Halcyon to Go Public Via SPAC Acquisition

By Emma Trincal, Senior Financial Correspondent |

Thursday, March 13, 2008

NEW YORK (HedgeWorld.com)—Halcyon Asset Management LLC, an $11.5 billion multi-strategy hedge fund manager, is going public through an acquisition by a so-called blank-check vehicle.

Alternative Asset Management Acquisition Corp. (AAMAC), the acquirer, is a special purpose acquisition company, or "SPAC," created last year and listed on the American Stock Exchange. This transaction represents AAMAC's first acquisition and materializes its mission to buy an asset manager. The deal is expected to close in the third quarter pending AAMAC stockholder approval.

SPACs raise money specifically to purchase operating companies and to take them public. They constitute a relatively new underwriting trend that has picked up steam lately. SPACs allow their managers to cash in on companies' needs to go public in a tough market where many traditional IPOs have either been canceled or postponed due to the credit crunch.

For hedge funds, doing an initial public offering via a SPAC is advantageous, for it keeps the process off regulators' radar screens.

"When a SPAC takes a company public through an acquisition, the filing requirements with the Securities and Exchange Commission are just not as rigorous as those imposed by the regulators for a traditional IPO," said Francis Gaskins, president of Los Angeles-based IPO research firm IPODesktop.com, in an interview. This is because have themselves already gone public; they are merely making an acquisition.

"Hedge funds can't stand the glare of full disclosure in this environment," Mr. Gaskins said. "This is like a private deal. It's just subject to shareholders' approval."

So far three large U.S. hedge funds have gone public in the past year through traditional IPOs. But all three—Fortress Investment Group, Blackstone Group LP and Och-Ziff Capital Management, have seen their share prices plummet since they started trading.

In July of last year, as credit turmoil was building, Kohlberg Kravis Roberts & Co. took a more modest approach by filing for a $1.25 billion IPO Previous Reuters Story. But the giant private equity firm appears to have been postponing its plan to go public.

Other firms, such as Citadel Investment Group LLC and Pershing Square Capital Management have been rumored to be contemplating IPOs. But none has made any move in that direction so far, nor confirmed the rumors.

As an alternate route to a full management company listing, some hedge fund firms have opted to float some of their vehicles. But in some cases, the market has already punished these initiatives. Carlyle Capital Corp., a debt vehicle listed in the Netherlands by its U.S. parent company The Carlyle Group, is now struggling to survive since last month as it faces unprecedented margin calls and redemptions. In fact, the fund on Thursday [March 13] was said to be on the brink of collapse Previous Reuters Story.

The AAMAC transaction values New York-based Halcyon at approximately $974 million, according to an SEC filing. Under the terms of the agreement, Halcyon owners will get up to $505 million in cash and notes and will retain interests in Halcyon that will be exchangeable into shares of AAMAC on a one-for-one basis.

"This transaction will enhance our ability to attract and retain the best talent in the business, ensuring our continued ability to build on our track record by having the right people for the right strategies at the right time," said John Bader, co-chairman of Halcyon Asset Management, in a statement. "It will give us a currency for further growth, which will help us motivate employees and support our recruiting efforts."

Hedge funds typically seek a public listing for at least two reasons: to grow to a scalable size to become institutional franchises and to retain talent through offering company stock to key traders.

Mr. Bader will become chairman and chief executive of the new entity, which will be named Halcyon Management Inc. Kevah Konner and Steven Mandis, both vice chairmen at Halcyon, and Tom Hirschfeld, the current president, will retain their respective roles.With this deal, AAMAC accomplished its mission to acquire ownership stakes in a hedge fund, having raised about $400 million for this purpose Previous HedgeWorld Story.

To finance the transaction, AAMAC will use approximately $390 million held in trust, assuming no conversions and excluding deferred underwriting fees. In addition, the SPAC will issue a bond in the amount of $115 million, according to the statement.

"Halcyon has proven through its growth that it has the history, scale, investment and risk management processes, operational infrastructure and capacity to attract large institutional investors," said Michael Levitt, chairman of AAMAC.

Halcyon, founded in 1981, runs Halcyon Fund LP, a multi-strategy fund and the firm's flagship that has posted a net annualized gain of 13.5% since inception in January 1991, according to the filing. During that time, the return of the Standard & Poor's 500 stock index was 11.4% per year.

Halcyon's asset size has tripled since 2000 and is expected to increase by 2.5 times during the next five years, according to the filing.

Aside from its multi-strategy flagship, Halcyon also runs strategies focused on distressed debt, undervalued asset-backed securities, senior secured bank loans and long/short corporate debt investments.

Separately, Halcyon announced that it sold one of its affiliate hedge fund strategies, with $2.2 billion in assets under management. Over the past three years Halcyon has launched three hedge fund strategies under this affiliate business model, a model that Mr. Levitt said the firm likes.

The firm has offices in London and Los Angeles. It has 11 active partners and 119 employees, 50 of whom are investment professionals.

Goldman Sachs and Citigroup Inc. were exclusive financial advisers to Halcyon and AAMAC, respectively.