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Private equity-style investment goes public for the first time in Canada

Canada’s first Special Purpose Acquisition Corporation (SPAC) is on the hunt for a deal with a privately-held middle market company that will help it punch above its $100 million weight. If everything goes according to plan, the SPAC could bring private equity-sized returns to retail investors in the TSX-listed shares.

Dundee Acquisition Ltd. is the first company in Canada to take advantage of a roughly six-year-old framework allowing a publicly traded shell corporation to use money raised in the market to finance the acquisition of an existing business.

“Investors put in money. It goes into a trust account for them, and when we find a transaction we bring it to the investors and they get to vote on whether or not they want to take part in the transaction or get their money back,” said Dundee’s director and chairman David Goodman.

Goodman wants to use $100 million that was raised in the sale of $10 Class A units (DAQ_u.TO) to buy into a company with an enterprise value of $200 to $800 million; a capital starved middle ground he says is being underserviced by institutional money managers.

“There are a lot of large pools of capital and there are private equity funds that specialize in the lower level of investment, sort of under $100 million. But there have been very few deals done between $100 and $500 million. We think that represents an opportunity for us to fund an appropriate acquisition that has some predictability of cash flow and is looking to make that transition to a public company with the deal certainty that Dundee can bring to the table,” he said.

Dundee is betting investors will be drawn in by a private equity-style investment that allows shareholders to walk away should they get cold feet. Dundee is also putting $4 million worth of skin in the game before the $100 million segregated trust account of investor money is in play. On top of that, they’re taking care of all management fees and salaries prior to a successful acquisition.

Dundee has two years to hunt for a target company and get approval from a majority of shareholders to make a deal after the close of the IPO on Tuesday.

If a suitable acquisition target is found, a majority of investors must vote on the proposed M&A action. If they vote in favour, investors can either give up the shares, but keep the warrants, receiving more than $10.00 cash per share. Or they can keep both the shares and the warrants, making their cash available to fund the acquisition.

“The new company would take over Dundee Acquisition Corp., likely change its name, and bring in its own management team and board of directors. For Dundee, we invest $4 million at the onset. So we insure that $100 million is worth $100 million by paying all of the costs associated with operating the corporation and finding the acquisition,” said Goodman.

If nothing suitable comes up it’s only Dundee that takes a hit.

“There is always a risk. And if that happens, we lose $4 million but our investors are still protected by virtue of having their $100 million sitting in a separate and segregated trust account,” said Goodman.

While this structure may be new to Canadian capital markets, it’s certainly popular abroad. But Goodman says Dundee isn’t brashly delving into new territory. The company apparently spent the better part of a year working with lawyers and negotiating with Canadian regulators to amend Canada’s 2007 rules to fall more in line with U.S. SPACs that Goodman says tend to be more successful.

“I believe there were approximately 64 different amendments to the regulation to make them match up more closely with what they have in the U.S. That’s what I think was one of the more significant hurdles to overcome,” he said.

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