In reality, SPACs could be the safest way to get a piece of the private equity game. Take a look at TAC Acquisition Corp. (TACA.PK). As with most SPACs, TAC went public via an offering of 20 million units in June 2005. For $6, investors received one share of common stock and two warrants with a $5 strike price (that were instantly in the money). Investors knew from the prospectus that TAC would try to acquire a technology company, and who the management was. Note that private equity funds raise billions of dollars without revealing much more.
The prospectus also revealed a number of safeguards. Most of the proceeds would be put in escrow pending an acquisition. The shareholders would receive a vote. If no acquisition was closed by the target date, then the escrowed funds would be returned. Also, a sponsor had agreed to purchase $2 million worth of warrants in the open market following the acquisition, lending support to trading as the warrants and shares became separately listed.
After some time, TAC found a target company, Aviel Systems, an IT provider with approximately $75 million in revenue and positive cash flow. But shareholders didn't like the deal. On December 29, 2006, shareholders voted to reject the acquisition. As a result, TAC formed a plan of dissolution, which shareholders approved on February 13, 2007. Under the plan, TAC will return $5.6941 in cash per share.
After the return of capital, original TAC investors will have lost less than $0.31 per share, or about 5%. For this risk, investors not only had a chance to participate in the upside via the common, but also had two warrants essentially giving them a leveraged, long-dated call option, and voting rights that you won't find anywhere else on Wall Street.
That kind of risk-reward setup is probably what attracts legends like Stevie Cohen and Seth Klarman. I have yet to invest in a SPAC, but several are on my radar.
TACA 1-yr chart
Disclosure: Author has no position in TACA.PK (which will dissolve effective February 21, 2007).
