Private equity has a new competitor: SPACs.

These special purpose acquisition companies are publicly listed cash shells, created for the sole purpose of buying an existing company. If the acquisition goes ahead, the management skims off 20 per cent of the SPAC’s equity – like the similar share of profits that private equity gives partners.

But if the managers of SPACs don’t succeed in buying a company within a set time frame, usually 18 months, shareholders get their cash back – nothing like private equity.

These safeguards are the biggest advantage of a SPAC compared with a private equity fund, whose investors hardly ever complain about poor investment performance or high management fees. One of the few times they did was in 2004 when Connecticut’s state pension fund took Forstmann Little to court over allegations that the US buy-out house had invested too much money in two technology stocks at the height of the dotcom boom.

It is too early to know what sort of negligence was encouraged by the recent debt-fuelled private equity boom, but the fear of finding out may deter investors from joining the next round of buy-out fundraising.

It’s clear that private equity cannot return to doing mega buy-outs soon. But before the equity markets go the same way as debt markets, investors are switching to SPACs. The worst that can happen is they don’t make any money, but at least they know what they have bought.

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