Friday, October 22, 2021

Why Chamath Palihapitiya Welcomes The SPAC Market Correction

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Chamath Palihapitiya, Founder and CEO of Social Capital

CNBC

Social Capital founder and CEO Chamath Palihapitiya has become synonymous with SPAC amid the Wall Street blank check swath of deals in recent years.

In 2020 alone, SPACs, or special purpose acquisition companies, raised more than $ 83 billion, up from $ 13 billion in 2019. As of July, SPACs had raised $ 125.7 billion through 435 agreements in 2021.

The venture investor has raised billions of dollars in the stock market for SPAC in a wide range of industries, from space tourism with Virgin Galactic Holdings to residential real estate with Opendoor and online personal finance with SoFi.

But as the SPAC deals – which raise capital in an IPO and then use that cash to merge with a private company and go public – have cooled amid scrutiny from lawmakers and meager returns from investors, Palihapitiya says that the market correction is welcome.

“At the beginning of every market, there are some people who are pioneers at something and then there are a lot of quick followers, and I think it’s always important to take a step back when you have all that quick follow up to figure it out,” Palihapitiya said while speaking at the recent conference. from CNBC Delivering Alpha.

“I think we are in the middle of sorting that out and separating the wheat from the chaff,” he said.

Force sponsors to have more ‘skin in the game’

Despite more IPOs from SPAC this year, enthusiasm in the market is beginning to fade.

As of September 6, 125 blank check deals had closed mergers and 58% of them were trading below $ 10, the typical price on their IPO. according to a CNBC analysis of data from SPAC Research. Unlike traditional IPOs, SPAC prices are not based on an existing business valuation.

Additionally, more than a third of those blank check deals have seen more than 50% of public shares redeemed, indicating that investors are resentful of SPAC’s hype.

However, Palihapitiya said he believes there is a significant difference in the success of “quality sponsors who sign good deals and have their skin in the game.”

“The incentives are not aligned to create great results from the beginning of a SPAC to the end of the SPAC,” he said. “The most important thing we need to do is force the people who are the backers to have a lot more capital at risk.”

Palihapitiya asked the SEC and Chairman Gary Gensler to get SPAC sponsors to contribute more capital so that “if I want to raise a $ 1 billion SPAC, I have to contribute $ 100 million.”

“I may or may not come up with a good deal, but I will take it very seriously and pay attention, and that has a lot of very positive side effects,” he said.

Palihapitiya still has several SPACs on the market. Share capital Hedosophesia Holdings Corp. IV and Social Capital Hedosophesia Holdings Corp. VI are still looking for possible mergers. In June, he applied for four more seeking to raise at least $ 200 million each, all focused on biotechnology; Areas of focus include neurology, oncology, “the organ space subsector,” and immunology.

Elizabeth Warren and political scrutiny

Palihapitiya, along with Cantor Fitzgerald CEO Howard Lutnick and Fertitta Entertainment CEO Tilman Fertitta, were among the investors sent a Sep 22 open letter from Sen. Elizabeth Warren and three other Democratic lawmakers on concerns about SPACs.

“We are concerned about misaligned incentives between SPAC’s creators and early investors, on the one hand, and retail investors, on the other,” the letter read.

Between January 19, 2019 and January 22, 2021, the average SPAC sponsor had returns of 958%, the letter says, citing a report from JP Morgan. By comparison, the “average investor who sold their shares and warranties just before a merger averaged a 40% return,” the letter says.

Palihapitiya, who said she was “happy to receive the letter” and would be responding to it, noted that the group of lawmakers also focused on “the skin in the game.”

“[Warren] Hopefully it will be someone else who believes in what I am defending, which is forcing the sponsors to contribute much more of their own money, “he said.

When CNBC “Fast Money Halftime Report” host Scott Wapner disagrees with the characterization that investors are taking the most risk with SPACs, Palihapitiya praised the current process.

“You have the opportunity to have months to back people that you think can find a good deal, and then you usually have months to fully underwrite the business and see how the rest of the market reacts, and then stay or get all of it. We give you your money back, “he said. “That strikes me as an incredibly investor-friendly thing.”

However, he stressed that “people just need to take time to do their own work” and “make sure [they] look at the incentives of the people you want to endorse. “

A prime target for critics of SPAC

As the face of the SPAC space in the eyes of many investors, Palihapitiya has been a target for critics.

Earlier this year, Palihapitiya was accused by short seller Hindenburg Research of mislead investors about Clover Health Investments Corp., which it made public in an October 2020 SPAC deal.

The firm accused Palihapitiya of concealing a US Justice Department investigation into Clover’s business. Clover later confirmed that he had received inquiries from the Justice Department, but did not need to disclose it as it was not important to investors. Clover’s share price is down more than 49% this year.

When asked if he had been transparent in dealing with Clover, Palihapitiya said: “I think I was completely direct and honest, and I think [Hindenburg] he has a lot to answer for. “

“There’s no fraud there and what it’s all about, and what a lot of short selling is, it’s about creating a change in sentiment and volatility and capitalizing on that, and I’d love for people to find out if that should be allowed. or not, “he said. “Do I believe what they wrote? No. Do I think what they do should be allowed? Yes, but am I a fan of that?”

Amid criticism about the performance of some of his other SPAC bets, Palihapitiya said he has chosen to “stay quiet and keep his head.”

“I’m going to get a lot of credit when things go up and I’m going to get a lot of blame when things go wrong,” he said. “I think we all have to step back and say, ‘We are one year away from a fairly significant revolution in the capital markets that will take years to unfold.”

“I would love for those same people rewrite that article in three and five years and see what it says, “Palihapitiya said.

Did you miss this year’s CNBC Delivering Alpha investor summit? Access full sessions on demand for a limited time only. Don’t miss out on the most important investment ideas in the business. Sign up for on-demand access at https://bit.ly/390rL5A

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