Will more private equity firms use SPAC IPOs to raise money?

26 03 2008

Will more private equity firms use SPAC IPOs to raise money?

Posted by: in Private Industry News

Filed under: GS Capital Partners, Private equity industry, Shareholders, Public or private?

There has been quite a bit of buzz around the trends in special purpose acquisition companies, or SPAC’s, of late. In fact, it seems that about two of each three IPO filings that get filed are from SPAC’s. These SPAC IPO’s offer the public essentially a call option to participate in private equity that’ll end up being publicly traded stocks. Ultimately, these will become operating companies or within 24 to 30 months investors will receive their cash back minus a few percentage points.

Attention is still being given to the fact that J.W. Childs Acquisition I Corp. was filed to raise $200 million. This was two weeks ago too. Some have asked if J.W. Childs is testing the water here or if this is because they would have trouble raising a private equity fund on their own. If you want a confusing explanation, the answer is “both and neither.”

SPAC’s are changing as well. In the past, Goldman Sachs (NYSE: GS) has avoided SPAC’s and blank check offerings. The reason is that the stigma behind these from the 1990’s wasn’t a good one. All things change in time. Goldman Sachs just filed for its SPAC initial public offering this week. They also made the terms slightly more tight than most other underwriters.

Opinions on traditional private equity firms going into SPAC launches vary already and they will vary only more in the future. But this strategy makes life easier for the private equity firm. For starters, they don’t have to go run through all the hoops associated with raising a private equity fund. They don’t have to use their own sales or biz0dev team to go spend the 90 to 180 days or longer due diligence period. This grants them to make the brokerage underwriting firm go do the leg work and allows them to distribute units that are publicly traded to retail and/or institutional clients. It also gives the private equity firm a two-year time frame as breathing room to go pick their deals.

Arguably, it even allows the firms to go through other private equity firms’ portfolios to see if there are businesses or units that can be purchased that would have otherwise been stuck as a buried entity.

There are many critics of SPAC’s and traditional blank check IPO’s. But this may be a trend you don’t have to care about. You just have to accept it for what it is.