$300 million to spend in a mere two weeks…but with a catch

Here’s an odd predicament: You have to spend $300 million in the next 14 days or it all goes poof.

Here’s an odd predicament: You have to spend $300 million in the next 14 days or it all goes poof. That’s what’s facing Michael S Gross, a co-founder of the big private equity firm Apollo Management and a director of Saks. And a similar conundrum could be in store for a string of other big-name gamblers on Wall Street: Ronald O Perelman, Bruce Wasserstein and Nelson Peltz, among them.

Gross, a 46-year-old entrepreneur with a penchant for shoot-for-the-moon risk, is one of dozens of deal makers who have recently piled into an obscure corner of Wall Street — one of the few places amid the market decline where money is still gushing in. If you haven’t heard about this little netherworld, you will: it is called— short for Special Purpose Acquisition Companies(SPACs). In the 1990’s, a variation on the same idea was called a “blank check company.”

Think of it is as a publicly traded buyout fund — or perhaps, more accurately, poor man’s private equity. Average Joes finally get access to Masters of the Universe, at least that’s the sales pitch.

Story continues below this ad

Here’s how it works: Average Joe buys shares in an initial public offering (IPO) for an investment company with no assets to speak of other than the pot of money from the IPO The company’s sole mandate is to make one big acquisition. Average Joe has no idea what it will buy. And frankly, neither do the folks running the investment company. It’s a blind bet that the Masters of the Universe will live up to their name.

Of course, there’s a catch (there is always a catch), and here’s where Gross enters the picture: These investment companies have only 18 months to 24 months to find something to buy with all the money they raised and get shareholders to sign off on the acquisition. If the investment company can’t find an acquisition, it must dissolve itself and give back the money to shareholders, less the costs it incurred on its failed hunting expedition for a takeover target.

Gross started a SPAC called Marathon Acquisitions and raised $300 million in the summer of 2006. Take a look at the calendar: his 18 months are almost up. Starting today, he’s got exactly 14 days left; that’s only 10 business days.

The way people like Gross get paid is by making sure they can get a deal across the finish line — not necessarily how great an investment it turns out to be five years later. If Gross can persuade shareholders to give the deal the thumbs up, he gets — are you sitting down? — 20 percent of the entire company. That’s a lot more than the 20 percent of the profits that private equity players take for at least ostensibly improving a company. And all he has to do is hold onto his shares for six months to a year after the deal is complete before he’s free to dump his shares.

Story continues below this ad

The timing of these SPACs may be telling: with the market in turmoil, promoters say they should have a good chance of picking up distressed assets that would have gone to private equity firms and maybe buy some businesses from private equity themselves. Some call them the next version of private equity. It’s even possible some SPACs could end up buying entire private equity firms, allowing firms that wanted to follow in Blackstone Group’s footsteps to become public through the back door even though the IPO window closed on them. They might even buy other public companies.