DALLAS — Thomas O. Hicks, in retirement, might be fishing in the same private equity waters as some small- to midmarket companies that include the new incarnation of his old firm.
Instead of raising money from institutional investors, his new endeavor, Hicks Holdings LLC, is going to the public markets for some of his private equity investments, resurrecting a once-reviled financial instrument, special purpose acquisition companies.
These vehicles give Hicks Holdings permanent capital to compete successfully against institutional buyout firms by enabling it to scoop up companies with a relative minimum of debt, one SPAC at a time, Mr. Hicks said. SPACS are publicly traded vehicles that are used to buy one business or asset. A SPAC can use the money raised only to buy a majority interest in another company.
Unlike executives at midmarket private equity firms such as HM Capital Partners LLC — the firm that Mr. Hicks co-founded as Hicks, Muse, Tate & Furst — the exit to the public markets is immediate, and the founders of each SPAC reap extra profit. And like private equity funds, investors do not know what companies the fund will be investing in when they commit.
Hicks Holdings already completed one SPAC — known as a “blank check” or blind pool company. Hicks Acquisition Co. I Inc.’s initial public offering on Oct. 1 generated $520 million, the largest-ever IPO of a SPAC. (Since then, Norman Peltz, chairman and chief executive officer of investment firm Triarc Cos., said he would raise a $750 million SPAC.)
Hicks Holdings plans to file another similarly sized SPAC to buy a company in the energy industry, Mr. Hicks said. Each SPAC will buy a company valued between $750 million and $2 billion.
Hicks will use a long-term, buy-and-build strategy. Each SPAC will hold the company for between five and 10 years, a relative eternity compared with the average two- to three-year ownership span when Mr. Hicks was at Hicks, Muse.
“We view it as permanent capital and expect to buy one company and use the public company to grow within the industry by acquisition,” Mr. Hicks said.
Not that long ago, SPACs were considered vehicles used for fraud and abuse. No Wall Street firm would touch them, said Michael L. Zuppone, partner in the corporate practice and co-chair of the securities and capital markets practice group of New York law firm Paul, Hastings, Janofsky & Walker LLP. In the 1980s and 1990s, the SEC investigated a number of SPACs because they were mainly raised by third- and fourth-tier, off-off Wall Street groups, many of which defrauded investors, he explained.
‘Decidedly upmarket’
“They have gone decidedly upmarket, where Citibank and Deutsche Bank are underwriting them now,” said Mr. Zuppone.
Anyone with a memory of the early days would not recognize the SPAC industry of today. So far this year, 54 SPACs have raised $9 billion, up from 12 SPACs in 2004. “It’s a way to use a skill set in finding and buying businesses and realize a gain on that,” Mr. Zuppone said.
SPACs are popular because they are a way for smaller investors to get in on the ground floor of a private equity transaction; there are more professional investment managers employed in current firms; ad the American Stock Exchange now lists them, which is a further endorsement, Mr. Zuppone noted.
Hicks Holdings is using the blank-check instruments to buy larger companies than targeted by the rest of his private equity business.
Mr. Hicks insisted, however, that his new venture, which invests family money, does not compete with the buyout firms he used to trawl with. The companies he buys are smaller than those the megafirms are interested in, he said. “We run smaller firms and we have a unique very proprietary deal flow.”
Hicks Holdings is divided into four main businesses: a real estate business, a private equity business, a sports ownership business and a business that owns companies and real estate in Argentina.
The new venture has no plans to raise money from institutional investors, Mr. Hicks said. Hicks Holdings invests for three families, including his own.
“The big difference (between Hicks Holdings and what he was doing at Hicks Muse Tate & Furst) is that we can take a long-term view to really build a company,” Mr. Hicks said. “Institutional private equity is a great business, but it has become more of a short-term holding one where people cycle out (of investments) on a regular basis to run their next fund, and we don’t have that pressure.”
