Special Purpose Acquisition Companies (SPACs) have witnessed exciting growth in 2020 based on investments from different quarters. SPACs are typically shell companies without actual commercial operations but are created to raise capital through an initial public offering (IPO) to acquire an existing private business.
Data acquired by Finbold.com indicates that direct investments in SPACs by Sovereign Wealth Funds (SWFs) have spiked by a staggering 2,532.35% on a year-over-year (YOY) basis. In 2020 as of November 24, the investments stood at $1.79 billion. In 2019, the figure was $68 million, an increase of 240% from the 2018 investment of $20 million. In 2017, the investment was at $50 million.
The research also overviewed the top ten largest sovereign wealth funds by total assets. The funds cumulatively control $5.65 trillion in assets. Norway Government Pension Fund Global leads with assets worth $1.12 trillion or 19.8% of the ten funds’ assets.
China Investment Corporation is second with assets worth $1.04 trillion, followed by Abu Dhabi Investment Authority in the third spot with $579.62 billion in assets. Kuwait Investment Authority is fourth, with assets worth $533.65 billion. Hong Kong Monetary Authority Investment portfolio lies fifth with assets amounting to $528.05 billion.
GIC Private Limited controls assets worth $453.2 billion to occupy the sixth spot, followed by Temasek Holdings with $417.35 billion in assets. The Public Investment Fund is eighth with assets worth $347 billion. In the ninth spot, the National Council for Social Security Fund controlling $32499. billion in assets while the Investment Corporation of Dubai caps the top ten class with $305.23 billion in assets.
Why SPACs are popular in 2020
2020 has been a tremendous year for SPACs, mainly due to the coronavirus pandemic that crippled the global economy. The pandemic resulted in massive uncertainty in the worldwide market. This year, with the uncertainty of raising money through the traditional means, was also uncertain. In this case, SPACs have found a perfect role to inject more funds into capital-starving companies. The unique position held by SPACs has seen sovereign funds make a bet in the sector.
The SPAC founders have attractive upside potential for a relatively small investment of capital along with a significant number of warrants purchased in a private placement. With the entrance of leading sovereign funds into the SPACs space, the sector is becoming more established.
Sovereign Wealth Funds’ entrance into SPACs space
In general, the highlighted Sovereign Wealth Fund are state-owned investment funds that invest in real and financial assets like stocks, bonds, real estate, and precious metals. SWF is created for various reasons, like being utilized during harsh economic times, as witnessed in 2020. Most funds took advantage of the uncertain period to help companies maneuver the 2020 crisis through SPACs.
Most sovereign funds seek to cash on the fact that SPACs are products of volatile times. They are often faster and more straightforward than a traditional IPO and offer investors some flexibility regarding whether they want to cash out or keep shares with the company. This flexibility gives sovereign funds a perfect opportunity to expand their returns.
SPACs have continued to attract attention because the traditional IPOs have faced scrutiny based on how they are priced. Notably, going public with a formal IPO is an expensive and extensive process. Part of that process is when bankers price the IPO, and then a block of shares are sold at the set price to institutional investors.