A reader asked me a very nice question a while back- what are blank check companies? He sought the explanation after perusing Seth Klarman's portfolio on Stock Pickr. Furthermore the reader noticed two blank check companies in Seths's portfolio, one with a focus on acquisitions in India (symbol: IGC) and another with acquisitions in China.
He wanted to know if I had any idea behind the rationale of putting money into these companies? "Investing in India and China sounds nice but both of these companies have made no prior acqusitions so it seems to me as if money is being thrown blindly at them like a dice roll."
Interesting comments by the reader & thanks for bringing this issue to light.
I replied to him-
While I'm not sure why Seth would invest in them I can say with conviction that he has some sort of edge. What you are seeing is just the tip of the iceberg and if you drill down in the filings you will probably notice a thing or two that will elucidate the rationale.
Not sure if you're aware of mezzanine financing, they pretty much are blank check companies. There are 1000s if not millions of companies who do not qualify for bank level financing. That's where mezzanine financing aka BCC comes in. They provide them bridge capital, often at much higher rates since they are taking more risk, and once the company regains its footings they sell their stakes to other companies who operate LBOs/PEs on a smaller level. That's how KKR and the big boys started out.
At RBC my boss told me about a friend of his who basically took ads out in the newspaper for companies looking for financing. He was connected with BCC and often pitched ideas of the companies who approached him to them.
He acted as a broker who got a 5-10% commission of totally financing arranged through him. Its sort of like VC investing, you invest in 10 good companies, you get them to give you fancy warrants aka derivatives and if 1 of them makes it big you make good on all your 10 investments.
There are lots of intricate details involved but thats the basics of it.
On another note- The next student discussion is coming up very soon, so if you'd like to participate please email me (yaser AT yaseranwar.com). Thanks.
Tuesday, December 26, 2006
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1 comments:
Klarman is specifically invested in blank check companies that are SPACs (special purpose acquisition companies). These have a very innovative structure that, if one is diversified, makes it difficult to lose money.
When a SPAC goes public all it has is a management team and the money it raised in the IPO. Their sole purpose is to buy a company within a certain timeline (say, 12 months). During those 12 months the money raised in the IPO is kept in an escrow. If no deal is consummated then THE MONEY IS RETURNED TO SHAREHOLDERS. In order for a deal to be consummated, the majority of the shareholders have to approve.
Several other aspects of the structure:
- a SPAC usually goes public as a "unit" made up of a share of stock and 1 or 2 warrants. The unit then splits up and the warrants trade separately. This creates hedging possibilities by trading the warrants.
- the management team of the SPAC are often required to buy stock or warrnats on the open market after the IPO.
- many SPACs end up trading for less than cash once public. Since they burn zero cash (because the money is held in escrow) it makes it very difficult to lose money once this happens.
Its a low risk, and possibly low return strategy. SPACs were the rage in mid 2005, meaning that the deals are happening right now so the jury is still out on whether its a high return strategy but the success of companies like Jamba Juice (bought by a SPAC) could be telling.
-James Altucher
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