The origins

Special Purpose Acquisition Companies were first introduced in 1990s by investment bankers David Nussbaum, Roger and Robert Gladstone, who were among the founders of EarlyBirdCapital, a boutique investment banking firm which since then launched and assisted a remarkable number of SPACs. After them, many other large investment banks started launching and backing SPACs, mostly in the US.

The instrument

These companies consist in a so-called Blank Check Company, which has in fact no significant operation and once it is listed is worth exactly the cash it possesses. Before launching a SPAC through an IPO, the management team leading the vehicle must go through a fundraising campaign to collect orders from investors interested in the opportunity. In this phase, the experience of the management team is the only real asset that the company has to offer, as it will be up to them to drive the success of the investment. Once investors have been gathered, the company goes public and the proceeds received from investors are safely stored into a so-called “escrow account” which is made available to the management team only with a vote from the shareholders (the investors). Starting from this moment, the management team has a 24-month time window to seek and propose a deal (i.e. a private company they want to merge with and hence indirectly list). So, up until the deal is proposed, this company is just a listed pool of cash doing nothing but waiting for opportunities.

As soon as a deal is proposed to investors, they are gathered at a meeting where they are asked to vote in favour, or against, the proposed deal. Note that this is an interesting feature of this type of investment vehicles, allowing investors to have complete control over the decision process. If the required majority of votes (much higher than the classic 50%+1) is not reached, the deal is rejected and there are two possible scenarios: either the SPAC has still time to look for and propose another company, or it doesn’t; in case the time has expired, the company is entirely liquidated and the money provided 2 years before in the escrow account is given back to investors, together with potential accrued interests given from the account in which the cash was invested. If, on the other hand, the required majority of voters approves the deal, the business combination is carried out. Also in this case, two scenarios are available to shareholders: an investor voted either in favour of the transaction, or against. In this last case, again, the investor will get back its funds from the escrow account. For those who – instead – voted in favour of the deal, the process will make them the new shareholders of the now-public company, listed through a reverse merger process.

There are advantages to investors…

First of all, investors are provided with a tool limiting the downside of the investment to virtually zero, while still retaining significant upside potential. Indeed, as the IPO is completed, investors are typically given both shares and warrants, which are options on newly-issued shares (please note that owners of warrants, upon exercise, increase their percentage of ownership of the company against those shareholders without warrants, who are consequently diluted). Thus, in case of success of the business combination, investors can increase their return by exercising – at specified moments and under conditions outlined in the admission document of the SPAC – the warrants they were given, whereas in case they don’t approve the proposed deal, they can vote against it and receive their capital back at no risk.

Another plus of this instrument is the fact that, ideally, investors could liquidate their shares the day after the IPO of the SPAC and retain the warrants, thus being able to profit from future possible increases in stock price.

An interesting feature of SPACs is the fact that – as previously stated – investors are given the unique opportunity to control the decision process of the management team, which in fact is not allowed to vote in that occasion.

… and to target companies

One of the most important features of SPACs, from the standpoint of the target company, is the fact that it can become listed avoiding the typical long and demanding IPO process. Indeed, as soon as the “business combination” becomes effective, the former SPAC ceases to exist and the target takes its place as a publicly-traded company.

In addition to the relatively smaller effort required, the costs of the operation are in general lower compared to those of the IPO, because, for example, the amount of documentation required for the business combination is far smaller, and the fees are lower too.

Another aspect encouraging entrepreneurs towards a SPAC-driven listing is the fact that in this operation there is no market risk, as the entire capital needed to liquidate existing shareholders has been already raised and is safely stored in the escrow account. So, for example, adverse market conditions affect the listing decision in a far reduced way than it would have for a typical IPO, where the conditions of the market and the risk aversion of investors are crucial in determining the amount raised by the company.

Potential downsides

Despite the considerable advantages provided by this type of vehicle, there are a few downsides for both investors and target’s shareholders.

An analysis on US SPACs listed from 2008 through 2015 has shown that if an investor had constructed a portfolio of securities listed through a SPAC and another portfolio of securities listed through traditional IPO processes, the first portfolio would have been characterised by larger volatility than the latter, but that this larger volatility would have been coupled with higher average returns. Therefore, SPAC-listed securities result being more speculative than their peers.

A second potential downside for investors is the fact that for the first period after the IPO, and after the business combination, liquidity for the shares seems to be relatively scarce, meaning that investors looking for liquidation may have to be ready to suffer some price jump.

Another aspect SPAC investors cannot disregard is the fact that their investment outcome is tied to the performance of a single company. This is in fact a kind of investment going strongly against even the most basic diversification recommendations.

One last potential downside, this time affecting the target company’s shareholders, is the dilution effect they have to suffer from the exercise of warrants granted to SPAC investors.

SPACs in the Italian economic landscape

SPACs have only recently entered the Italian stock market. However, there seems to be great potential in the future because of several structural reasons linked to the Italian economic landscape. Firstly, there are many family-owned mid-market companies struggling to find industrial partners to raise capital and keep growing. An IPO process would be too costly and time consuming, and it could even not lead to positive results because of the relatively small size of the firm. Listing these companies through SPACs would reduce the uncertainty of the IPO, the costs and the overall stress on the company while, at the same time, providing an injection of fresh capital needed to fuel growth. This process could shine in Italy thanks to the many relatively small companies that are internationally recognised as a mark of excellence in industries such as fashion, manufacturing and food & beverages. Those companies could leverage their reputation and, helped by the capital provided by the market, reach interesting results. Secondly, many entrepreneurs willing to retire, but who prefer not to leave their companies to their heirs, could opt for a quicker listing through a SPAC, solving many succession issues.

Being such a recent instrument, yet so closely dependent on the reliability of the management team heading the SPAC, the absence of track record of the performance of professionals could be an obstacle, at least at the beginning. The higher perceived risk could lead to more difficulty in gathering the necessary capital, but over time this negative effect will probably wear off.

Notable SPACs

One of the first SPACs in Italy was created in 2011. It was called “Italy1 Investment” and managed to gather €150m. In 2012, it completed a reverse merger with IVS (International Vending Machines) creating IVS Group. The SPAC was backed up by Banca IMI and J.P. Morgan Securities, and Equita SIM acted as co-Lead manager. It is currently listed in the Italian stock exchange.

More recently, in February 2017, a deal was completed between Glenalta Food, an €80m SPAC specialized in alimentary products, and GF Group. The result of this business combination is Orsero. The company performed well after being listed and the share price started growing steadily, but in May a problem emerged in their shipping cargos transporting fruits from overseas and the stock was hit heavily.

On the international stage, the size of SPACs is increasing considerably, reaching and surpassing the $1bn threshold. A notable example is the 2012 SPAC named Justice Holding, organized mainly by Bill Ackman’s Pershing Square Capital Management, a $10bn hedge fund based in New York. It raised $1.2bn in capital and acquired a 30% stake in Burger King from 3G Capital (owned by Brazilian billionaire Jorge Paulo Lemann) which had taken Burger King private in 2010 with a leveraged buyout.


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