These days, Chamath Palihapitiya seems to defy gravity. The question is whether anyone else can perform the simple act of taking a company public.
Mr. Palihapitiya’s third special purpose acquisition company, or SPAC, broke a cold streak in the IPO market this week with a $720 million offering by Social Capital Hedosophia Holdings Corp. III (ticker: IPOC-UN), which seeks a target in the technology industry overseas. It was the first IPO over $500 million since Flying Eagle Acquisition Corp raised $690 million on March 5, according to Dealogic, and came sooner than many investors expected given the extreme recent market volatility.
Part of the reason for Mr. Palihapitiya’s latest success is almost certainly tied to the impressive performance of his first SPAC, which acquired Richard Branson’s Virgin Galactic Holdings, Inc. and has traded amazingly well in an otherwise weak market. The new SPAC apparently drew interest from investors who got wind of it outside of a small circle and upsized the deal from an original planned offering of $600 million.
Indeed, Mr. Palihapitiya made fairly minor concessions to push the deal through. Each unit comes with 1/3 warrant, which is more than the 1/4 warrant that has become common with large, brand name deals. And the SPAC agreed not to spend any trust money on working capital. That compares with roughly $1 million allowed for working capital in typical offerings earlier this year, according to B. Riley FBR’s SPAC Desk, which is separate from the firm’s Research Department.
It is also extraordinary considering the flight to cash that occurred among SPAC investors in late March. At that time, SPACs traded with yields of 3% or more on cash in trust, if only for a few days.
Will others follow Mr. Palihapitiya? At least three SPAC IPOs – CC Neuberger Principal Holdings I, GigCapital3, Inc., and Chardan Healthcare Acquisition 2 Corp. – all look set to price fairly soon.
It’s important to remember that SPACs are ultimately an extremely safe asset, which may appeal to investors with worries about the full impact of the pandemic. Each SPAC will hold cash in trust, meaning investors with enough patience to wait for a chance to redeem have virtually no downside.
And there are signs that the “De-SPAC” process can still work in this environment. Indeed, Diamond Eagle Acquisition Corp. is on the verge of completing its merger with DraftKings, Inc. The shareholder vote to finalize the deal is Thursday.
All that suggests a recovery in SPAC deals – from IPO to merger – is already underway, even if the thaw may take some time. But for regular-way IPOs, which had struggled even before the coronavirus took hold of Wall Street, the wait will likely be much longer.