Update on SPACs from M&A Journal

I got permission from Jonathan Marino of M&A Journal to reprint the below article he wrote. You can also find it at: http://www.mergersunleashed.com/news/186252-1.html

SPACs Brace for Hedge Fund Industry Shrinkage

Unwinding positions could hamper SPAC backlog; mid-market companies
eyeing blank-check exits may find opportunities dwindling in near-term.

By JONATHAN MARINO

October 3, 2008

Citigroup’s Old Lane hedge fund, which took several positions in special purpose acquisition companies (SPACs), has cashed in on many of those investments as it liquidates, according to its federal filings. The fund, which was bought from now-chief executive Vikram Pandit in 2007, announced this summer plans to liquidate after its change in management prompted a mandatory allowance of investors to remove their capital, if wanted. They did, en masse.
Old Lane likely isn’t the only hedge fund that invests in SPACs to see its investors seek back what money they have left. In fact, the entire asset class faces an uncertain future as funds may go to untold lengths to recoup money and combinations are voted down. If funds aren’t rejecting combinations solely out of the desire to repay anxious investors clamoring for cash, the prospect of a company being brought public and then seeing its valuation hurt is also cause for hesitation. One hedge fund investor stated that his fund sold SPAC shares after it brought a company public; that company in turn shed nearly 40% of its value in trading thereafter.

What happens next for hedge funds—market speculation and handwringing indicates 2008 could see the most hedge fund liquidations ever—will directly impact SPACs’ fundraising ability. Cliff Teller, executive managing director at Maxim Group, which both underwrites and advises blank check companies, said it is his hope for the asset class that around half of SPACs that identify a target succeed in making a combination. Anything short of that is a poor harbinger for blank check companies.

“The current environment is similar to 1998,” said Ken Heinz, president of Hedge Fund Research Inc., a database that tracks thousands of funds. “There’s a lot of speculation.”
This year could outpace 2005, which saw the most hedge fund liquidations ever, when about 850 or them—11 percent—became no more, Heinz said. Between 800 and 1,000 liquidations this year “is plausible,” he said, and that only takes into account 350 funds that ceased to exist in the first half of this year. The tail end of 2008 has potentially to nearly double that.

The results may be widespread: backlogged blank check companies may be stifled interminably until market conditions improve. Teller indicated that those capable of enduring the uncertainty are best poised.

SPACs have “infinite life if the management team is committed to the process,” he said.
Further, those that have already listed might begin to enjoy an advantage, as the scarcity of capital available to companies looking to grow could eventually push more mid-market firms toward SPACs for exits. Future SPACs, Teller said, will likely be smaller, perhaps generating still more chances for mid-market firms looking at a sale.

Another hedge fund investor whose fund has often taken SPAC positions said that, while existing blank check companies can feel more secure thanks to having cash, those trapped in the sizeable SPAC backlog are not likely to succeed. However, thanks to the extremely high price of debt, those SPACs that have already come to market might enjoy an advantage going into the M&A process, since their targets will have few, if any, options to finance growth.

The options, the first hedge fund investor said, are for SPACs to either “stay backlogged” or “pack it in.” A third option, the investor said, would be after abandoning expectations of making it to the US market in the near term, would be to pursue a listing on the Toronto Stock Exchange. The TSX’s Julie Shin, who leads the exchange’s listed issuer services, said ideally it will see its first blank check listing by the end of 2008.

Another, third, investor is less optimistic for the worldwide SPAC market at this juncture.
“Current SPAC returns in the secondary market and lack of leverage available globally make me skeptical,” that investor said.

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