Capital Raising: SPAC invaders

Add SPACs to the list of quirky and slightly sketchy financial innovations that the financial crisis could not quite kill off. Special purpose acquisition companies allow blue-chip investors - and those who think of themselves that way - to raise cash in an IPO and deploy it later, by buying an as-yet-unidentified company. In 2007, 66 US SPAC offerings raised $12bn in proceeds, nearly four times the level of two years earlier. Most of those SPACs flopped because deals never materialised and investors got their money refunded. In recent years, SPAC issuance has been nowhere near its 2006-2008 heyday, but today's deals may be attracting smarter money.

The basic SPAC mechanics are simple. A sponsor, who is ideally a respected investor or manager, creates a shell company that offers units to the public for $10 each. The unit is both a common share and a warrant; the latter can be used to buy an additional share. The SPAC typically has two years to find a business to buy. Adding debt and equity allows the acquisition to be bigger than the IPO proceeds.

Shareholders retain the right to redeem their common stock at $10 a share (Before the crisis, opportunistic funds would buy up shares, then threaten to block deals unless they were paid out; the rules have changed to make this strategy harder).

SPAC economics, however, make executing an acquisition tricky. The sponsor gets a fifth of the sponsor equity for free (mirroring private equity "carry"). Because of that dilution, the purchase must not be expensive if the ordinary shareholder is to earn a decent return (the chance of a public listing and share price appreciation can persuade the target to accept a lower valuation).

SPACs can turn out magnificently. Martin Franklin and Nicolas Berggruen's Platform Acquisition Holdings debuted in July 2013 and, after a series of deals, trades at $26. Still, there are plenty of SPACs that either folded or, post-deal, sit below $10 (failed New York cupcake chain Crumbs went public via SPAC). The structure is a way for Joe investor to join forces with legends. As usual, the legend tends to get the better deal.

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