Stocks of Blackstone, Carlyle Group and other publicly traded private-equity firms aren't the only way that individual investors that don't want to fork over what it takes to buy into a partnership can participate in this part of the smart money set. In fact, legendary investor Wilbur Ross has led PE into a little-known corner of the public markets known as special-purpose acquisition companies, which raise capital through IPOs that is then put to use in M&A. Of course, you and other buyers of SPAC shares may have no idea what the PE firms will end up buying, but at least you needn't bet the farm to bet alongside them.
Over the last year, more than half of the initial public offerings and registrations tied to special-purpose acquisition plays have been led by private equity players. And while PE investors have always had a connection to this quirky corner of Wall Street, the bond has never been this pronounced.
SPACs are investment vehicles created for the purpose of bringing private companies public, raising capital for the transactions via IPOs, with the proceeds placed in a trust designated for the transaction costs. The vehicles have a specific time period, generally 18 months to 24 months in which to close a merger. Should the SPAC fail to complete a transaction, the IPO revenues are returned to investors, who also generally have the option of voting against deals that don't make their grade, and have their investments returned.
Sponsors generally receive common stock equal to 20% as compensation for putting the deal together, similar to the carried interest in a PE deal, and those shares are locked up for a period of at least 12 months.
According to PrivateRaise, a service of TheStreet's subsidiary, The Deal, nine SPACs since August 2015 have raised almost $3.8 billion in IPOs led by PE-related entities. That total includes a $510 million private-equity-in-public-equity, or PIPE, transaction prior to the$690 million May 2016 IPO of CF Corp. (CFCO) , a blank check company led by former Blackstone dealmaker Chinh Chu and Fidelity National Financial Chairman William Foley. The CF deal was the largest transaction in the past year, but it certainly wasn't the only transaction that included marquee private equity investors.
July, for example, saw Conyers Park Acquisition (CPAAU) sponsor Centerview Capital debut its $402.5 million IPO, and TPG Capital is behind the $450 million IPO of Pace Holdings (PACE) . Riverstone Holdings, a PE firm focused on the energy sector, priced its $500 million Silver Run Acquisition Corp. (SRAQ) SPAC in February. Fellow energy player KLR Holdings raised $85 million with its KLR Acquisition Corp. (KLRE) in March.
Marc Lasry of Amroc Investments and others brought Boulevard Acquisition Corp. II (BLVD) public last September in a $370 million transaction and the Gores Group checked in with Gores Holdings Inc. (GRSH), an August 2015 IPO of $375 million. Easterly Acquisition Corp. (EACQ) - Get Easterly Acquisition Corp. Report came public last August, raising $200 million and already closed its merger, grabbing up solar company Sungevity Inc. Global Partner Acquisition (GPAC) raised $155 million in August 2015, as well.
And of the nine SPACs that have registered but not yet priced an IPO in the last year, five of them—Colony Global Acquisition, Dundon Capital Acquisition Corp., NB Capital Acquisition Corp., PMV Acquisition Corp. and Highland Acquisition Corp.—all have PE ties.
Sometimes referred to as the "poor man's private equity fund," SPAC's have never gained the full respect of Wall Street or regulators, in part because the vehicles were targets of fraud in the 1980s. After a hiatus, new SPACs began forming in the early 2000s. In 2007, 81 SPACs went public raising $19.6 billion, but just two years later, with the economy in tatters and Wall Street still trying to find its way, just three SPACs went public, raising a mere $118 million, according to PrivateRaise.
And though the current IPO market is challenging—just 56 deals priced this year, according to Renaissance Capital—SPACs are pricing regularly.
"It's the golden age of SPACs," said Doug Ellenoff, a founding member of the New York firm of Ellenoff Grossman & Schole, which does a lot of work in the SPAC sector. "It is a combination of factors. The IPO market is down, private companies are now more comfortable with the SPAC program, and the sponsors who are involved in deals are stronger."
David Miller, managing partner with Graubard Miller, which has a solid SPAC practice, has a more PE-centric explanation.
"I think SPACs are perfect vehicles for PE sponsors for a couple reasons," he said via email. "First, PE guys are experts at finding solid target companies at a pre-IPO stage, so it stands to reason that they will also be discovering some interesting IPO-ready targets. Secondly, if for some reason their SPAC fails to locate an appropriate target business within a reasonable period of time, they will likely have a number of their own portfolio companies which could make suitable SPAC targets."
Among those buyout gurus is Ross, once a workout artist for Rothschild who made his fortune in restructuring and distressed asset deal. Ross' PE firm rolled out a SPAC raising $500 million in a June 2014 IPO. WL Ross Holding Corp. (WLRH) wound up buying chemical maker Nexco Solutions Holdings (NXEO) - Get Nexeo Solutions, Inc. Report from Fort Worth, Texas, PE firm TPG in June, with private equity on both sides of the same deal.
While the Ross SPAC didn't break brand new ground, it did serve as a signal to PE investors and others that SPACs were back as viable investment vehicles, and, in 2014, according to PrivateRaise, 36% of the SPACs that went public had PE backing, raising a little over $1 billion. (Last year, that figure for PE-backed SPACs dropped to 25%, but the volume rose to almost $1.5 billion.)
Just one investor contacted for this story was willing to talk, but not be identified.
He said that 10 years ago, SPACs were sponsored by management teams who were short on expertise and the vehicle suffered from a poor reputation among investors. But that reputation has slowly improved to the point where private equity firms and players consider the vehicle a legitimate investment.
"It is an interesting form of liquidity and given our expertise at finding companies and deals, it now makes sense to be involved," this person said.