Look Who's Backing SPACs

When GLG Partners, one of Europe's biggest hedge funds, announced plans earlier this week to go public in the United States, it threw a spotlight on a popular, if still little-known investment vehicle: the special acquisition company, or SPAC.

GLG is gaining a stock listing through a merger with a SPAC, Freedom Acquisition Holdings. Companies like Freedom are essentially shell companies formed to acquire another company. They raise funds from investors who sign what's known as a "blank check"--here is my money, now go do something with it. Freedom raised $528 million in an I.P.O. last December.

When SPACs came onto the Wall Street scene in full force a couple of years ago, many skeptical eyebrows were raised. Articles in Barron's, the New York Times, and SmartMoney (including one written by this reporter) warned investors against investing in the high-risk investment vehicles that resemble the crooked "blind pool" offerings of the 1980s.

Institutional money managers, it seems, didn't listen. And most of them are probably richer because of it.

The growth in these offerings has been spectacular. SPACs have raised more than $4 billion so far this year, according to Dealogic. That's more than double what they raised during the same period last year. They account for more than a quarter of all I.P.O.s this year.

So who, exactly, is funding these operations? The major shareholders of Freedom Acquisition represent an intriguing mix of investors.

Fortress Investment Partners, a manager of hedge funds and private equity funds that made its own debut on the stock market earlier this year, owns nearly 3 percent of the company. Assuming Fortress holds onto its shares until the merger is complete, GLG Partners will be in the precarious position of having to answer to one of its competitors at its shareholder meetings.

Two other hedge funds are among the top shareholders--Third Point and Jana Partners, both known for their activist approach to investing. If Freedom had trouble finding an acquisition target, it's a safe bet that these funds could have stepped in with their own ideas.

Most curiously, the owner of 3 percent of Freedom is the investment management firm Baupost Group. The Boston-based firm is run by Seth Klarman, a noted value investor who is often compared to Warren Buffett for his calculated, conservative approach to investing. Klarman wrote the highly sought after, although currently out-of-print book "Margin of Safety: Risk-Averse Value Investing for the Thoughtful Investor." Klarman is so conservative that he currently keeps nearly half his holdings in cash.

Yet Klarman is also a SPAC enthusiast. At the end of March, Baupost's equity portfolio, which consisted of 39 different stocks, included no fewer than 18 SPACs.

So one of the most successful value investors has nearly half of his equity portfolio in the same investments that one commentator had likened to a casino.

Investing in SPACs, as it turns out, can be a very promising way to not lose money. If the company's executives have not found an acquisition during the first 18 to 24 months after their I.P.O., shareholders get their money back (minus fees paid to bankers and lawyers, of course). The worst possible scenario is that an investor will lose about 5 percent of his money in less than two years.

While that's not ideal, it's also rare. According to Dealogic, there are currently 57 of these public companies trolling for targets right now. Another 49 have already announced a deal. Only 5 have had to liquidate because a deal couldn't be reached. With so many private equity funds investing in these companies, a wealth of possible targets sits only a phone call away from any SPAC executive coming up dry on the takeover trail.

And the upside to investing in SPACs? Well, look no further than Freedom Acquisition Holdings.

Shares of Freedom rose 8 percent the day before the deal with GLG was announced, and another 7 percent immediately after the news broke.

Clearly some investors found their exit strategies.

Megan Barnett