACs or funds to invest in SPACs in order to exploit opportunities in the growing marketplace.
However, the number of SPACs currently in existence outweighs investors’ appetites, and purveyors of new SPACs are being forced to fly in a holding pattern until existing operators find companies to invest in at attractive valuations.
“The appetite for new SPACs is not there and the new issuance window has been closed for a few weeks because of the very large number of deals that have gotten done,” says Tina Pappas, a managing director at investment bank Morgan Joseph & Co. “Many of the deals that have been priced continue to trade below issuance so there’s not a compelling reason to go buy a new IPO when you can buy something that’s recently gone public at a discount.”
She adds that warrant prices have also decreased over time, “which clearly affects the returns of hedge funds on a structural basis.”
According to the bank, the number of new issuances has climbed dramatically since 2003 when there was one, to 66 in 2007. Year-to-date, there are 12 new issuances in the offing.
Steven Samuels, general partner at Bulldog Investors, concurs with Pappas’ assessment of the SPACs market.
“We are currently seeing more funds go into liquidation and therefore the IPOs have basically come to a halt,” says Samuels. “While we expect more liquidations going forward, we also expect some surprises on the upside.”
Bulldog’s $11 million Absolute Plus Fund, which launched in February, is up 0.14% through March. Samuels says that with additional moderate leverage, the firm expects the fund to deliver low-to-mid teen returns.
According to Pappas, who says Morgan Joseph has spoken to over 50 private equity firms about issuing new SPACs or selling portfolio companies to SPACs, what will help the SPAC market to rebound are announcements of more good deals.
“That frees up capital because that’s a natural time when hedge funds trade in and out of a name, and it also proves out the strategy if they can acquire a company at an attractive valuation,” she says.
But regardless of when the IPO market for SPACs will pick up again, sources agree that blank check companies are a good investment.
Phil Goldstein of Bulldog Investors says that what makes SPACs safe is that their capital goes into a bank trust fund, which can’t be touched until a deal is approved. The shareholders have an opportunity to endorse the deal, and if they don’t, they are entitled to a pro-rated share of the trust fund.
“It’s a win-win if a good deal comes down the road, but if it doesn’t, then the manager has to take the hit,” he says.