SPACs benefit from dearth of cheap leverage

Special purpose acquisition companies, or SPACs, are becoming an increasingly popular alternative to traditional private equity funds as cheap leverage has disappeared from buyout deals, a group of private equity and blank cheque company professionals said today.

“The timing to have SPACs in the marketplace now is very fortuitous,” said Richard Heckmann, chief executive officer and chairman of Heckmann Corporation, a $460 million (€290 million) SPAC currently seeking an acquisition target. “We don’t have that [private equity] competition anymore. The game out there today is a lot easier than it was 12 months ago.”

Heckman, who was echoed by several others, made the remarks to an audience of 500 gathered at investment bank Morgan Joseph’s inaugural SPAC Conference in New York earlier today.

Not only are private equity firms less active in their deal-sourcing because of the credit market dislocation, but many general partners themselves are considering forming or adding SPACs as portfolio companies to meet larger equity requirements for major deals, conference panelists said.

In the last two months, former general partners from the Carlyle Group, JW Childs and Apollo Management have formed high-profile blank cheque companies. Earlier today, hybrid firm Angelo Gordon filed plans to raise $300 million (€189 million) for a SPAC.   

According to data released by Morgan Joseph, the number of blank cheque initial public offerings nearly doubled between 2006 and 2007, from 37 floats in 2006 to 66 listings in 2007.

In the first quarter of 2008, SPACs accounted for roughly 48 percent of all US IPOs, it said. There are currently 72 proposed SPAC public floats in registration with the Securities and Exchange Commission, with an average proposed size of $204 million.

Beyond discussing the perks of blank cheque companies in the current credit climate, industry panelists touted other structural advantages of SPACs over their private equity counterparts, including the ability to broaden a private equity firm’s typical acquisition size through access to public capital.

“What we’re trying to do with our SPAC is to position ourselves for a larger transaction,” said Donald Hughes, a partner and chief financial officer in Baltimore-based mid-market specialist Camden Partners.

Despite the increasing popularity of blank cheque vehicles, there are some signs that that the hectic pace of SPAC formation may be slowing.

Based on Morgan Joseph’s projections, the size and volume of acquisitions completed by SPACS this year is set to decline 26 percent from 2007. Several high-profile SPACs, including Good Harbor Partners Acquisition, Grubb & Ellis Realty Advisors, Harbor Acquisition and Oracle Healthcare, have also recently been forced to liquidate after they were unable to complete an acquisition within a target window.