Private equity has a new competitor in special purpose acquisition companies.
These are publicly listed cash shells, created for the sole purpose of buying an existing company. If an acquisition goes ahead, the management skims off 20 per cent of the SPAC’s equity - similar to the carry, or share of profits, that private equity gives partners.
But if the managers of SPACS do not succeed in buying a company within a set time, usually 18 months, shareholders get their cash back - nothing like private equity.
These safeguards are the biggest advantage of a SPAC compared with a private equity fund, whose investors hardly ever complain about poor investment performance or high management fees.
One of the few times they did was in 2004 when Connecticut’s state pension fund took Forstmann Little to court over allegations that the US buy-out house had invested too much in technology stocks at the height of the dotcom boom.
It is too early to know what sort of negligence was encouraged by the recent debt-fuelled private equity boom but fear of finding out may deter investors from joining the next round of buy-out fundraising.
This is where SPACS come into their own. According to Thomson Financial, they have raised $10bn globally this year compared with $2.7bn in 2006 - and the number of SPACS waiting to launch initial public offerings looks healthier than the banks’ M&A pipeline.
It is clear private equity cannot return to doing mega buy-outs soon. But before equity markets go the same way as debt markets, investors are switching to SPACS.
The shift makes sense. The worst that can happen is they do not make any money but, at least, they know what they have bought.
