It has taken him 16 months, but Nicolas Berggruen has finally found something to spend his money on.
The US investor is in exclusive talks with Hugh Osmond’s Pearl Group about a potential takeover of the life assurer.
Under the terms being discussed, Liberty International Acquisitions, Mr Berggruen’s cash shell, would inject £500m into Pearl in return for a 60 per cent stake in the business.
If Liberty’s shareholders approve the deal, it will mark the largest acquisition by a special purpose acquisition company (Spac) in Europe.
It is make or break time for Spacs in the next few months, as investment deadlines approach after a new issue glut two years ago.
Although Spacs have been in the US market since 1993, they exploded in popularity in 2007 at the peak of the debt boom. By the end of that year, 68 Spacs worldwide had raised a record $12bn, according to data from Dealogic – twice as much as in the previous two years combined.
Unless Spac managers find acquisitions, they will be forced to return the capital raised in initial public offerings to shareholders.
“We expect to see most existing Spacs announce acquisitions over the balance of 2009 and early 2010, and with healthier market underpinnings suspect that many deals will be well received,” said John Shaw, a director in Deutsche Bank’s equity capital markets group.
Spacs are cash shells which raise money via an IPO for the sole purpose of making an acquisition, usually within two years.
Any deal needs the support of at least 70 per cent of its shareholders. If nothing is acquired, the cash shell is wound up and the money returned to its investors – usually hedge funds – minus the interest and fees.
Unlike leveraged buy-outs, Spacs do not rely on high-yield debt to fund a deal. They are also among the few buyers able to take assets off the hands of buy-out groups that need to sell.
But critics accuse Spacs of being a fee structure in search of a business model. Once they have made an acquisition, managers charge 20 per cent of the initial equity, encouraging them to close a deal at any cost.
In other words, Spac managers can make money even on bad investments.
“Spacs are highly reliant on the credibility of the management which created them. But if that management has a large financial incentive to do a deal, then the quality of those acquisitions should be questioned,” said Ken Brown, European head of equity capital markets at Nomura.
They also argue that, unlike private equity executives, Spac managers do not help companies become more efficient by stripping out costs.
Investors have been wary of placing money in vehicles that rely on intangible talents of their managers, rather than more traditional accounting metrics.
One of the reasons why Mr Berggruen won support from investors for Liberty International Acquisition is his track record.
In mid-2007, just before the worst of the market volatility caused by the US credit crisis, his Spac Freedom Acquisitions vehicle raised about $500m from investors that included Wellington and Fidelity at about $10 a unit of shares-plus-warrants.
Freedom then agreed to buy GLG Partners, the UK hedge fund group, and the unit price rose to about $18. At the time, GLG said that reversing into Freedom was a quicker, simpler and cheaper route to a US listing than an IPO.
If Mr Berggruen can achieve the same results with Pearl Group, the market can expect Spacs to be kept alive as an alternative asset class for a while.
