Pirate Walks the Blank

Pirate Capital, a $1.8 billion hedge fund with a reputation for shareholder activism, wants your money.

The 4-year-old hedge fund filed a registration statement late Tuesday to raise $100 million in an initial public offering for a newly formed "blank check" company called Doubloon Corp. The Norwalk, Conn.-based hedge fund says Doubloon will raise cash from investors to buy an existing financial services firm, or even another hedge fund.

Over the past three years, there has been a wave of blank check IPOs, in which a company raises money in public markets before deciding precisely what to do with it. Hedge funds have been the main investors in the deals, and Wall Street has marketed blank checks as a relatively safe way for hedge funds to invest in private equity. Investors in a blank check IPO are guaranteed to get back most of their money if the company can't find a suitable business to acquire within 18 months.

Most of the people forming blank checks are former corporate executives who are able to sell investors on the strength of their resumes and business acumen. In May, for instance, Michael Gross, who helped found the $10 billion private-equity outfit Apollo Management, debuted as the pitchman for Marathon Acquisition, a planned $300 million blank check IPO.

But the Doubloon IPO is the first blank check company fronted by a hedge fund with the stature of Pirate. Maxim Group, a small investment bank that has become a big player in blank check IPOs, is the underwriter on the deal.

Pirate Capital, led by Thomas Hudson, Jr., a former Goldman Sachs ( GS) portfolio manager, will own about 20% of Doubloon after the IPO. The hedge fund, which is renting space to Doubloon at a fee of $7,500 a month, will own its equity stake through an affiliated entity.

A Pirate Capital spokesman declined to comment on the offering.

Hudson opened Pirate Capital with just $2 million in assets under management. But it's grown quickly over the past four years by taking large equity stakes in companies and agitating for managements to either shape up or ship out. Some of Pirate's biggest fights have been with the managements of security-services firm Cornell Companies ( CRN), auto-parts dealer Pep Boys ( PBY), CEC Entertainment ( CEC), owner of Chuck E. Cheese's restaurant, and James River Coal Company ( JRCC).

Just last month, Pirate Capital sent a letter to Pep Boy's management demanding that the company set a date for an annual meeting. Pirate Capital, which has an 8% equity stake in the auto-parts chain, claims Pep Boy's management has been bad for shareholders, noting that the stock has fallen more than 20% this year.

In the regulatory filing for Doubloon, Pirate Capital says it might consider buying a "distressed'' company in another industry if it can't find a suitable financial services firm to acquire.

"We intend to focus our efforts on the financial services industry, but will not be limited to pursuing acquisition opportunities only within that industry,'' the IPO filing says. "A typical acquisition target is a company whose performance we believe we can improve by capitalizing upon our management's and Board of Directors' more than 60 years of aggregate experience in creating value for both public and private companies in the financial services industry, as well as other industries.''

Doubloon's corporate officers include Hudson, who will serve as chairman and CEO, and other Pirate Capital managers. William Redmond, president and CEO of auto-parts concern Gentek ( GETI), will serve as a special adviser to the company. Pirate Capital, as of the end of March, was Gentek's seventh-largest shareholder.

To date, blank check offerings, despite their appeal to cash-rich hedge funds, have had modest success. Of the approximately 62 blank check companies to sell shares to the public over the past three years, only seven have completed acquisitions. Another 20 companies have tentative merger deals.

Investors have sunk more than $3 billion into blank check IPOs. But there are another 33 blank check IPOs still pending, according to the Doubloon filing. Those blank-check-deals-in-waiting are looking to raise another $2.6 billion from investors.

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