On December 5, 2007, Camden Learning Corporation consummated its initial public offering, netting $50 million in gross proceeds with the goal of acquiring an operating business in the education industry. While over 150 SPACs have been funded over the past several years, Camden exemplifies a distinct evolution in the vehicle: It is one of many recent SPACs sponsored by private equity firms.
Camden CEO David Warnock is a partner and co-founder of Camden Partners Holdings LLC, a private equity firm focused on health care, education, and business and financial services. SPAC sponsors such as Camden have tapped their senior money managers and experienced dealmakers as executives to lead the search for attractive acquisition candidates.
While SPACs began as vehicles for entrepreneurs and dealmakers to enter into new business ventures, Wall Street began to realize that SPACs could be an effective means to meet certain needs of larger financial institutions and corporations. If credit markets remain dry, if a corporation’s stock prices are depressed, or if other factors contribute to a less favorable environment for traditional acquisitions, SPACs can provide a mechanism to avoid missed opportunities.
SPACs are newly formed corporations, organized for the sole purpose of completing a public offering of securities and acquiring a business. Until the business combination is consummated (or the SPAC dissolves), approximately 99% of the IPO funds are held in trust. When the vote to consummate the business combination occurs, shareholders have the option to vote for the transaction, or to vote against the transaction and convert their shares for cash. Provided the transaction is approved by a majority of the SPAC’s shareholders and not disapproved by more than 40% who also demand to convert their shares to cash, the business combination will occur and those shareholders who voted for it will hold publicly-traded shares of the combined entity.
Private Equity/Hedge Fund-Sponsored SPACs
Private equity firms and hedge funds have sponsored some of the largest SPACs to date. Freedom Acquisition Corp., sponsored by private equity firm Berggruen Holdings, Inc., raised $528 million in its IPO. Freedom recently completed a cash and stock acquisition of London-based hedge fund GLG Partners in a transaction valued at $3.4 billion, by far the largest SPAC acquisition to date. Other notable institutional-sponsored SPACs include Sapphire Industrials, founded by an affiliate of Lazard, and Liberty Acquisition Corp., also backed by Berggruen Holdings, Inc., which raised $800 million and $750 million, respectively.
While these institutions are perceived as not requiring public financing to fund their acquisitions, SPACs can create opportunities for them in certain situations. Private equity firms and hedge funds often have investor/LP dictated requirements to diversify their holdings. In other words, they may not commit to invest more than a certain percentage of their assets in any one industry or business.
As a result, a good investment opportunity may present itself, and if it’s otherwise too big for the institution at that particular stage in its lifecycle, a SPAC might provide a means to capture the opportunity while staying within diversification parameters. In the current market, the SPAC sponsor is expected to fund up to 4% of the gross IPO proceeds and will own both the 20% founder’s interest and the warrants that it purchases with the 4% “at risk capital”.
Private equity and hedge funds are a logical choice as SPAC sponsors because of the numerous opportunities they see. One of the challenges of traditional, individual SPAC sponsors is finding an attractive acquisition opportunity. These institutions see significantly more deal-flow since opportunities are presented to them on a daily basis.
While conflicts of interest between the SPAC and private equity and hedge funds may arise, underwriters can mitigate these by clearly establishing which opportunities will be first presented to the SPAC. In addition, SPAC-sponsor structure can also eliminate some conflicts of interest. Camden is sponsored by the existing Camden investment funds as if it were a portfolio company. Accordingly, Camden’s limited partners have an interest in the SPAC succeeding. Some current deals are sponsored solely by the managing general partner of private equity firms and hedge funds, thereby highlighting conflicts between the SPAC and the funds’ limited partners, who have no interest in the SPAC.
Corporate-Sponsored SPACs
SPACs also present opportunities for public corporations looking to expand their businesses. If the board of directors is presented with an interesting opportunity but is reluctant to issue its stock as part or all of the purchase price due to a cyclical depression in its market price, sponsoring a SPAC enables the public company to raise capital and possibly achieve an acquisition strategy which is anti-dilutive to it by virtue of its 20% founder’s promote. In addition, companies may expand into different industries through the SPAC, whose stock trades at higher multiples, without fear of over-paying in equity.
Oceanaut Inc., a SPAC sponsored by New York Stock Exchange traded Excel Maritime Carriers Ltd., completed its IPO of $155 million worth of its units on March 1, 2007. Excel is a shipping company that specializes in seaborne specialization of dry-bulk cargos. The SPAC vehicle allowed Excel, as shareholder of Oceanaut, to “(1) explore a larger number of opportunities in the shipping industry than would otherwise be available to Excel and in a manner that would not entail substantial changes to its capital structure, and (2) potentially permit Excel, as a company operating primarily in the dry bulk sector of the shipping industry, to diversify into other sectors of the shipping industry.”
Oceanaut entered into agreements with its corporate sponsor whereby the SPAC would have the first opportunity to acquire businesses outside the dry-bulk sector, and the sponsor would have first crack at any dry-bulk opportunity. Clearly defining roles between the SPAC and corporate sponsor, especially where the companies share officers and directors, is critical in fleshing out any potential conflicts of interest before the SPAC completes its IPO. Despite one brief unsuccessful flirtation with an acquisition, Oceanaut continues to search for a business combination opportunity.
The Next Step
When SPACs first gained popularity approximately five years ago, the program attracted entrepreneurial individuals who sponsored the initiative. As they’ve gained acceptance in the market place, financial institutions and corporations began to realize that SPACs are a viable program for them as well. As SPACs continue to evolve, we expect new and creative uses, structures, and applications to develop.
Stuart Neuhauser is a partner and James Mangan an associate of Ellenoff Grossman & Schole LLP, a New York law firm that focuses on all aspects of corporate and securities law, including securities regulation, public and private offerings, mergers and acquisitions, and general corporate and corporate governance matters.
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