Opinions & Interviews

2021-08-23 Roberto Ruozi

The SPAC Market: the Cases of the United States and Italy

Although their performance has been up and down on the American and Italian markets in the past two years, the importance of the goals of SPACs – investment vehicles that are listed on a regulated or unregulated market to raise funds – remains unchanged, and they can have success only by updating their structure, having serious advisors and managers, and protecting their investors better than they have up to now.

SPACs (Special Purpose Acquisition Companies) are financial instruments created almost twenty years ago in the United States. Economia&Management dealt with these types of companies back in 2017 and 2018,[1] assessing the situation in the US and Italy; in the latter, SPACs emerged in 2011 not structured based on specific regulations or laws, but through a combination of legal forms allowed for other types of financial companies.

When we speak of SPACs, we always need to refer to the regulation based on which each has been constructed. Despite having the same goals, different jurisdictions can in fact require different technical steps and different types of actors. In general, SPACs are investment vehicles that are listed on a regulated or unregulated market to raise funds in order to acquire, and potentially absorb or merge with, one or more operating companies defined as “targets,” then creating what is called a “business combination.” There are three players in SPACs: sponsors, funders, and the target companies. The quality of those players is decisive for the success of a SPAC. The sponsors of SPACs and the management of the companies resulting from the business combinations condition the success of the initiative and thus the satisfaction of the funders/investors.

So it’s not easy to discuss SPACs and their performance in individual countries over time in general terms. Here, I will however compare their development in the United States and Italy in recent years.

In the United States, SPACs have recently met with extraordinary success. In 2020, for example, 250 SPACs were listed on US markets, that raised 83.4 billion dollars. That same year, the IPOs organized by those SPACs raised more than 90 billion dollars. However, the most attentive observers pointed out that at the end of the first quarter of 2020, some signs of slowdown were already present, suggesting that the hostile and restrictive attitude of the Securities and Exchange Commission (SEC), the US federal agency in charge of oversight of financial markets, could have a negative effect on the sector. Those predictions rapidly came true. In the month of April 2021, there were only 10 new SPACs, while there had been 1009 in March and 97 in February. The question is whether April 2021 was an exception to a trend that will soon resume rising, or whether it represents the start of a lasting drop in the development of SPACs in the United States. Most analysts support the second hypothesis, including due to the consequences of the cited attitude of the SEC, aimed at protecting savers. It is thought that savers are not informed well, or enough, regarding their investments, and can easily be manipulated. 

There are also other reasons that corroborate the hypothesis of a slowdown of SPACs in the United States. The sponsors of SPACs and the managers of the companies resulting from the business combinations have in fact turned out to have a poor level of professional skills on average, being incapable of selecting and adequately managing the acquisition operations, and showing behavior that is too speculative. These characteristics seem to have been common to many SPACs in the United States, to the point that there is even talk of a SPAC “mafia.” The greed of the sponsors also seems to have caused a broad collapse in the market value of the companies resulting from the business combinations, that in many cases fell – even considerably – in the days immediately following listing. This phenomenon was more evident where the target companies required considerable restructuring, for which the sponsors and management proved to be inadequate.

This situation has made the performance of SPAC shares in the United States increasingly volatile, to the point that fears abound of a bubble, like those that have often characterized other sectors of the financial markets. Furthermore, many believe that SPAC “mania” has ended in particular due to the more or less indiscriminate flooding of the market with this type of instrument, causing an unmanageable fever. The worries and decisions of the SEC are justified and the warning given above all to retail investors to carefully consider their investments before implementing them is entirely reasonable.

Similar problems have been found in Italy as well, although with smaller dimensions and importance. Between 2011 and 2018 there was a constant and considerable development of SPACs, at least in relative terms. In the period considered, 31 SPACs were established, which collected approximately 4 billion euros, of which slightly less than 3 were invested in the target companies. There are various reasons for this success. First of all, the instrument met the interest of a market in which the thirst for innovation is very strong, among both those who offer and those who raise capital. The novelty was also supported by the media and SPACs were marketed as offering greater simplicity, less time and fewer costs for accessing the market compared to normal listing. In addition, investors found the ex ante availability of prospective data on the business combinations to be interesting, as it is theoretically useful to make it easier to assess potential investments, whose risk, until the time the acquisition of the target company takes place, remains very low. In this regard, it is important to remember that if the business combination is not executed, the investors have the possibility to abandon the investment without losses. It has even been observed that, in part due to the considerable initial administrative costs, the market prices of the shares of some SPACs fell below the nominal price before the business combination was carried out. Various investors with principally speculative goals thus bought them at the lower prices, and when it was decided not to proceed with the business combination, or when they themselves voted against it, they requested and obtained reimbursement of their shares at the nominal price, generating small or large capital gains. Finally, an important factor for the success of SPACs in Italy was the introduction of individual savings plans (“PIR"), with the 2016 Budget Law. PIRs allowed for tax benefits for savers who invest at least in part in SMEs, which are the targets of SPACs.

For a few years now, the situation has changed, and all of the sudden new SPACs have almost disappeared from the scene. In 2019 there was only one, that collected 30 million euros, and in 2020 there were none, while in the first seven months of 2021 only two SPACs were listed on the Italian stock market, that raised a total of 358 million.

In the same period, some sponsors created various SPACs indicating the target company from the start, raising hundreds of millions of euros; but instead of listing them in Milan they did so in New York or Amsterdam, markets that are proving to be particularly interesting.

It is evident that the Italian SPAC model has not succeeded in taking hold definitively, especially because its protagonists did not perform the functions well and meet the goals that had been set at the time of the listings. The characteristics of the listings turned out to be less interesting than expected, the role of the main actors was not always positive, and the ability to choose target companies did not always meet expectations. The acquisition prices were too high on average, and in many cases the performance of the SPAC shares resulting from the business combinations were heavily penalized, without considering the fact that the preliminary disclosure notice on the investments proposed to potential subscribers was often based on inaccurate data. Moreover, the last three years have been very negative for Italy’s economy, not favoring the increase in value of our businesses, that to the contrary, has often fallen, frustrating investors.

In essence, negative structural and cyclical elements have cast heavy shadows on the Italian model of SPACs. This took place while New York and Amsterdam launched models of SPACs that were simpler, more transparent and more efficient, and thus more attractive than those in Italy. The size and characteristics of those financial markets also offered sponsors greater possibilities than those on the Italian stock market, in regard to which the attitude of companies has changed negatively in recent times.

These observations lead to the conclusion that in Italy the SPAC form is not obsolete, but needs to be optimized and adapted to the times, considering the fact that competition in the financial markets has increased and that the range of choices available in the sector has expanded. The competition with classic Italian SPACs is not represented only by other companies of the same type that adopt new models, but also by other types of intermediaries that, despite pursuing similar goals, have structural and functional characteristics that are different, newer, and more efficient. In this context, the importance of the goals of SPACs remains unchanged, and they can win the battle on the market only by updating their structure, having serious and competent sponsors and managers, and protecting their investors better than they have until now.

[1] Valter Conca, “Mercato delle SPAC. Eppur si muove”, Economia&Management, 2017/5; Valter Conca, Linda Longhi, “C’è SPAC e SPAC. I casi di Italia e USA”, Economia&Management, 2018/1.