The SPAC (Special Purpose Acquisition Company) market is NOT catching a break. Short sellers have picked their fight with SPACs ...and the short sellers are winning. As the face of SPACs, Chamath Palihapitiya (the "SPAC King"), seems to be going down with them.
There's been a lot of news pushing the negative narrative on the SPAC market recently. You don't have to tune into CNBC for too long before hearing about the SPAC bubble, or better yet the "SPAC craze" or "SPAC frenzy". 🙄
“The SPAC phenomenon will end badly and leave many casualties,” Marshall Wace said, whos hedge fund has more than $1 billion of gross exposure to SPACs.
At the end of the day, I DON'T care about the narrative... I care about the numbers (as should you). So, the question we need to be asking ourselves is... should we be scared, or is this a buying opportunity?
Without a doubt, there is a frothiness we need to be aware of... More than 300 SPACs raised in nearly $100 billion this year alone; and that's after raising more than $80 billion last year. Chamath contributed by raising more than $4 billion in these blank-check himself via Social Capital.
SPACs have clearly been on the SEC radar, which they appear to be cracking down on more recently. Short sellers, as well as the media, have also been on the attack.
- February 4, 2021: Hindenburg Research released their short seller report on Chamath's Clover Health, indicating a big oversight on disclosure of a key DOJ Investigation to prospective investors.
- March 10, 2021: The SEC advised investors not to make decisions based on celebrity-endorsed SPACs.
- April 8, 2021: The SEC issues another warning on financial projections in SPAC presentations (vs. IPOs)
- April 12, 2021: The SEC updates reporting requirements for SPAC warrants as liabilities
- April 17, 2021: Bloomberg releases, "SPAC Wipeout Is Punishing Followers of Chamath Palihapitiya" claiming that his SPACs that have been among the worst bets.
All of this, in short, leads to the SPAC market taking a nose dive and Chamath being the poster child of it all. He hasn't formally responded to the Clover Health allegations (which I'm more interested in), but he did apparently respond to Bloomberg's article on Twitter by posting the inception-to-date returns of his SPACs.
It's my opinion that Clover Health was his only miss, and I think he's hurting his reputation by not addressing it better. It could be a legitimate mistake he made... in which case it's best to come out and admit it. His followers deserve that closure. Because, right now, he's getting more haters than followers.
Some of the criticism on his post was that:
- NASDAQ is a better comparison for his technology companies – which is a fair a point.
- IPOE is driving most of the outperformance, which benefited from a huge Day-1 "pop".
- He released the figure after the CLOV short squeeze (lol).
Ignoring what he does as a promoter, I honestly don't see a reason NOT to trust Chamath as an investor. He has proven to be good at what he does. He's a billionaire for a reason. And, with the exception of Clover Health, I do see the vision of the companies he's bringing public.
What is the buying opportunity with SPACs right now?
There's two strategies (for pre-merger SPACs) that I would play.
- Buy only SPACs trading at a discount to NAV, with solid management, and a proven track record. You can't go wrong with this strategy. In the worst case, you'll capture a small yield... and in the best case you'll capture a nice post-deal or post-rumor "pop". At that point, just exit the position. This is known as the SPAC Arbitrage strategy. There are a lot of SPACs fitting this criteria now, whereas a couple months ago, it was impossible to find anything at a discount. You just need to be patient... so allocate the "safe" part of your portfolio to this strategy.
- You can also take a little more risk with the same strategy by buying into the high-profile SPAC sponsors, like Chamath or Bill Ackman, whose SPACs will probably never trade at a discount. But, they've taken a SIGNIFICANT beating from their highs. Chamath's IPOD and IPOF are both trading at or below $10.50, which still represents an amazing risk/reward ration imo.
I do believe that Chamath can and will come through with another home run. Obviously the negative PR isn't helping him, or his SPACs, right now... but isn't that the opportune time to buy?
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