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The complete lack of deals more than a year after the first SPAC made its debut is ominous for those involved.

Mark Blinch/Reuters

The resounding silence from Canada's first generation of special-purpose acquisition corporations, or SPACs, is likely to be broken some by the sector's first takeover deals, which promise to be a critical test of the structure's ability to deliver on its hype.

Six SPACs have been launched with considerable fanfare since April, 2015, as high-profile founders from private equity and banking tapped into demand from retail investors and pulled in more than $1-billion.

The concept behind a SPAC is simple: Founders raise money, then find companies to buy, with the caveat that investors get to approve any acquisition. The structure was invented on Wall Street in the 1990s and Canadian regulators cleared the way for the SPACs in recent years, with the first domestic offering coming during 2015's red-hot market for initial public offerings.

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The catch for founders is that SPACs must do their buying in a relatively short time frame. Acquisitions have to be made within two years, or investors get their money back. So the complete lack of deals more than a year after the first SPAC made its debut is ominous for those involved.

Law firm Torys LLP said in recent report that the future of the sector is riding on the results from the first generation of companies. The lawyers said: "Long-term, the success of the SPAC in Canada hinges on whether the SPACs that have gone public will complete qualifying acquisitions within their tight time frames."

The SPACs deemed most likely to bring the first transaction to investors include the first one launched in Canada, Dundee Acquisition Ltd., where sources say management is working on acquiring a real estate portfolio. Another candidate for a debut deal is Infor Acquisition Corp., which can tap a deep network of backers that include former CI Financial Corp. boss Bill Holland and Element Financial Corp. Dundee and Infor could not be reached for comment.

A lack of results to date does not reflect a lack of activity. Sources say the largest domestic SPAC, Acasta Enterprises Inc., dove deep into negotiations on at least two deals in recent months, including the potential purchase of Toronto-based waste disposal company GFL Environmental Corp., which is privately owned. Acasta co-founder Anthony Melman declined comment. Acasta has a $403-million war chest.

What's interesting about the Acasta speculation is the reason why takeover talks broke down. According to a source with knowledge of the negotiations, Acasta's blue-chip list of directors and advisers nixed deals over concerns with the rich valuation demanded by potential sellers.

Along with Mr. Melman, a veteran of private equity firm Onex Corp., Acasta's backers include Belinda Stronach and current or former chief executive officers of Air Canada, Canadian Pacific Railway, Royal Bank of Canada and Bank of Nova Scotia.

Giving investors the ability to make or break each acquisition is new territory in Canadian capital markets. If deals do get announced, investors will learn if Canadian SPAC founders avoided the pitfalls encountered by their U.S. predecessors, who ran into a shakedown after creating the first SPACs on Wall Street in the 1990s.

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In the U.S. market, the structure was gamed by a crowd that came to be known as the SPAC mafia. These investors, mostly hedge funds, would buy stakes in SPACs, and then use their ability to block acquisitions unless the founders agreed to give them a larger proportion of the deal's upside. Lawyers and bankers who created Canadian SPACs claimed to have designed a better structure when the companies made their debut, but none of the domestic SPACs have been tested.

While giving investors veto power over acquisitions helped to sell SPACs during their initial public offerings, these provisions add uncertainty to the takeover process, and can leave SPACs at a disadvantage versus rivals such as traditional private equity funds when bidding in corporate auctions that are hotly contested and run on relatively tight schedules.

The lack of successful takeovers from SPACs comes during a period that featured a sharp drop in overall mergers and acquisition activity, in part because potential sellers were spooked by the volatile equity markets seen earlier this year. Thomson Reuters data show that through the first three months of 2016, the value of Canadian private equity buyouts was down 22 per cent versus the previous year, with just 59 transactions announced, the fewest number of deals seen in a first quarter since 2010.

At a time when there are relatively few companies on the auction block, market dynamics dictate that established, long-term players in the private equity market, such as the Canadian pension plans, see attractive buyout candidates long before such opportunities percolate down to the newly launched SPACs.

Conditions are now far more conducive to deals. Rising equity markets mean that potential sellers can expect to receive decent valuations on their business. Competition still exists for attractive companies, but SPACs are looking to make acquisitions in a small-to-mid-market sectors, where there is less interest from the pension funds and established private equity companies.

And SPACs are sitting on cash and know that the clock is ticking when it comes to putting this money to work. Either takeovers get done in the coming months, and the sector proves its merit, or the SPACs risk going down as a passing finance fad.

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