The market for special purpose acquisition companies (SPACs) suffered in the financial crisis: new offerings have had trouble enticing investors and many previously established vehilces failed to invest their capital within set timeframes. But one new vehicle that was recently in the market, 57th Street General Acquisition Corp, employs new governance structures and fee arrangements that were able to lure SPAC investors back to the table.
SPACs, or blank cheque vehicles, involve gathering commitments from a group of investors with the goal of finding a single acquisition target within a specified time period. Once a target is identified, the investors usually vote to approve the transaction.
Amid credit market dislocation in 2007 and 2008, the vehicles became increasingly popular with private equity firms like Angelo Gordon and Greenhill and Co. Former executives from the Carlyle Group, JW Childs and Apollo Management also formed high-profile blank cheque companies during the period. But after the financial crisis new SPAC formations ground to a halt as LPs dealt with liquidity problems and were unable to commit to new vehicles.
57th Street General Acquisition Corp, which raised $50 million earlier this month, is the first SPAC raised successfully in quite some time. The SPAC’s management includes Mark Klein, ex-CEO of investment bank Ladenburg Thalmann, and Michael Levitt, former head of the New York office of Hicks Muse Tate & Furst (now HM Capital). The Dallas private equity firm shut its New York office in 2001 and Levitt resigned. He later founded Stone Tower Capital, a leveraged loan specialist firm.
The duo's previous SPAC, Alternative Asset Management Acquisition, last year took public financial services firm Great American Group after having had fall apart a prior deal to float of hedge fund Halycon Asset Management.
It lets you get a deal done much more quickly, because it’s quicker to do a tender offer than to do a proxy solicitation and a shareholder vote.
Klein's and Levitt's latest SPAC has several unique terms. Most importantly, rather than requiring a shareholder vote to complete an acquisition, the SPAC will conduct a tender offer for the shares of any investors who decide they want to take their capital out after the SPAC has chosen a target.
“The thing that’s attractive about this structure is it lets you get a deal done much more quickly, because it’s quicker to do a tender offer than to do a proxy solicitation and a shareholder vote,” said Michael Littenberg, a partner at law firm Schulte Roth & Zabel who did not work on this transaction. “It can shave a few months off the process on the back end. That in turn creates a more marketable acquisition vehicle so as a result the SPAC is likely to see more targets than it might otherwise see.”
The structure also benefits the investors, by giving them the chance to leave if they don’t like the target. For a more traditional SPAC, a massive shareholder opt-out would be a problem, as they are usually required to dissolve if a certain percentage of shareholders vote against a deal (usually somewhere between 20 percent and 40 percent depending on the vehicle). But 57th Street General Acquisition Corp only requires 12 percent of investors to opt-in for the deal to go forward. This condition means that 57th Street can close a deal with more certainty as well as more speed.
There are several other provisions that are attractive to investors. 57th Street only has 15 months to find a deal, or the vehicle is dissolved and the investors get their money back.
“Some of the earlier SPACs that were done in 2005 and 2006 had somewhat similar horizons to invest money, but then the periods started creeping up to 24 months, 30 months,” Littenberg said. “So this is kind of setting the clock back somewhat in terms of the sunset provision. From the investor standpoint they don’t have to lock their money up nearly as long if the SPAC can’t get a deal done.”
And perhaps most attractive of all: 57th Street charges a 10 percent carry fee, rather than the 20 percent that had become the standard. The lower carry has nothing to do with the type of assets the SPAC is looking to acquire – the vehicle is sector and geography agnostic.
The ease with which 57th Street was able to attract investors should show other would-be SPAC sponsors that with the right enticements, dealmakers can raise the capital.
“A lot of industry observers are optimistic that the structure will help to jump start the market, and you’ll see more SPACs,” Littenberg said. “Certainly it’s the most positive development we’ve seen in the SPAC market in a long time.”
Littenberg said he has gotten questions from a number of his clients about the structure of 57th Street, and whether the structure might make sense for them. In SPACs as in private equity funds, LP-friendly terms might win the day.