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New York—The growth of the Special Purpose Acquisition Company (SPAC, also known as ‘blank checks,’) market illustrates the symbiotic relationship between research and new markets.  SPACs, which are companies that go public in order to raise capital to make acquisitions, have begun to attract alternative research coverage, which has helped the market gain traction with hedge funds, but still lacks the depth of coverage to get broad acceptance from long only managers.

Background

Special Purpose Acquisition Companies (SPACs) are a growing financial vehicle used for raising capital for private companies.  SPACs raise blind pool money (most of which goes into a trust) from the public for an unspecified merger, sometimes in a targeted industry.  In the typical structure, each SPAC is typically sold at $6 per unit for one share of common stock (to be publicly-traded in the future) and two warrants for the purchase of additional shares. If an acquisition is not made in two years, the money is returned to the original investors.

In the United States, approximately US$500M was raised in 2004, over $2B in 2005, over $3B in 2006 and over $12B raised in 2007.   SPACs thrived in 2007 and in the first quarter of 2008, as investors turned to them as an alternative to private equity deals, which were disrupted by the credit crisis.  A record 65 SPACs went public in 2007, raising $11.7 billion in proceeds, according to Renaissance Capital's IPOHome.com.  Prior to 2007 a total of  75 SPACs were issued from 2003 through 2006, raising $5.8 billion.  Volumes are down in 2008, but issuance is continuing despite the current market conditions.

SPAC investing appeals to event driven investors, who view the investment in SPAC warrants as a form of risk arbitrage investment.  Hedge funds make a profit by buying as SPAC when the stock price is down post-IPO and then redeeming their shares at a higher price after the SPAC has made an acquisition and liquidated.       

Research Coverage

Despite the increasing number of SPACs, sell side research coverage of SPACs has been limited by restrictions on covering IPOs.  Also, it is difficult to allocate scarce analytic resources to companies that may unwind in two years.   

As is often the case, alternative research firms have moved in to fill the void.  There are currently two firms specializing in covering SPACs:  SPAC Research Partners LLC and SPAC Investments Ltd.  SPAC Research Partners was founded by former employees of an Indian technology outsourcing company, Global Infozone, who teamed up with a boutique, Sand Hill Research Partners.  SPAC Research Partners offers a few research products, including weekly valuation analysis of warrants and ‘Red Flag’ reports on pending acquisitions which analyze the risks to the transaction, similar to merger arbitrage analysis. 

SPAC Investments Ltd. was founded by Neil Danics a former portfolio manager of a risk arbitrage hedge fund at Deutsche Suisse Asset Management.  The service is offered through www.spacanalytics.com, and includes analysis of a pending SPAC transaction and the probability of the deal being approved by the SPAC shareholders.

Recent Events

 Liberty Lane Acquisition Corp, a SPAC IPO sponsored by Goldman Sachs, withdrew from the market in early May in a closely watched transaction.  Liberty Lane was targeted to long-term institutional investors — pension and mutual funds, rather than the traditional group of hedge funds.  It had fewer warrants and other characteristics to appeal to long-only investors and discourage hedge funds.  Unfortunately, it failed to attract enough interest from traditional investors and was pulled. 

Since Goldman dropped Liberty Lane, the SPAC market has revived with more traditionally structured deals, including Navios Maritime Acquisition Corp, a $220 million SPAC listed on the NYSE issued by a Greek shipping firm, and $49 million Symphony Acquisition.  The market was also boosted by the proposed $688 million purchase of Hughes Telematics from Apollo Management by an existing SPAC, Polaris.

Conclusion

Which comes first, market liquidity or research coverage?  Alternative research has helped the SPAC market grow from its early stages, but as the failure of Goldman’s Liberty Lane structure shows, the appeal to traditional investors is still lacking—at least in the current market environment.   Research coverage plays a role in attracting investors.  The current research, which is focused on hedge funds specializing in merger arbitrage, does not yet resonate with traditional investors, who have been generally slower to embrace alternative research than hedge funds.  The maturation of the SPAC market is one example where has not yet alternative research bridged the gap.