Several readers here (and on the blog, Equity Investment Ideas by Yaser Anwar) have been asking why is super hedge fund manager Seth Klarman invested in “blank check” companies like CDS (Cold Spring Capital) and others. Klarman is a well-known value investor up 6000% since his fund started. His book, “Margin of Safety” sells for $1000 on Amazon.

Negative and inaccurate articles in various national publications have created a negative spin on SPACs, making them seem reminiscent of dot-coms in the 90s going public with little or no assets and shortly thereafter going out of business. However, this time its different, for important structural reasons.

Klarman is specifically invested in blank check companies that are SPACs (special purpose acquisition companies). These have a very innovative structure that, if one is diversified, makes it difficult to lose money.

When a SPAC goes public all it has is a management team and the money it raised in the IPO. Their sole purpose is to buy a company within a certain timeline (say, 12 months). During those 12 months the money raised in the IPO is kept in an escrow. If no deal is consummated then THE MONEY IS RETURNED TO SHAREHOLDERS. In order for a deal to be consummated, the majority of the shareholders have to approve.

Several other aspects of the structure:

- a SPAC usually goes public as a "unit" made up of a share of stock and 1 or 2 warrants. The unit then splits up and the warrants trade separately. This creates hedging possibilities by trading the warrants.
- the management team of the SPAC are often required to buy stock or warrnats on the open market after the IPO.
- many SPACs end up trading for less than cash once public. Since they burn zero cash (because the money is held in escrow) it makes it very difficult to lose money once this happens.

Its a low risk, and possibly low return strategy. SPACs were the rage in mid 2005, meaning that the deals are happening right now so the jury is still out on whether its a high return strategy but the success of companies like Jamba Juice (bought by a SPAC) could be telling. CDS, for instance, has recently announced an acquisitions. Klarman might not be up on his investment yet but he has probably zero risk at this point while he analyzes his prospects.

To keep track of Seth Klarman’s portfolio and all updates we make to it, don’t forget you can “bookmark” it by rating it with four stars. Then you will be notified by email whenever his portfolio changes. In addition, we will be setting up shortly a portfolio of all SPACs that you can track. I like this strategy and once tried, and failed, to raise $10mm or so to do a hedge fund that just invests in SPACs but misunderstandings on what SPACs were made it difficult to raise money for.