I last wrote about Social Capital Hedosophia Holdings VI (NYSE:IPOF) and IPOF stock near the end of January. I suggested that investors consider buying all 26 of superstar investor and IPOF CEO Chamath Palihapitiya’s Special purpose acquisition company (SPAC) offerings, both current and future.
Palihapitiya’s six SPACs have raised $3.7 billion from investors over the past three-and-a-half years with IPOF, his most recent in October 2020, accounting for 27% of the total funds.
If the venture capitalist gets all the way to the letter “Z,” my guess is he’ll have raised almost $30 billion from investors when he does, with combinations totaling more than $150 billion.
While there’s no question that Palihapitiya will get rich from all this SPAC activity, recent data suggests his investors might not make out nearly as well.
The Truth About SPAC Performance
While SPAC’s are all the rage these days — through the first two months of the year, there have been 176 raising a total of $54.6 billion — there’s plenty of evidence that suggests you’re better off putting your fun money in something like the First Trust US Equity Opportunities ETF (NYSEARCA:FPX) or one of First Trust’s IPO alternatives.
FPX recently went over $2 billion in total assets after nearly 15 years in existence. Up over 50% over the past 52 weeks, it’s on fire. In fact, it’s been hot since its inception, up more than 600% on a cumulative basis.
Meanwhile, SPACs have a spotty record at best.
Part of this has to do with the structure of SPACs, while the quality of combination has also been less than stellar. That’s according to a November 2020 article by finance professors from Stanford and New York University.
The authors point to “three sources of dilution” that put a steep cost on the SPAC shareholders, the shareholders of the merger target, or both.
Looking at the three-month, six-month, and 12-month median returns post-merger of SPACs that merged between January 2019 and June 2020, they’re abysmal at -14.5%, -23.8%, and -65.3%, respectively. The FPX over the same period gained 36%.
Bloomberg Law recently published an article about post-merger SPAC performance that was a little more flattering. It showed that post-merger performance was mixed.
“Of all 117 SPAC merger deals—with an aggregate value of $99.3 billion—that were announced between Jan. 1, 2019 and Feb. 10, 2021, and for which definitive agreements have been entered into, 39 deals—with an aggregate value of $47.9 billion—have reached completion so far,” the article states.
The publication looked at 24 deals that had been closed for at least one month. Of those 24, 14 were in negative territory after the first month.
The worst performance?
Alta Equipment Group (NYSE:ALTG). It merged with B. Riley Principal Merger Corp. in February 2020. It lost 45.7% of its value in the first-month post-closing. Year-to-date through Feb. 25, it’s doing a little better, up 11.09%.
The SPAC went public at $10 in April 2019. As I write this, it’s trading at $10.89, a gain of just 89 cents over almost 24 months.
Of the 24 SPACS, you’ll notice that only six have both a one-month post-merger gain and a YTD gain, which suggests most of these have experienced a fair bit of volatility since their mergers.
What’s This Mean for IPOF Stock
SPACInsider.com keeps track of the performance of SPACs currently seeking a target. Of all the SPACs, IPOF has the fifth-best performance, up 74.8%. The median return is 11.5%. Annualized over a year, IPOF has the 15th-best return at 177.5%.
Of the SPACs that have announced an acquisition but have yet to complete it, Rodgers Silicon Valley Acquisition Corp (NASDAQ:RSVA) has the 14th-best performance.
It raised $200 million in December 2020. On Feb. 22, it announced a merger with Enovix, a designer of next-generation 3D Silicon Lithium-ion batteries. It’s got a projected annual rate of return of 2,042.7%.
However, to have a chance to achieve this projected return, its shareholders have to vote for the deal. If they don’t, shareholders can forget a return anywhere close.
While IPOF stock is backed by one of Silicon Valley’s rising stars, recent history suggests that SPAC disappointments will continue to be the norm. For this reason, it makes no sense to bet the farm on IPOF or any other Chamath Palihapitiya SPACs.
That doesn’t mean I don’t think you shouldn’t speculate on it. Just keep in mind there have been plenty of SPAC disappointments over the last couple of years.
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.