Chamath Palihapitiya spac

Amid the tech sell-off and the general pessimism towards SPACs (special purpose acquisition companies), Chamath Palihapitiya has dissolved two of the black cheque companies which were sponsored by him.

The SPACs in question are Social Capital Hedosophia Holdings IV (NYSE: IPOD) and Social Capital Hedosophia Holdings VI (IPOF) which had raised $460 million and $1.15 million respectively in the IPO. IPOF was among the few SPACs that had raised over $1 billion from the IPO.

In his blog post, Palihapitiya said, “Over the past two years, we evaluated more than 100 targets and while we came close to doing a deal several times, we ultimately walked away each time for a couple of reasons.”

He listed the high valuations of target companies as one of the reasons. Palihapitiya admitted that it is difficult to find companies that have a decent valuation and margin of safety.

Notably, earlier this year, Bill Ackman also dissolved his maiden SPAC which had raised over $4 billion and was the biggest SPAC IPO of all time. Ackman admitted that a lot of SPACs were hunting for merger targets which meant that the competition for quality assets is quite high.

SPACs Are in Trouble Amid the Tech Sell-Off

This basically means that companies looking to go public are still spoilt for choice and are seeking high valuations despite the slump in public markets. Notably, the valuations of private companies have also been hit by the tech rout and Stripe recently raised funds at a much lower valuation than its previous funding round.

Retail investors usually buy into a company after the IPO. We however have a guide on how to invest in startup companies.

In his blog, Palihapitiya also pointed out that given the volatility in public markets, a lot of companies are delaying their listing plans. To be sure, the performance of newly listed companies has been quite disappointing. IPOs as well as de-SPACs have tanked amid the sell-off in growth stocks.

The Renaissance IPO ETF, which invests in newly listed companies is down 47% so far in 2022 and best summarizes how the fortunes of IPOs have tanked in 2022. However, despite the rout in newly listed companies, some of the upcoming IPOs like Instacart are attracting a lot of attention from investors.

Palihapitiya Dissolves SPACs, to Return Money to Investors

The two SPACs that Palihapitiya has dissolved would now return the money that they raised in IPO plus any accrued interest in the SPAC trust account to the stockholders. Notably, Palihapitiya-backed SPACs have taken several companies including Virgin Galactic, SoFi, Opendoor, and Akili public.

All the companies that went public with a Palihapitiya-backed SPAC trade below the IPO price with Clover Health being the worst performer. Hindenburg Research accused Clover Health of fraud and hiding material facts from investors. Earlier this year, short seller Grizzly Research accused Chinese electric vehicle company NIO of accounting fraud.

In 2020, SPACs emerged as an attractive alternative for companies looking to go public. The process was cheaper and seamless and allowed companies to go public much sooner than the traditional IPOs.

Also, given the regulatory laxity, merger targets were allowed to provide financial projections, a privilege that companies going public through IPOs don’t have.

Palihapitiya Became the ‘King of SPACs’

Palihapitiya became the “King of SPACs” and launched multiple SPACs. However, given the market turmoil, even Palihapitiya-backed SPACs have tumbled. Meanwhile, analysts see SoFi, which merged with Palihapitiya’s IPOE, as a cheap stock amid the slump.

All said, the tech sell-off has deepened amid the aggressive tightening by the Fed. The US Central Bank is expected to announce a 75-basis point rate hike today and some fear that it might even announce a 100-basis point rate hike.

Growth stocks have crashed this year amid the rise in Treasury yields. However, there are some investments that can outperform during inflation.

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