Dealmaker declared 2007 The Year of the SPAC, and what a blank-check bull-run it was, as special-purpose acquisition companies surged into the LBO vacuum. Averaging $183 million per deal, 66 SPACs raised $12 billion in 2007, while also proving forceful in the most active U.S. IPO market since 2000.

With this royal year crowned by kings of the hill Martin Franklin and Nicolas Berggruen—deploying their first fund in the $3.4 billion acquisition of British hedge fund GLG Partners in December 2006 and then raising a second fund worth $1.04 billion in December 2007--the hot streak appeared fueled for 2008. But after burning relative rubber with 12 new issuances worth $3.4 billion in the first quarter, SPACs—shells-by-design for raising IPO capital to acquire closely-held operating companies--shrunk to just one $34 million second quarter deal.

Then came signs of shifting back into gear. In May, the $433 million Heckmann Corporation became the first SPAC to list on the Big Board, transferring from Amex. And there was Goldman Sachs’ well-publicized SPAC IPO underwriting debut. But its $350 million Liberty Lane deal failed to price, quickly dead-ending and triggering questions over SPACs’ long-term investment appeal.

One answer materialized just last week: the $3.2 billion Hicks-Blackstone SPAC IPO of Graham Packaging. Handsome-looking at first—a six-times multiple of Hicks’ $552 million fund—the deal’s warrant pricing, typically the early barometer of success, fell flat. So the question remains--how well paved is the road ahead for the one-time funny car that became a post dot.com ambulance before hot-rodding through 2007 and then seeking re-ignition in mid-2008?

That’s what we asked a dozen influential hedge fund, PE and VC fund, corporate and other guests at Doubledown Media’s June 24th SPAC Thought Leadership Forum in New York City, thereafter inviting several attendees to provide comments. Their collective look under the hood revealed this about SPACs: it’s a tune-up or two shy of a reliable ride.

Gear Box

Corporate lawyer Barry Grossman, a founding member of New York-based Ellenoff Grossman & Schole LLP, has been involved with over 50 SPACs, closing 17 financings. He says they are a good product. “Just look at who is getting involved,” he says, pointing to big law firms (who once considered SPACs “gimmickry”), major banks (Citigroup, Merrill, Goldman) and billionaires (Hicks, Ron Perelman, Nelson Peltz). “SPACs are hardly at a crossroads.” In early on SPACs, Grossman sees an evolution from cookie-cutter to complex. “The dealmaking time frame has expanded, and there are more back-end options, such as concurrent private placements, “he says, adding that, “shareholder protections are much improved.”

Indeed, the risk-reward structure favors public money. After escrowing their cash in whole or near-whole trusts, investors can liquidate their interest and get their investment back if the deal is not approved or if the deal is approved but they vote against the transaction.

“I do not know of any situation where a shareholder could not get his money out,” says Grossman, who credits the SEC for setting some basic ground rules. That’s an improvement from former SEC chairman Arthur Levitt’s comments in the Washington Post earlier this year, red-flagging blank-checks as “the ultimate in terms of lack of transparency.”

Perhaps the nefarious SPACs of yesteryear, but today’s blank-checks are at least more transparent than private equity deals. The SEC requires financial statements and reviews shareholder proxies for all U.S. (not foreign issued) acquisitions, and just approved the NYSE’s proposed rules for SPAC listings.

SPACs are marketed largely on the corporate reputations of sponsors and management teams. The bet is on the jockey, and Grossman has his chips ready: “The great deals are out there, and the IPO market will come back.”

Nicholas Ponzio, Jr., president and CEO of leading securities firm Hill, Thompson, Magid & Co, says SPACs brought life back to capital raising and dealmaking--and are here to stay. “Some procedural issues still must be worked out, such as Regulation M,” says the 20-year securities industry veteran, “but the product is much improved from five years ago.”

Ponzio equally likes the marketplace’s growing maturity and performance-driven model. “Some SPACs blew up because of inexperienced people treating SPACs like low-hanging fruit,” he says, “but second stage funds like Navios II are a testament to people clearly investing the time in developing deal structures and negotiating skills.”

While deal sizes have scaled up significantly since 2003, Ponzio would like to see better balance in the market. “Martin (Franklin) and Tom Hicks are driving the market upwards,” he says, “but there should still be recognition for the entrepreneurial and incubative end of the spectrum.”

Hummer or Smart Car?

James Hauslein, on the other hand, believes that bigger is better in total transaction size--$500 million to $1 billion plus. That’s unsurprising, given his independent directorships with GLG Partners and Liberty Acquisition Holdings—the $1.04 billion follow-on fund from Mssrs. Franklin and Berggruen. “Size matters,” says Hauslein, formerly CEO of Sunglass Hut International and now running his own $200 million SPAC. “You have to be ready to go public, which means carrying a market capitalization that can attract institutional investors and a research following. Think about auditing, compliance and other costs—rounding errors to big companies, major hits to smaller enterprises.”

He also finds himself setting people straight on how SPACs work. “They may be ideal for companies seeking capital, liquidity or both, but even in this less leveraged environment, they are not suited for all deals. Think again if you are looking to cash out and retire via a SPAC, for instance.”

And he acknowledges that SPACs still have room to grow. “There’s no question that SPACs have arrived as a viable structure, but when you compare the total raise since 2006 with, say, Blackstone's private equity funds for investing in similar transactions, SPACs are still a drop in the capital bucket. And I’d say we are currently in a shakeout period, waiting to see if enough good deals can get done relative to the number of SPACs raised in the past 18 months."

And speaking of looking at deals, aspirants on the prowl have a powerful tool in the Virtual Dataroom tool from financial communications leader Bowne & Co. Calling SPACs “a great capital-raising vehicle in credit-crunched times, especially for private equity investors shut out by the banks,” vice president of business development Robert Bocksel says that Bowne sees SPACs as a subset of the IPO market—with the same filing and documentation requirements—and thus ideal for running through the Virtual Dataroom.

“As large capital pools,” he says, “SPACs benefit from reviewing a wide target portfolio. Virtual Dataroom makes for a quick, cost-effective look at multiple products and companies—it’s a deal lubricant and accelerator.”

Interest in this one-stop tire-kicking and due diligence machine is hot, especially from foreigners eyeing U.S. assets in these depressed-dollar times. “Bankers love it, too,” says Bocksel. “A roomful of suitors is just an e-mail away, driving competitive tension, and consequently, pricing. Plus it’s web-based, which means no more poring through bankers’ boxes—it’s portfolio review anywhere, anytime.”

Paul LaRosa has had a long look at the SPAC evolution. His current shop, the Maxim Group, was spun-off from international specialist bank Investec, which had acquired the brokers of one of the original SPAC pioneers that handled an early wave of retail-driven deals in the 90's. "Of the 13 deals announced," recalls LaRosa, a senior managing director and SPAC specialist on the capital markets side, "12 were consummated, and at one time or another, all traded well, doubling and even tripling in price." Winding forward from the free-wheeling dot.com era (when the SPAC value proposition no longer made sense) through 2003 to 2006 (when hedge funds started picking up on SPACs, and deal sizes steadily increased) and then over the last 18 months (when SPACs gained more popularity with bulge bracket underwriters), LaRosa, like Hauslein, is in a wait-and-see mode.

"The last few quarters saw the market saturated with paper," he says."The supply has to slow and the market has to rebound before I see traction again." Noting how previously announced transactions are getting stuck in renegotiations and their multiples boiled down-or new deals failing to sizzle-LaRosa says the forest has to clear before new growth can begin.

"After we cycle through previously issued paper, I see the first deals coming out being of smaller size or with seasoned management teams that have successfully done SPACs before. If they trade well, that could set the stage for bigger transactions, but I think we have yet to see if the larger SPACs can truly bring value to the public markets."

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