Virgin Galactic deal sparks interest in obscure investment vehicle

Sir Richard Branson takes a tour of the new Virgin Galactic SpaceShipTwo as it deployed to the Mojave Desert, around a year and a half after Virgin’s last rocket plane shattered to pieces and killed the test pilot.

Al Seib | Los Angeles Weather | Getty Images

There’s a lot of excitement that tech superstar Chamath Palihapitiya’s Social Capital Hedosophia is buying a 49% (roughly $ 800 million) stake in Virgin Galactic to perform space flights. Part of the excitement is due to the unconventional but exciting investment – the space – but also to the fact that social capital can be one of the most successful PSPC investments, a previously boring area that has become, with IPOs, a hot investment vehicle.

Hard to believe, but PSPCs barely existed two years ago. Short for Special Purpose Acquisition Company, these are blank check companies that are formed for the purpose of amalgamating or acquiring other companies. They are usually trained by veterans of key industries or by well-known negotiators. The pitch is quite simple: “I’m a famous person in the business (oil industry, tech company, trading company, etc.) and I want to buy something. Trust me.

This is what Chamath Palihapitiya did in September 2017. Here is the pitch to investors: “We intend to focus our research on a target company operating in the technology industries.

That was it.

The trader typically sets the price of SPAC at $ 10 and typically has two years to complete an acquisition. This is what Social Capital did: it valued 60 million shares at $ 10 in September 2017. It’s $ 600 million, but Palihapitiya has not announced what it is investing in until today. hui.

It’s a long time to wait for an investment, but it doesn’t matter: SPACs, as well as IPOs, are suddenly fashionable investment vehicles. 28 SAVS went public this year, raising $ 6.1 billion, which, at this rate, will easily surpass the 2018 record of 46 SAVS, according to Renaissance Capital.

Growing popularity

Why are PSPCs suddenly so popular? Having a vibrant stock market and a vibrant IPO market helps, but there is also a growing interest in hiring professional experts to make purchases on behalf of investors.

“What you are buying is a management team with a lot of experience, which is very attractive to investors,” Carolyn Saacke, director of capital markets operations at the NYSE, told me. 2017, when the first SPACs launched on the NYSE. “They usually have a lot of experience with mergers and acquisitions in the companies and the industries they come from, so they are confident that they will be able to buy a company at a decent price.”

Another help for PSPC investors: there is an “exit clause”. The proceeds of the IPO are initially held in a trust account that can only be accessed to make acquisitions. Once acquisitions are completed, public shareholders can choose to buy back their shares for cash if they do not wish to stay in the deal.

Do SPACs make money for investors? The question is not simple, since companies cannot do anything for more than a year before making acquisitions.

Bad track record

But Matt Kennedy, who analyzes IPOs and SAVS at Renaissance Capital, notes that the overall track record is uneven: “On average, they don’t do it well, but there have been exceptions.”

He notes that since 2017, there have been 108 SAVS. The average return was a meager 2%, but that includes companies that have not made any acquisitions.

Of the 22 who made acquisitions, the average return was down 13.5%.

One of the reasons for the underperformance is what Kennedy calls a “search commission” that allows founders to buy into PSPC, essentially for nothing. In Social Capital’s case, the original shareholders got 20 percent of the company at an insider price of $ 0.002 cents. This is not a typo: $ 0.002 cent. Public shareholders got the remaining 80 percent of the company for $ 10 a share.

This is a serious dilution.

Kennedy also notes that in most cases, investors also receive warrants that allow them to buy more shares at an agreed price once the deal is completed. They can also sell these warrants, which can add additional value.

Despite the uneven record, as long as the market holds up, many more PSPCs are coming. There are two this week alone, including Pivotal Investment Corp II, which plans to raise 20 million shares at $ 10 on the NYSE on Friday. It is led by Jonathan Ledecky, co-owner of the New York Islanders and well-known investor in his own right.

What is he buying? Battles Me: The company intends to “focus our research on North American companies in industries poised to experience disruption from ever-changing digital technology.”

Is it clear enough?

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