Posted by: Aaron Pressman on June 26, 2008
I’ve never been a big fan of special purpose acquisition corporations, or SPACs. Those are the publicly-traded pools of money raised to give some financier or other a source of funds to do one or more unknown future acquisitions within a set time, typically two years. If the dealmaker finds a target and shareholders approve, the funds are spent and the newly acquired company becomes part of the SPAC’s portfolio. If no deal comes up, investors get back their money plus interest (minus the costs of taking the SPAC public in the first place).
Reminds me of a closed-end fund. You don’t really want to buy at the IPO, when you may suffer an immediate 6% or 7% loss to the underwriting fees. You can avoid that immediate hit buying after the IPO.
There’s also sometimes a question about excessive fees and deals where funds from a SPAC are used to cover only a portion of an acquisition. You have to ask whether the SPAC manager’s interests are always going to be aligned with those of a SPAC shareholder. And after acquisitions are completed, SPAC share prices tend to be quite volatile. Generally, investors would be better off in a simple stock index fund. A Bloomberg article on the SPAC market noted that over the past five years, the vehicles provided an average annual return of just 6% versus the S&P 500’s 13% average annual gain.
So I was surprised and interested to hear fund manager John Osterweis, who runs the Osterweis Fund (OSTFX), at the Morningstar conference in Chicago talking about owning a SPAC as a good bet in a down market. Osterweis, whose fund has beaten the S&P 500 by 3 percentage points a year since 1993, was on a panel of undiscovered fund managers. Despite his stellar record, the Osterweis fund still has just $350 million in assets.
Osterweis likes the SPAC being run by activist hedge fund manager Nelson Peltz, which is called Trian Acquisition Corp (TUX). He was impressed with Peltz’s efforts to improve performance at H.J. Heinz (HNZ) and thinks the SPAC is a smart way to follow in Peltz’s footsteps.
But he also says a SPAC is a good place to hide in a tumultuous stock market, like we have so far this year. If Peltz makes an acquisition, the shares are likely to go up in price. Until then, Trian keeps the cash in trust. If no deal materializes, Trian gives the cash back plus any interest. “It’s a great bear market investment,” Osterweis says, breaking the pieces down as a surrogate cash holding plus an option on a future Peltz deal. “I can’t figure out how we could lose money on it,” he says. “But it’s not the kind of thing we would invest in in a raging bull market.”