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After postcrisis calm, blank-check companies back to wooing Wall Street

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After postcrisis calm, blank-check companies back to wooing Wall Street

A rising number of Wall Street institutions are backing companies that have little beyond their names.

Special-purpose acquisition companies, known as SPACs or blank-check companies, have existed in a relatively obscure corner of the market for more than a decade. Designed to enter the public markets with no assets on hand or business operations in place, SPACs have a short window of time, usually 24 months after going public, to target and acquire a burgeoning private company. That company is then integrated into the publicly traded scaffold organization.

But now, blank-check companies are seeing renewed interest from some of Wall Street's most prominent companies and executives, giving the once "sleazy" market more credibility, University of Florida finance professor Jay Ritter said in an interview.

"When they started well over a decade ago, I would not have predicted that there would be this much staying power," Ritter said.

The SPAC model has been on the rise for several years. In 2017, 33 SPACs conducted IPOs, the highest number since 2007 when 65 SPACs hit the public markets, according to data from Ritter, which studies IPOs. In 2016, 13 SPACs went public.

That growth is not expected to slow any time soon, with the likes of Goldman Sachs Group Inc. and hedge fund Third Point LLC, among others, unveiling plans to back SPACs of their own in 2018.

Goldman Sachs-sponsored GS Acquisition Holdings Corp recently filed for an IPO looking to raise up to $600 million. Led by former Honeywell International Inc. CEO David Cote, GS Acquisition is expected to focus on striking a deal in the industrial sector.

Third Point-backed Far Point Acquisition Corp. also recently filed with the SEC to conduct an IPO, in which it hopes to raise $500 million, according to an amended SEC filing. Former New York Stock Exchange President Tom Farley is leading the SPAC, which is focused on acquiring companies in the financial technology space.

A host of other former corporate and Wall Street executives have found new homes in the SPAC market as well. The upgraded caliber of executives leading SPACs is a leading reason for the changing dynamic in the industry, Ernst & Young LLP Americas Financial Accounting Advisory Services Partners Karim Anani and Alex Zuluaga wrote in a February report.

In 2016, former Blackstone Group LP partner and Managing Director Chinh Chu and Fidelity National Financial Inc. non-executive Chairman William Foley II launched CF Corp., a blank-check company that ultimately acquired life and health insurer Fidelity & Guaranty Life and became FGL Holdings in 2017. Before joining President Donald Trump's administration, Commerce Secretary Wilbur Ross led WL Ross Holding Corp., a blank-check company that combined with Nexeo Solutions Holdings LLC in 2016.

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"In the SPAC space, there have been a lot of very well-regarded executives that have been participating," Ritter said. "The more that do so makes it easier to attract other well-regarded executives."

Goldman Sachs' and Third Point's recent entrances into the SPAC market will add some diversity to their pool of sponsors, which have tended to be private equity companies. Contrary to typical private equity investments, SPACs give private equity companies a comparatively shorter investment that also allows public market investors to participate, said Sara Terheggen, a managing director with law firm NBD Group.

Blank-check companies have drawn criticism in the past because many SPACs liquidate before finding a suitable deal target. A SPAC usually has a specific period of time, set in its registration statement, to close an acquisition.

If the deal is not completed before the SPAC's allotted time period, investors who backed the company during its IPO tend to receive nearly all their money back. Today, SPACs use a mechanism that holds the IPO proceeds in a trust until a deal is struck.

"A SPAC is a finite-life vehicle," said Douglas Ellenoff, a partner with Ellenoff Grossman & Schole LLP, which is working with Far Point during its IPO process. "The hunt only really begins after the closing of the IPO."

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