29th Jan 2021
Former Facebook vice-president Chamath Palihapitya quietly added three more SPACs to his growing conglomerate in September 2020. This brought his Social Capital Hedosophia Holdings up to six separate companies, IPOA, IPOB, IPOC, IPOD, IPOE, IPOF. (He has suggested his intention to complete the alphabet!)
Let’s review the basics: SPACs are Special Purpose Acquisition Companies with no commercial operations, which are established solely to raise capital from investors for the purpose of acquiring one or more operating businesses. Investors buy shares in the SPAC, to secure their part in the merger or acquisition of a not-yet identified company within two years. If the SPAC fails to find a target or the investor does not favor the proposed acquisition, the initial investment is returned, making SPACs a low-opportunity-cost option, especially in a period of very low interest rates.
Palihapitya is well-positioned to lead such bids, due to his strong track record in senior management and private finance initiatives. Apart from his success in the early core management team of Facebook, he served on the board of directors for Slack Technologies (NASDAQ: WORK) and was a financier for the Trine Acquisition Corp (NYSE: TRNE) and Fortress Value Acquisition Corp (NYSE: FVAC).1 The three latest Social Capital Hedosophia companies (IPOD, IPOE, IPOF) each have the same management team, with one additional member particular to each company.2 Palihapitya’s explicit goal is to democratize access to major technology companies’ initial public offering, and to smooth those companies’ transformation to public status. His focus is on the technology sector, aiming to develop Social Capital Hedosophia into a next generation technology holding company akin to Berkshire Hathaway, which holds Coca-Cola, GiIlette and McDonalds.3
Palihapitya’s first four SPACs already show promise. IPOA raised $720 million and merged with Virgin Galactic in October 2019.4 Galactic aims to be the first commercially viable space tourism carrier. It aims to pioneer routine, consistent and affordable space travel for private individuals and researchers. Chamath Palihapitiya became the chairman of the board and the new share ticker (SPCE) has since risen over 38%.5 IPOB raised $360 million and acquired OpenDoor in December 2020. Termed the “future Amazon” of the real estate sector, OpenDoor offers a radically different service in the housing market – an intermediary between the buyer and seller, it saves both sides the uncertainty and hassle of negotiating the market and making a deal with a stranger.6 Share prices have risen over 85% since the deal was announced in September 2020 with OpenDoor valued at $4.8bn. IPOC announced its intention to buy Clover Health in a deal valued at $3.7 billion in October 2020, with the deal set to be completed early 2021.7 Clover Health sells Medicare Advantage insurance plans in seven U.S. states and Palihapitiya has emphasized the aging US population as a strong potential future market for the growth of this business. In both the IPOB and IPOC deals, Palihapitiya has also committed significant sums of his own in PIPE funding that accompanies the SPAC acquisition. IPOE announced its intention to merge with SoFi (Social Finance) in January 2021 at an $8.65bn evaluation.8 SoFi’s mobile first approach claims it can lower the cost of banking through technology and make it more accessible and customer-oriented.
Two of Palihapitya’s most recent SPACs to be formed have not yet identified their targets. IPOD plans to sell 35 million shares at $10 each to raise $350m and IPOF plans to raise $1bn through the sale of 100 million shares at that price. The amount raised will determine what scale of company the SPAC is able to acquire.
Social Capital Hedosophia Holdings is just one company spearheading the use of SPACs to bring retail investors into major public mergers and acquisitions. SPACs have surged in popularity recently, following changes in their cost structure to improve the terms for the individual investors, and their promotion by credible, experienced backers. With their increased popularity among retail and institutional investors and their ability to raise significant sums, SPACs now offer a real and attractive alternative route to the traditional IPO process. However, the uncertainty around a particular SPAC succeeding remains; and that is where a SPAC ETF can mitigate risk by balancing exposure to any one particular company, while offering coverage of the wider SPAC space.
Defiance ETFs’ SPAK next generation SPAC-derived ETF gives investors access to the most liquid SPAC IPOs in a diversified basket. Holdings are weighted 80% towards IPO companies derived from SPACs and 20% is allocated to common stock of newly listed Special Purpose Acquisition Companies. The latter are reviewed quarterly and the former every month. This first-leader SPAC ETF can provide flexible, liquid targeted exposure to major acquisition deals that were previously beyond reach. SPAK encompasses the entire IPO-replacement process – from the pre-deal blank check company to the post IPO ticker that could potentially see a significant boost to it performance in the post-deal period and beyond.
Palihapitya’s IPOA (Virgin Galactic), IPOB (OpenDoor), IPOC (Clover Health) and IPOF are already included in SPAK’s 111 holdings. Their weighted contribution gives investors exposure to the dynamic SPAC space.
1“Chamath Palihapitiya Launches Three More SPACs: IPOD, IPOE, IPOF,” Chris Katje, September 19, 2020.
2“Chamath Palihapitiya’s IPOD, IPOE, IPOF SPACs: What Investors Should Know,” Chris Katje, December 23, 2020·
3“Virgin Galactic dealmaker defies IPO lull with $720 million blank-check deal,” Joshua Franklin, April 21, 2020.
4 “Virgin Galactic dealmaker defies IPO lull with $720 million blank-check deal,” Joshua Franklin, April 21, 2020.
6“Opendoor Is the Future Amazon of the $1.6 Trillion Real Estate Market,” Luke Lango, InvestorPlace Senior Investment Analyst, October 29, 2020.https://investorplace.com/2020/10/opendoor-is-the-future-amazon-of-the-1-6-trillion-real-estate-market
7“SPAC News: 13 Things to Know About the Clover Health Deal,” William White, October 6, 2020.
8“Fintech start-up SoFi to go public via SPAC backed by Chamath Palihapitiya,” Kate Rooney, January 7, 2021