Have you thought about buying Social Capital Hedosophia Holdings Corp. VI (NYSE:IPOF) and IPOF stock?
I get the urge.
I don’t think there’s any question that if you had to name major players in the burgeoning world of special purpose acquisition companies (SPACs), Social Capital Hedosophia would have to be at the top of the list.
Social Capital Hedosophia Holdings, through its affiliate SCH Sponsor Corp., is the creation of two men: Chamath Palihapitiya and Ian Osborne.
The former runs San Francisco-based venture capital firm, Social Capital. The latter is the co-founder and Chief Executive Officer of Hedosophia, a London-based venture capital firm.
Hence the name.
Together, the duo plan to create 26 SPACs, up from the six they’ve already raised funds for, including three where a combination has been completed, one where a combination’s been announced, and two where they are searching for targets as we speak.
What began as a simple idea in September 2017 with Social Capital Hedosophia Holdings Corp. raising $600 million from investors became the beginnings of a SPAC empire when it merged with Richard Branson’s Virgin Galactic (NYSE:SPCE) in October 2019.
15 months on, Social Capital Hedosophia has raised $3.7 billion from investors, including $1 billion from IPOF, its SPAC IPO from October 2020.
While there is a temptation to get on the Social Hedosophia bandwagon, why not wait for the Social Hedosophia ETF? At the pace it’s going, it ought to get to IPOZ by the end of 2025.
Seriously, though, given fractional shares make buying all six of its SPACs, and any more that come down the pike, a simple task, would it be so bad if you bought all 26?
Here are my thoughts on the subject.
Buy IPOF Stock and All the Rest
As I said, Social Capital Hedosophia’s raised $3.7 billion so far. The market capitalization of those six SPACs is currently $31.5 billion, with Virgin Galactic and Opendoor Technologies (NASDAQ:OPEN) accounting for 76% of the total.
Even if some of these SPACs flame-out, if you participated in all six IPOs, the odds are good you’ve made a handsome return on your investment.
Social Capital Hedosophia Holdings Corp. V (NYSE:IPOE) announced on Jan. 7 that it would merge with financial services platform, SoFi, in a transaction valued at $8.7 billion. The merged business will have $2.4 billion in cash at its disposal from IPOE’s trust account along with $1.2 billion private investment in public equity (PIPE), and cash held on SoFi’s balance sheet.
SoFi has more than 1.8 million members who’ve used its digital platform to borrow, save, spend, invest, and protect their money since inception. It’s on track to generate $1 billion in annual revenue in 2020, 60% higher than a year earlier, with adjusted EBITDA profitability.
Assuming Social Capital Hedosophia’s shareholders approve the merger, the deal should be completed sometime by the end of March.
SoFi’s been run for the last three years by CEO Anthony Noto, who was brought in from Twitter (NYSE:TWTR), where he was Chief Operating Officer, to help clean up its toxic corporate culture.
Palihapitiya’s reasons for going with SoFi are straightforward.
“What I did was just kind of systematically try to figure out what was broken in banking and then try to figure out which company was best representative of the solutions that people wanted,” Palihapitiya said, “which I can basically tell you is three things; people want low to no fees, they want fair and transparent lending and they want a full suite of products so that you can basically have a one stop shop.”
Investors should expect SoFi to grow by further acquisitions and organic growth from its large customer base. It will be interesting to see what the company does to challenge this country’s major financial institutions.
Palihapitiya and Osborne Will Get Bored
There’s no way of knowing when or if the SPAC will flame out. I suspect, like most newish investment vehicles, investors will get a lot more selective about the SPAC sponsors they back.
In the meantime, to get to IPOZ, Social Capital Hedosophia has to launch 20 more SPACs. Averaging $617 million raised per SPAC, if the average holds and they’re successful in getting all the way to the end of the alphabet, that will mean an additional $12.3 billion raised for combinations that could deliver more than $120 billion in equity five years down the line.
We have To Get There First
David Erickson, Senior Fellow in Finance at The Wharton School, University of Pennsylvania, recently wondered if 2020 will become known as the “Year of the SPAC ‘Bubble.’”
“As we saw back in 2000 with the Tech ‘bubble,’ the fraying started as more and more of the ‘dotcoms’ went public, the stocks’ of those companies, that had done their IPO most recently, started to trade poorly,” Erickson stated on Dec. 18, 2020.
“As a result, investors started to lose money, and eventually lost their enthusiasm. This eventually caused the ‘dotcom’ IPO market to seize up, as more struggled to complete their IPOs.”
It’s quite possible that the same thing could happen with SPACs, especially those that have little in the way of revenues to keep investors engaged in their growth story.
Of the three combinations already completed: Virgin Galactic, Opendoor Technologies, and Clover Health (NASDAQ:CLOV), none are profitable.
Should the Covid-19 economy continue into 2022, that could very well be the event that triggers a retreat from SPACs.
The Bottom Line
Just as Social Capital and Hedosophia make venture capital bets on many different businesses hoping that a few will blast off, the same approach can be made with SPAC investments.
If you can afford to lose a few thousand dollars, I absolutely would consider buying all 26 SPACs using fractional shares. That’s what they’re designed for.
IPOF stock, like the rest of them, is a speculative buy in my book.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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