Listed companies created to buy other companies used to be at the shadier end of finance. Now they are high fashion. Gary Cohn, one-time economic adviser to President Donald Trump, and former Republican House Speaker Paul Ryan are among the elites launching so-called special purpose acquisition companies, or SPACs, seeking between them to raise $900 million. The vehicles are a bit like private equity’s poor cousin.
Cohn and Ryan are following a playbook that has generated $31 billion of capital this year so far, according to Dealogic. A SPAC raises money in an initial public offering, then buys a company that wants a stock-market listing without the usual palaver. The founders typically start out entitled to 20% of the company, minus whatever equity is given to the sellers. There’s usually some provision to keep them honest – in Cohn’s case, the backers can’t sell during the first year after a merger if the company’s value hasn’t increased by one-fifth. Hedge fund bosses Dan Loeb and Bill Ackman are among the other elites that have created SPACs, each with their own tweaks.
This may not be Paris Hilton advertising cryptocurrencies, but it’s celebrity endorsement nonetheless. Cohn’s fund makes a feature of his extensive dealings with chief executives and policy makers. Before working for Trump, he was a top executive at Goldman Sachs. Ryan’s SPAC “will leverage his deep network of relationships at the most senior levels of business.” While both claim other qualities too, the implication is that these individuals can open doors. If they succeed they will become rich – or even richer – in the process.
True, there’s more to it. SPACs at least talk not just about buying businesses but running them. Former Citigroup banker Michael Klein, who launched a series of SPACs, boasts a network of executives he can parachute in, including former Ford Motor Chief Executive Alan Mulally.
Private equity firms already do something similar. Big-name SPACs are a version of buyout shops like Blackstone and KKR, but more readily available to the speculative masses and without the financial leverage or the decades-long track record. What both approaches share is a strong underlying message that wealthy, connected people get better deals, and the next best thing to being one of them is to ride on their coattails.