Why Chamath Palihapitiya is welcoming the SPAC market correction
Chamath Palihapitiya CEO, Social Capital founder
Social Capital’s CEO and founder Chamath Palihapitiya has become synonymous with SPACs, despite the multitude of Wall Street deals that have been made in recent years.
SPACs (or special purpose acquisition corporations) raised over $83 billion in 2020, up from $13 Billion in 2019. SPACs had raised $125.7 million through 435 deals between July and 2021.
Palihapitiya said that SPAC deals are welcome, as they allow for capital to be raised in an IPO, and can then merge with a private firm and make it public.
Palihapitiya stated that “In every market, there are a few pioneers and then you get a lot more fast-following. And I believe it’s important to step back once you have all this fast following,” Palihapitiya explained at the CNBC conference. Delivering Alpha conference.
He stated, “I think that we’re currently in the midst sorting out that and separating the wheat form the chaff.”
Although there were more SPAC IPOs than usual this year, it is beginning to look less hyped.
As of September 6, 125 Blank-Check deals had been closed and 58% were trading below $10. This is the average price for their IPO. according to a CNBC analysis of SPAC Research dataIt is possible to. SPACs can be priced based not on the existing value of a business, as opposed to traditional IPOs.
Furthermore, more that a third (or more) of these blank check deals saw more than 50% redemption of public shares, suggesting investors are losing faith in the SPAC hype.
Palihapitiya however stated that there are significant differences in success between “quality sponsors” who provide good deals and those who have skin in this game.
“The incentives don’t match up to bring about great outcomes at the SPAC beginning and ending,” he stated. We must force sponsors to take on more risk capital.
Palihapitiya asked the SEC Chair Gary Gensler for more capital to be put up by SPAC sponsors so that “if I want a billion-dollar SPAC to raise, I must come up with $100 millions.”
He said, “I might or may not be able to come up with an excellent deal but I will take it seriously and pay close attention and that has lots of positive knock-on consequences.”
Palihapitiya has many SPACs on 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.
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.”
As the face of the SPAC space in the eyes of many investors, Palihapitiya has been a target for critics.
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 allAbout, 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 what they wrote?” I don’t. What do I think they should be allowed to do? It’s okay, but is it something I like about it?
Palihapitiya stated that, amid criticism regarding the results of other SPAC bets he made, he has chosen to “stay still and keep my head”
His statement was, “I am going to receive a lot if things are going up but I will also get some of the blame when things fall down,”. I think everyone needs to stop and look back at the fact that we are just one year into an important revolution in capital markets, which will continue for years.
“I wish those exact people were my friends.” re-write that articleIn three or five years you will see the results,” Palihapitiya explained.
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