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Canada's four remaining special purpose acquisition corporations, or SPACs, are likely to steal a page from U.S. peers in coming months by acquiring companies from private equity funds that need cash out on their investments.
SPACs debuted last year on the Canadian stock market, with six companies raising approximately $1-billion. They are sometimes called "blank cheque" companies because investors put their money in before knowing what management will do with it. In the U.S., 241 of these companies have raised $32.6-billion for acquisitions over more than a decade.
Two Canadian SPACs announced transactions in the past two months and there is pressure for the remainder to do deals soon. Blank-cheque companies must put their money to work within two years or hand it back to investors.
In the U.S., since the first of these companies appeared in 2003, 77 SPACs failed to find a deal and had to return their capital, according to research from SPAC Analytics.
Executives at Canadian SPACs and investment bankers who work in the sector say there are deals brewing with private equity funds that want to sell long-held companies but cannot attract investors to an initial public offering, as the Canadian IPO market has been weak this year.
"Any private company that's considering raising capital through an IPO is ideal for a SPAC acquisition, because in both cases, the business owner will accept a slight discount on the valuation to gain access to public markets," said one Toronto-based SPAC executive who is looking at a number of potential acquisitions from private-equity owners.
If Canadian SPACs do manage to acquire companies from PE funds, they will be following a trend seen at U.S. SPACs in recent months.
The American IPO market is also moribund, and SPACs have stepped up for PE-owned companies that wanted to go public.
In March, a SPAC launched by financier Wilbur Ross bought U.S. chemical-distribution company Nexeo Solutions Holdings LLC for $1.6-billion from private equity fund TPG Capital Management LP, which acquired the company in 2011. Mr. Ross, a veteran of both private equity and SPACs, told Bloomberg at the time: "After a few years, [private equity] investors want you to realize the gain … you're kind of forced to sell things fairly quickly. With a SPAC, our investors can each independently decide when they want to sell their shares, and I don't have to liquidate my position."
Other recent deals saw a SPAC led by U.S. shale-gas pioneer Mark Papa buy a Texas oil and gas company named Centennial Resource Production LLC in July, after its PE owners initially filed for an IPO, and Chicago restaurant entrepreneur Larry Levy use a SPAC to acquire the 550-outlet Del Taco Inc. chain for $500-million from a PE fund.
In contrast to recent U.S. deals, the two Canadian SPAC deals announced to date saw Infor Acquisition and Dundee Acquisition acquire stakes in companies that were already public. Those who work in the sector – SPAC executives and investment bankers – say the two deals reflect the investment strategies of founders at each SPAC.
Infor plans to buy into a company being spun out of Element Financial, which is an investor in the SPAC. Dundee is investing in a struggling real estate company, a sector that is familiar territory for the SPAC's founders, financiers Ned and David Goodman.
The four Canadian SPACs that have yet to acquire assets all feature private-equity veterans in leadership roles. They are Acasta Enterprises Inc., which has a $400-million war chest; Alignvest Acquisition Corp., which raised $225-million; Gibraltar Growth Corp., which has $100-million to invest; and Kew Media Group Inc., which raised $75-million. Acasta, the largest, is led by former Onex Corp. managing director Anthony Melman.
These SPACs are now negotiating with private-equity firms that typically invest in companies with a goal of selling the business within five to seven years, and face firm deadlines on cashing out at the end of 10 to 12 year lifespans of their funds.
Canadian and U.S. private-equity funds raised record amounts of capital in the run up to the 2008 global financial crisis, and are now sellers of companies bought in that era.
Andrew Willis