2020 was a year for the books in the stock market. Investors saw the market fall dramatically as COVID hit and then saw it hit all-time highs. Despite the uncertainties, 2020 had the highest-ever number of IPOs (a process in which private companies offer shares to the public and are listed on a stock exchange) due to SPACs.
So what exactly are SPACs and why is billionaire investor Chamath Palihapitiya launching 26 of them?
‘Special purpose acquisition companies’ (SPACs) are shell companies that generate money by selling shares through an IPO. The sole purpose of these companies is to raise funds through IPOs and then use these funds to acquire existing companies, helping them go public. The scope of SPACs increased dramatically in 2020 as they contributed the majority of all money raised through US IPOs.
Chamath Palihapitiya is one of the key players in this wave of SPACs and plans on launching 26 of them under his company Social Capital Hedosophia Holdings (SCHH). SCHH was launched in 2017 and branded as ‘IPO 2.0’, to help tech companies become public through an alternative path to a traditional IPO.
Since 2017, SCHH has launched 6 SPACs, 3 of which have merged with companies successfully, and one of the three most recent launches has announced a deal. This is an impressive feat for SCHH as SPACs are required to complete a deal within a short period (generally 2 years) and Palihapitya’s SPACs have done so successfully.
Social Capital Hedosophia (NYSE:IPOA.U) was SCHH’s first vehicle listed, raising $600 million on the New York stock exchange in 2017. In 2019, IPOA.U merged with Virgin Galactic in an $800 million deal for a 49% stake and was listed as Virgin Galactic Holdings, Inc (NYSE: SPCE). Since then, the share price has more than quadrupled, achieving a market cap of above $10 billion.
Both of SCHH’s SPACs launched after IPOA.U reflect the strong investor confidence in Palihapitiya-backed companies. Social Capital Hedosophia Holdings Corp. II (NYSE:IPOB) stock had risen more than 13% a month after the announcement of its merger with real estate company Opendoor Labs. The company listed on the market post the merger, Opendoor Technologies Inc. (NASDAQ: OPEN), also reflects this positive growth.
These, however, present only the first lot of SPACs launched by Palihapitiya. In September 2020, Palihapitiya launched three new SPACs, namely IPOD, IPOE, and IPOF through very successful rounds of funding. The three new firms raised a combined $2.1 billion through their IPOs. With a healthy amount of funds kept safe in trust accounts, these SPACs are on track for big future deals.
What is to come now?
After completing deals for their first 3 SPACs and launching 3 new ones, SCHH shows no signs of stopping. In early January 2021, SCHH announced the merger of Social Capital Hedosophia Holdings Corp. V (NYSE: IPOE) with fintech company Social Finance (SoFi). The prospect of this merger created an investor frenzy, driving up the price of the IPOE stock more than 100% within the month.
Palihapitiya’s SPACs entice investors due to the future prospects of their acquisitions and Sofi is a great example of this.
A huge catalyst in SoFi’s growth is the approval of a US bank charter; SoFi has received preliminary approval for the charter already. This will allow SoFi to approve loans and hold deposits without the need to license a charter from another bank. The bank charter could allow them to increase their EBITDA from $42 million in 2021 to up to $1.48 billion in 2025.
“The new investments and our partnership with Social Capital Hedosophia signify the confidence in our strategy, the momentum in our business, as well as the significant growth opportunity ahead of us.”
– SoFI Chief Executive: Anthony Noto
The recent rise in the stock could also be attributed to Redditors investing in the company due to Palihapitiya’s support of the Gamestop short squeeze. This certainly does not harm the company, and Palihapitiya’s open criticism of stock-trading application Robinhood’s role in this situation also paves the way for SoFi’s trading platform SoFi Active Investing.
Given the success of SCHH’s previous SPAC deals and the hype around the prospects of SoFi, the upcoming merger could prove to be beneficial to investors in the long run.
Are Palihipitiya’s SPACs worth investing in?
The success of Palihapitiya’s previous mergers and acquisitions sets a positive precedent for the future of Social Capital Hedosophia Holdings. Palihapitiya has already reserved the tickers “IPOA” to “IPOZ” on the New York Stock exchange. Considering that he seems eager to list a new SPAC for every letter in the Alphabet, SCHH could present great opportunities for investors in the future.
Palihapitiya’s SPACs have had successful and rewarding IPOs. Each of these SPACs has gained value after deal announcements and SCHH’s involvement and investments have proven to be successful for the growth of those companies.
The future of these companies backed by SCHH does pose uncertainties, however. SCHH’s deals are with companies in rising sectors such as fintech and “next-gen medication” and these sectors are very competitive. Established and fast-growing companies like StoneCo (NASDAQ: STNE) and PayPal (NASDAQ: PYPL) reside over fintech while companies like Zillow (NASDAQ: Z, NASDAQ: ZG) and Redfin (NASDAQ: RDFN) challenge SCHH backed real estate company Opendoor.
It is also safe to say that SCHH’s SPACs now trade at a premium in price, given the success of its previous SPAC deals. Both SCH IV (NYSE: IPOD) and SCH VI (NYSE: IPOF) trade at prices of $15.9 and $15.12 respectively, which is at a premium given their IPO prices of $10 each. This is although both SPACs have not yet acquired any deals.
Some, including investor Jim Chanos, say that the recent SPAC craze is pure speculation as these deals do not warrant success. Reports also suggest that SPACS are less beneficial to shareholders as they include hidden fees which can be detrimental to investors.
Needless to say, SCHH’s deals have been beneficial to investors. Keep a lookout for SCHH’s deals involving SPACs and other future projects.