May 16 (Bloomberg) -- Kohlberg & Co., Madison Dearborn Partners LLC and Kirtland Capital Partners have resorted to selling holdings to so-called blank-check companies, a path more private-equity firms may follow as other buyers remain scarce.

Leveraged buyout firms stepped up the pace of takeovers in the past five years, aiming to cut costs at businesses ranging from newsprint makers to crane purveyors and then sell them to the public. Now they're turning to special-purpose acquisition companies as demand for IPOs sinks to a three-year low and tight credit markets make it harder to borrow money to finance LBOs.

``We're definitely seeing private-equity firms talk to SPACs as possible exits for their portfolio companies,'' said Thomas Ivey, a partner in the Palo Alto, California, office of Skadden, Arps, Slate, Meagher & Flom LLP. ``The M&A market for traditional private-equity purchasers is closed. The other piece is that the IPO market is closed.''

SPACs, also known as blank-check companies, are publicly traded corporate shells created solely to buy other businesses. Chicago-based Madison Dearborn, whose $60 billion of announced buyouts last year included Canadian phone company BCE Inc., was one of the first LBO firms to turn to a SPAC. Last September, Madison sold paper, packaging and newsprint businesses to Aladabra 2 Acquisition Corp. for $1.63 billion. Madison didn't say whether it earned a profit.

Five months later, Miami-based HIG Capital LLC said it would sell Stream Holdings Corp., a business process outsourcing firm in Richardson, Texas, for $225.8 million. The buyer was a SPAC called Global BPO Services Corp.

`No One to Sell To'

Jerome Kohlberg, a co-founder of Kohlberg Kravis Roberts & Co., is in the process of selling Critical Homecare Solutions Holdings Inc. to a SPAC, according to a Feb. 7 statement. His firm is selling the company for $420 million.

Kolhberg didn't say how much he paid for the Conshohocken, Pennsylvania-based Critical Homecare when he bought it two years ago. He didn't return a call for comment.

Kirtland Capital Partners, a Beachwood, Ohio-based firm run by former Continental Illinois executive John Nestor, said in March that it would sell Essex Crane Rental Corp. to Hyde Park Acquisition Corp. for $210 million. Kirtland bought Essex eight years ago. Hyde Park is run by Rand Logistics Inc. CEO Laurence Levy.

While SPACs are flush with cash, the other buyers private- equity firms have traditionally relied on are unable or unwilling to invest, according to Steven Kaplan, a finance professor at the University of Chicago's business school.

``Buyout firms are selling into these situations where they can't go public by the normal route and there's no one to sell it to,'' Kaplan said.

Secondary Market

All told, SPACs had $13.5 billion on hand to fund purchases as of April 18, according to Morgan Joseph & Co., the New York investment bank. Global IPOs dropped 35 percent in dollar volume from last year through May 15, according to Bloomberg data. Excluding a $19.7 billion offering by Visa Inc., the world's largest credit-card network, the gap widens to 59 percent.

At the same time, the volume of deals in which private-equity firms sold companies to other buyout shops, or secondary buyouts, has plunged about 80 percent so far this year, to $11 billion from $55 billion, according to data provider Dealogic, blocking another outlet for private-equity investments.

The drop was even more severe for secondary LBOs within the U.S., which are down over 90 percent to $2 billion from $26 billion so far this year.

Blank-check companies sell units, usually one share of common stock and one warrant, and use the money to buy assets or a closely held firm. Takeovers must be approved by at least 60 percent of the SPAC's shareholders. Money is returned to investors, less operating costs, if a purchase is voted down or isn't completed within a certain time, usually two years.

Ticking Clock

Fourteen SPACs have returned $1.2 billion to investors since 2003 as of April 18, according to Morgan Joseph data.

As the clock ticks to put money to use, some blank-check companies are finding their pool of money and stock helps in an environment where lenders are pulling back.

``It's nice to have cash in a market where cash is hard to come by,'' said Frederick Moseley, a managing director at LLM Capital Partners LLC in Boston. His firm has a stake in Prospect Acquisition Corp., a SPAC that raised $250 million in November to find a financial services deal.

To contact the reporters on this story: Elizabeth Hester in New York at ehester@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net.

Last Updated: May 16, 2008 00:01 EDT