Project blank check

Just as public-company CEOs are bemoaning life on the public market, private equity general partners are going public.

Unlike in the private, private equity market, where limited partnerships reign supreme, the public private equity market is home to myriad structures. Kohlberg Kravis Roberts, for example, has elected to raise public money by listing a Guernsey limited partnership on the Amsterdam Euronext exchange (see p. 12).

Michael Gross, a co-founder of New York-based Apollo Management who stepped down earlier this year to pursue his own venture, has resurfaced as the chairman of a proposed US special purpose acquisition vehicle (SPAC) called Marathon Acquisition.

Gross' new venture is described in SEC filings as a ?blank check company? that will acquire one or more operating businesses. The vehicle, which is seeking to raise $300 million (€234 million) through a listing on the American Stock Exchange, is being underwritten by Citigroup and Ladenburg Thalmann.

Once the initial public offering is complete, Marathon Acquisition will have 18 months to agree to a first acquisition, otherwise the cash is returned to shareholders. The prospectus notes that an acquisition target has not yet been identified, but that the firm will target businesses with strong management and cash flow.

Gross co-founded Apollo in 1990 having worked at high-yield bond specialist Drexel Burnham Lambert throughout the 1980s. In addition, Gross has experience running a public company – he was chairman of Apollo Investment, a publicly traded business development company affiliated with Apollo Management. Joining Gross on the Marathon venture are Adam Aron, the former CEO of Vail Resorts (a former Apollo portfolio company) and Martin Franklin, the former CEO of Jarden Corporation, a consumer products company. Franklin served on the board of Apollo Investment. If successful, following the offering, Gross will own 19.8 percent of Marathon, based in New York.

The offering is to date among the largest such offerings to have been organized. Among the larger SPAC deals to have been completed in recent months has been International Shipping Enterprises' $182 acquisition of Navios Maritime Holding. Several dozen other SPACs have registered to go public, but not all of these have succeeded. Market observers note, too, that Gross is the best-known private equity investor to embrace the SPAC model. Many previous efforts have been what many regard to be of miniscule size, obscure origin and led by people who don't have the same private equity cachet as does Gross.

Senate hearing touches on convergence
Speakers at a US Senate hearing on hedge funds, held last month in Washington DC and overseen by Senator Chuck Hagel, noted a convergence between private equity, hedge funds and other strategies, and highlighted the difficulties of regulating hedge funds because of this. The hearing was held under the auspices of the Subcommittee on Securities and Investment. The event was designed to examine the role of hedge funds in the economy as well as to weigh whether hedge funds need greater regulatory oversight. One speaker, Adam Lerrick, a visiting scholar from the American Enterprise Institute, noted the difficulty regulators would face in even defining hedge funds. ?[T]o try to define a hedge fund I think is a waste of time? It's more a question of defining the type of activity that funds do perform and whether you call them hedge funds or private equity funds or real estate funds or arbitrage funds really is irrelevant,? Lerrick said. He added later: ?I do not know of a single large hedge fund that cannot move offshore in a matter of hours its entire operations. Any attempt to put large-scale regulation on hedge funds, private equity funds? will meet with total defeat, and I think that's something the committee should keep in mind??

At another point in the hearing, Senator John Sununu asked whether the US rule defining an accredited investor should be revised upward in terms of income and net worth. Randal Quarles, undersecretary for domestic finance at the US Treasury Department, called the inquiry ?sensible? but said any change would have to be subject to a ?more comprehensive review of all the potential implications? resulting from such a move.

German law to make squeeze-outs ?faster?
A proposed set of laws in Germany are aimed at making the takeover of corporations ?faster and thus also less expensive,? according to a client memo from law firm Debevoise & Plimpton. The proposed law is part of the Takeover Directive Implementation Act, which was drafted to be in line with the European Takeover Directive. The amended corporate statutes will change socalled squeeze-out procedures, which are generally undertaken by majority shareholders who want to wrestle full control of a corporation from minority shareholders. Current law requires a shareholder resolution in order for a squeeze-out to take place. ?As a consequence, the minority shareholders have the ability to slow down the squeeze-out procedure significantly by bringing shareholder action against such a resolution,? according to the Debevoise memo, which notes that these actions are often settled through costly settlements. Now, a shareholder with 95 percent of both a company's voting rights and voting share of capital may gain a court order to transfer the minority shares. However, the Debevoise memo notes that squeeze-outs may end up getting bogged down due to legal appeals in court.

Singapore considers AIM-like market
The government of Singapore is evaluating a plan to create a stock market similar to London's thriving Alternative Investment Market. According to a report in the Times of London, Singapore is in the process of reviewing whether a ?nomad? model – which would create a lighter regulatory burden on small and medium-sized businesses – would work in the citystate, which already has two stock markets – Singapore Exchange and Sesdaq. Some private equity firms have expressed interest in AIM because it bills itself as an attractive exit route for mid-market portfolio companies. Many Asian businesses have listed on AIM since its launch. For example, there are 29 Chinese companies listed on the exchange.

SEC: Small companies must adopt SOX
Despite pleas from advocates for smaller public companies that these companies face a heavy regulatory burden, the US Securities and Exchange Commission announced last month that ?ultimately all public companies will be required to comply with the internal control reporting requirements of Section 404? of the Sarbanes-Oxley Act. Section 404 requires public companies to certify that internal controls are sufficient. The SEC has spent several months evaluating whether to make certain smaller companies exempt from this rule. An advisory panel to the SEC had recommended that small companies be given a lighter regulatory load with respect to Section 404. The SEC's decision may affect private equity firms in two ways. First, middle-market companies that are being groomed to go public will need to become SOX compliant regardless of market capitalization. Second, and perhaps more significantly, the management of publicly traded companies may become more eager than ever to be taken private with the help of private equity firms, and thereby sidestep the many strictures of the US public markets.

Courts pass judgment on ?tax avoidance? in Europe
Two contrasting recent court decisions in Europe and the UK highlight the varied regulatory terrain with regard to offshore structures. According to a recent client memo from law firm SJ Berwin, the Advocate General of the European Court of Justice has ruled in a case involving Cadbury Schweppes that, according to the European Union's freedom of establishment principle, businesses may seek more favorable tax regimes through the establishment of offshore operations so long as those operations are not ?wholly artificial.? A final decision from the European Court is expected later this year. In the UK, the Court of Appeal issued a decision in March that ?takes a dim view of ?treaty shopping,?? according to the SJ Berwin memo. The vehicle involved in the UK case was established as an intermediary to reduce the tax on interest. The memo also noted several decisions against Barclays Bank which tightened requirements surrounding customers' use of offshore accounts. ?These decisions serve as a timely reminder that extreme care needs to be taken in any offshore operation,? the memo concludes.

Carlyle Japan forms real estate JV
In a move to advance investments in mid-size retail properties in nonmetropolitan Japan, private equity firm The CarlyleGrouphas entered into an alliance with a local real estate consultant, SOW Inc. The joint venture will aim to accumulate more than 10 assets with a value of up to ¥30 billion ($270 million; €210 million). To date two mid-sized shopping centers have been acquired – Power Centre Otsu in Shiga and LOC Town Odate-Nishi in Akita. Carlyle closed its first Asia-dedicated real estate fund, Carlyle Asia Real Estate Partners, with $410 million of commitments in July 2005.

Schwarzman: SOX is ?worst thing? for US
In a joint interview with The Blackstone Group's Stephen Schwarzman and The CarlyleGroup's David Rubenstein aired last month on US public television, Schwarzman called the Sarbanes-Oxley Act the ?best thing that's happened to our business and one of the worst things that's happened to America.? The two appeared on The Charlie Rose Show but were interviewed by CNBC reporter Maria Bartiromo. Both Schwarzman and Rubenstein said their firms have recently been deluged with interest from the managers of publicly traded companies, some with market capitalizations of more than $100 billion, who want to pursue privatizations. Rubenstein attributed this to ?the tyranny of quarterly earnings.? Both private equity leaders argued that regulatory strictures in the US are sending financial business elsewhere.