SPAC: a new frontier of Private Equity investment

By Camilla Bianchi, Edoardo Cogliati

SPACS: What and How

Special Purpose Acquisition Companies (SPACs) are publicly-traded buyout companies that raise collective investment funds in the form of blind pool money, through an initial public offering (IPO), for the purpose of completing an acquisition (or merger) of an existing private company (target).

We can distinguish four main stages:

  1. Creation of the SPAC. The SPAC is funded and initially financed by the Sponsors (or Promoters), that provide the risk capital. The resources are entirely allocated for current management and for listing fees. Since the SPAC is a “shell company”, the management team will be comprised of individuals who have demonstrated success in identifying, acquiring and operating growing businesses and have experience in the public company setting.

  2. IPO. The SPAC offers to the underwriters some units in the IPO, each comprised of one share of common stock and a warrant to purchase common stock. The cash raised in the IPO is placed in a trust account and not released until the SPAC completes a business combination or a predetermined period of time (usually 24 months) elapses.

  3. Search for a target company. The management team of the SPAC then has a specified period of time, usually 24 months (max 36), in which to identify a private operating company acquisition target and complete the acquisition. In this timeframe business valuations are made and non-disclosure agreements are signed. If the SPAC is unable to complete a business combination with a target business it must return all money in the trust account to the SPAC’s public shareholders, and the founder shares and warrants will be worthless.

  4. Business Combination. The resources collected with the IPO are used to acquire the targeted company. As a result of the Business Combination the shares of the Target company are listed on the Stock Exchange. The Business Combination must be approved by the shareholders meeting of the SPAC. Shareholders not in favor are entitled to exercise a way out right and their shares be redeemed.



We now analyse pros and cons of the use of SPACs from both the investors and target company perspective.


  • More decision power to the investors:

SPAC investors can in any moment liquidate their position in the SPAC (and therefore in the target investment) both through the public market and through the SPAC itself. This is not always feasible in other type of private co-investments due to lack of liquidity or by the SPV statute itself.

  • Buying at a discount:

When SPAC buys company they immediately incorporate the liquidity premium of the private company who immediately goes public.

  • Risk of deal break:

SPACs proceed to the acquisition only if a pre-specified threshold of shareholders agrees on it. If they are unable to provide that support, the funds held in the escrow accounts are returned to shareholders at the pro-rata bases.

Target company.

  • IPO alternative:

A traditional IPO can be challenging for certain companies both in term of costs, size, market timing etc. In this case a company may opt for a “reverse-merger” strategy which allow the company to go public by merging with an already public company, in our case the SPAC.

  • Investor selection:

In a regular IPO, the company gets to select its investors; the SPAC has already done that, and they may not be the supportive investors the company may prefer.

The Italian SPAC market

In Italy, as of right now we have 25 SPACs, 18 of which have already made a business combination.

As you can see from the below graph, the SPAC Italian market is in constant growth. As of February 2018, the total capital raised by SPACs amount to EUR 3.5bn for an average of EUR 141ml per SPAC.  

The increasing interest in the SPAC market in Italy is confirmed by the recent creation (March 2018) of the first Italian SPAC index, that has the goal of monitoring their value together with the warrant issued in IPO.

Below you may find some example of SPAC that made a business combination and their performance since the business combination announcement benchmarked to the FTSE MIB. As you can see, a relevant proportion of the below mentioned business combination significantly outperformed the benchmark. 


Characteristics of Italian Markets

First of all, it is worth noticing that Italian SPACs tend to invest in SMEs, with a production value that varies in a range between 73 ml € and 742 ml €.

Secondly, unlike the American experience, where target companies are often in a restructuring phase (“SPACs for restructuring), the Italian SPACs are known as “SPACs for growth”. As a matter of fact the targets are healthy from a financial point of view, with a sustainable debt coverage (NFP/EBITDA = 2.8) and a satisfactory level of debt (NFP/Equity = 1.9).

Also the profitability results are overall positive, with an average EBITDA margin of 12.2% and an average profit margin of 4.3%.


Results for the target company after the business combination in Italy

As expected, the capital injection due the IPO causes an improvement of the financial solvency and leverage. Moreover, a dimensional growth is noted. Nevertheless, often the EBITDA and Profit margin decrease, resulting in a deterioration of the operating efficiency.