Social Capital founder and CEO Chamath Palihapitiya became synonymous with SPACs amid the swath of blank-check deals on Wall Street over the last few years.
In 2020 alone, SPACs, or special purpose acquisition companies, raised more than $83 billion, up from $13 billion in 2019. Through July, there had been $125.7 billion raised by SPACs through 435 deals in 2021.
The venture investor has raised billions of dollars in the stock market for SPACs across a wide range of industries from space tourism with Virgin Galactic Holdings to residential real estate with Opendoor to online personal finance with SoFi.
But as SPAC deals, which raise capital in an IPO and then use that cash to merge with a private company and take it public, have cooled amid scrutiny from lawmakers and meager investor returns, Palihapitiya says the market correction is welcome.
“In the beginning of every market you have a few people that pioneer something and then you have a lot of fast following, and I think it’s always important to take a step back when you have all that fast following to sort it out,” Palihapitiya said while speaking at the recent CNBC Delivering Alpha conference.
“I think we’re in the midst 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 for SPACs this year, the hype around the market is starting to fade.
As of Sept. 6, 125 blank-check deals had closed mergers and 58% of them were trading below $10, the typical price at their IPO, according to a CNBC analysis of SPAC Research data. Unlike traditional IPOs, SPACs are not priced based on an existing business valuation.
Furthermore, more than a third of those blank-check deals have seen more than 50% of the public shares redeemed, indicating that investors are souring on the SPAC hype.
However, Palihapitiya said he believes there is a significant difference in success for “quality sponsors who underwrite good deals and who has skin in the game.”
“The incentives aren’t aligned to create great outcomes from the beginning of a SPAC to the end of the SPAC,” he said. “The most important thing we need to do is to force the people that are the sponsors to have much more capital at risk.”
Palihapitiya called for the SEC and Chair Gary Gensler to make SPAC sponsors put more capital up so that, “if I want to raise a billion-dollar SPAC, I have to come up with $100 million.”
“I may or may not come up with a good deal, but I’ll take that really seriously and pay attention, and that has a bunch of very positive knock-on effects,” he said.
Palihapitiya still has several SPACs in the market. Social Capital Hedosophesia Holdings Corp. IV and Social Capital Hedosophesia Holdings Corp. VI are still looking for potential mergers. In June, he filed for four more that sought to raise at least $200 million each, all focused on biotechnology — the 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 some of the investors that were sent a Sep. 22 open letter from Senator Elizabeth Warren and three other Democrat lawmakers about concerns over SPACs.
“We are concerned about the misaligned incentives between SPACs’ creators and early investors on the one hand, and retail investors on the other,” the letter read.
Between Jan. 19, 2019 and Jan. 22, 2021, the average SPAC sponsor saw returns of 958%, the letter says, citing a J.P. Morgan report. In comparison, the “average investor that sold its stock and warrants right before a merger averaged a 40% return,” the letter states.
Palihapitiya, who said he “was happy to receive the letter” and that he would be responding to it, noted that the group of lawmakers also focused around “skin in the game.”
″[Warren] is hopefully another one that believes in what I’m advocating for, which is to force sponsors to put up a lot more of their own money,” he said.
Asked by CNBC “Fast Money Halftime Report” host Scott Wapner if he disagrees with the characterization that investors are assuming the most risk with SPACs, Palihapitiya praised the current process.
“You have an opportunity to have months to get behind people who you think may find a good deal, and then typically you have months to completely underwrite the business and see how the rest of the market reacts, and then stay in or get all of your money back,” he said. “That to me seems like an incredibly investor-friendly thing to do.”
However, he did stress that “people just need to take their time to do their own work” and “make sure [they] look at the incentives of the folks that you want to get behind.”
A top target for SPAC critics
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 misleading investors about Clover Health Investments Corp., which he took public in an October 2020 SPAC deal.
The firm accused Palihapitiya of concealing a U.S. Department of Justice inquiry into Clover’s business. Clover later confirmed that it had received DOJ inquires, but that it did not need to disclose that as it was not material to investors. Clover’s stock price is down more than 49% this year.
Asked if he had been transparent in the Clover deal, Palihapitiya said, “I think I was completely straightforward and honest, and I think [Hindenburg] has a lot to answer for.”
“There’s no fraud there and what it was all about, and what a lot of short selling is, is about creating sentiment shift and volatility and profiting from that, and I would love for folks to figure out whether that should be allowed or not,” he said. “Do I believe in what they wrote? No. Do I think what they do should be allowed? Yeah, but am I a fan of it?”
Amid criticism over the performance of some of his other SPAC bets, Palihapitiya said he’s chosen to “stay quiet and keep my head.”
“I’m going to get a lot of credit when things go up and I’m going to get a lot of the blame when things go down,” he said. “I think we all have to take a step back and say, ’we are one year into a pretty meaningful revolution in the capital markets that will take years to play out.”
“I would love for those same people to re-write that article in three and five years and see what it says,” Palihapitiya said.
