The SPAC is a method of getting around some of the rules that have been defined for public trading. As a legal model for accelerating growth in terms of public investing, the SPAC provides for the previously approved IPO of a shell company to be used after a merger with an existing company so that they can go public and more rapidly gain funding. In a world that is changing quickly, the ability to go out and raise public funds at a rapid rate can be the difference between success or failure. Saudi Arabia uses the Sovereign Wealth Fund (SWF) as a method to invest for the future of the Kingdom. In the past few years, Saudi Arabia has increasingly used the system of investing through SPAC opportunities, and is recently participating by placing a company in which the SWF has invested for the purpose of funding electric vehicles. Saudi Arabia has used its public investment program as a way to offset economic challenges in the Kingdom, and through the use of SPAC, has participated in building investment that will connect with the future in terms of alternative energy companies and competitive advantage.

The SPAC

            One of the newest concepts in publicly traded companies is found in the idea of SPAC: The Special Purpose Acquisition Company. In 2020, the United States saw approximately 200 SPACs in which companies went public by merging through this new framework.  in total, approximately 64 billion dollars in total funding was raised, which equaled almost as much as last year’s IPOs if they were combined together (Young, 2021). Essentially a SPAC is a shell company that investors design with the single purpose of raising enough money through the tool of an IPO so that they can acquire another company. An example can be found in Diamond Eagle Acquisition Corp., which in 2019 was put into the market and went public as a SPAC. At that point, it merged with DraftKings and a gambling Tech platform SBTech.  After the merger had taken place, DraftKings was able to trade as a public company, and the SPAC has no assets other than the money raised for its own IPO. They are often referred to as a blank check company, because their purpose is solely for the reason of helping a company to go public through an acquisition (Huddleston, 2021).

            The purpose of the SPAC is to streamline the process of going public. When a company wants to go public, they must go through what is considered to be a grueling process of going to the SEC and registering the IPO, which can take as long as six months. This means that it will postpone the idea of raising investor money to at least 6 months or longer, which is not always preferable. The SPAC allows for a company to merge with the parent company which is already established itself with an IPO, allowing for a company to go public and raise a capital influx at a much more rapid rate then would be allowed for a conventional IPO. In addition, the target company has the privilege of negotiating a fixed value, rather than having that value fixed for them (Huddleston, 2021).

            The advantages of a SPAC are clear, but there are also some disadvantages. First, one of the advantages can be that a company that sells to the SPAC may add as much as 20% to the overall sale price in comparison to a private Equity deal. It increases the IPO process and also typically means that there is an experienced partner in the form of the management of the SPAC, which decreases any problems that a company may have as they work to go public (Young, 2021). However, when becoming part of the process the disadvantages should also be taken into consideration. It is possible that this trend will not disappear rapidly, because of the number of investors in billionaires who have become involved and are looking for a quick turnaround.  However, companies who want to merge with a SPAC and are depending on this type of deal to create the capital that is required for their continued business may find that they are rejected. An investor side, they are typically going into a situation blind. There is no transparency that is required concerning the SPAC, and there is not a rigorous diligence conducted as there would be during a traditional IPO. In addition, those who sponsor an SPAC must find a proper acquisition within two years, and that may mean taking a deal that is less than ideal. Because of the business model and incentivisation problem, there is always the chance that the value can be significantly destructive (Nilsson, 2021).

SPAC in Saudi Arabia

            SPACs have been very popular for electric car makers. Martin, Nair, Ludlow, and Porter (2021) write that electric vehicle (EV) makers have been raising funds using the SPAC model, for which the rush is based on the idea of needing to compete with Tesla Inc. Faraday & Future Inc. is currently in talks to merge with Property Solutions Acquisition Corp, and Nikola Corp.and Fisker Inc. went public in 2020. This has led to the emergence of Lucid Motors as a candidate for being funded through an SPAC this year.

            Lucid Motors Is a company that is backed by Saudi Arabia Sovereign wealth fund and is in direct competition with Tesla. According to Arabian Business (2021). Investment banker Michael Klein Runs the SPAC that is said to be near ideal to go into a merger with the Saturday backed automobile company. The company intends to be delivering $169,000 electric based automobiles in the second quarter of the year. The merger would initially approximately 1 billion dollars to 1.5 billion dollars, and investor demand is likely to change the valuation and increase the overall funding. The result of the merger is expected to have a valuation of $15 billion (Ludlow & Nair, 2021). Arabian Business (2021) goes on to state that Klein was originally a Citigroup Inc. rainmaker, which means that he was very good at making money.  Churchill Capital Corp IV is the largest SPAC under Klein’s management, and has been able to raise more than 2 billion dollars for the purpose of making the transaction happen. Since the news broke with Bloomberg that the merger was likely to take place, Churchill Capital Corp IV has surged in the market more than five times its original valuation (Arabian Business, 2021). As a result of the news of the merger, shares for Churchill Capital Corp IV have surged more than 300% between February of 2020 and February of 2021 (Yahoo Finance, 2021). 

             The year 2020 was big for SPAC in Saudi Arabia. Sovereign investors were interested in both institutional investment as well as SPAC opportunities. However, investment in SPACs have begun to increase rapidly over the last few years. Data from the kingdom suggest that the Sovereign Wealth Fund (SWF) invested over $1.79 billion in 2020, in comparison to $68 million that was reported for 2019. In 2018, there was only $20 million invested in SPACs, with $50 million in 2017.  The year 2020 showed a remarkable increase in comparison to the previous three years. Saudi Arabia uses the SWF for a number of different purposes, one of which is as an offset for difficult Economic Times. During the Pandemic of 2020, investments through the SWF and into SPACs helped to provide funds that help to leverage the challenges that came from the economic crisis associated with the pandemic (Dalal, 2020).

            A popular SPAC that the SWF has invested in is the Foley Trasimene Acquisition Corp I and II. The SWF has taken a keen interest in investing in this SPAC, with the evidence of the effects on Churchill Capital as the background for supporting a continued interest in supporting the SWF through SPAC investment (Dalal, 2020). Foley looks attractive because in the medium-to-long-term, there has already been a surge of 41% since it was announced that the stock would be offered based on a merger agreement with a company called Paysafe. With an interest in digital Commerce and iGaming, most of the revenue for the company at a rate of 75% comes from integrated services and online interaction. Because Paysafe has a proven business model, it is likely that the revenue estimate for Foley will be approximately $1.4 billion, with an adjustment of EBITDA projection for about $420 million, which would put the EBITDA margin 30%. There is an expectation that by 2023, the revenue will increase to $1.9 billion (Yahoo Finance, 2021).  Compound annual growth rate (CAGR) is estimated to be 42% from Fiscal year 2019 to fiscal year 2025. Growth in the market for iGaming is estimated to be at approximately 12% for the same time period.

            Another example of a company that the Saudi SWF is interested in is QuantumScape, which is backed by Bill Gates and Volkswagen, and is expected to have approximately $1 billion in funding commitments and cash. While Qatar is interested in putting their sovereign wealth fund into the business, Saudi Arabia is also interested in backing the EV battery supply company.  this company will be merging with Kensington Capital Acquisition, and is expected to do very well in creating a solid Capital base through its IPO, and through the investments of various funding resources, including both Qatar and Saudi Arabia (Arabian Business, 2021).

         Through these various investment opportunities, Saudi Arabia is not only Participating in creating Investments that will help to secure the future of the state, but is also participating in investment into alternative energy, which is one of the primary goals of Vision 20/20, a plan to decrease and eventually eliminate the economic dependence on oil in Saudi Arabia. The SPAC allows for investors to be able to look at a company that holds the future, and not have to wait the months that are often required for the IPO to be available. Instead, with a merger with an SPAC, the company can offer its IPO on behalf of the party acquired, and investors can help to build a future today. Saudi Arabia is very interested in participating in the acceleration of business opportunities, and through the SWF has supported a number of different businesses, as well as offering businesses backed by their own funds.

References

• Arabian Business. (2021, February 21). Saturday back to Lucid Motors said to near deal to go public via Klein’s SPAC. Retrieved from https://www.arabianbusiness.com/banking- finance/458983-saudi-backed-lucid-motors-said-to-near-deal-to-go-public-via-kleins-spac
• Dalal, K. (2020, November 24). Sovereign wealth fund investments in SPAC zoom higher in 2020. Seeking Alpha. Retrieved from https://seekingalpha.com/news/3639187- sovereign-wealth-fund-investments-in-spac-zoom-higher-in-2020
• Foley Trasimene Acquisition Corp I and II. (2021). Retrieved from https://www.foleytrasimene2.com/
• Huddleston, T. Jr. (2021, February 23). What is a SPAC? Explaining one of Wall Street’s hottest trends. Retrieved from https://www.cnbc.com/2021/01/30/what-is-a-spac.html
• Ludlow, C.T.E. & Nair, D. (2021, February 22). Lucid Motors is said to near deal to list via Klein’s SPAC. Bloomberg. Retrieved from https://www.bloomberg.com/news/artic les/2021-02-20/lucid-motors-is-said-to-near-deal-to-go-public-via-klein-s-spac
• Martin, M. Nair, D., Ludlow, E., & Porter, K. (2021, February).  Lucid Moters is in talks to list via Michael Klein SPAC. The Detroit News. Retrieved from https://www.detroitnews.com/story/busin ess/autos/2021/01/11/lucid-motors-talks-list-via-michael-klein-spac/6630277002/
• Nilsson, G. O. (2018). Incentive Structure of Special Purpose Acquisition Companies. European Business Organization Law Review, 19(2), 253-274.
• Yahoo Finance. (2021, February 23). Paysafe merger makes Foley Trasimene Acquisition attractive. Retrieved from https://finance.yahoo.com/news/paysafe-merger-makes-foley-trasimene-131112955.html
• Young, J. & Anderson, S. Special purpose acquisition company (SPAC). Investopedia. Retrieved from https://www.investopedia.com/terms/s/spac.asp