I’m of mixed mind regarding special purpose acquisition companies (SPACs) such as Social Capital Hedosophia Holdings Corp VI (NYSE:IPOF). On the one hand, it’s not often regular punters get to ride along with a venture capital superstar like Chamath Palihapitiya. On the other, SPAC opportunities like IPOF stock are becoming a dime a dozen.
Every venture capitalist has one.
In my last article about IPOF stock, I suggested it was unlikely to break a historical pattern of SPACs underperforming post-merger. For this reason, I recommended only fun money be used for betting on the latest edition of Palihapitiya Inc.
Performance Has Been OK
Palihapitiya tweeted a rundown of the performance of his six SPACs and eight PIPEs (private investment in public equity) through March 5. The VC likely did this as a form of therapy, given how many of his investments have taken a hit lately.
According to Palihapitiya, his 14 public investments have had a median return of 23.1% since inception, a year-to-date median return of 5.1%, and a week-over-week media return of -12.3%.
@thatstocksgirl responded to the VC’s tweets on performance:
Why don’t you actually focus on a few good quality companies rather than a gazillion that clearly don’t have a good return. 5% average for all of them YTD? No thanks I won’t be investing [in] your companies.
I don’t know; if I could average a 1% return monthly, in perpetuity, I’d be fairly happy. But hey, I get the point. He’s a professional VC who gets paid a lot of money to make investments. He should be doing better.
The bloom may have not only fallen off the Social Capital Hedosophia rose and IPOF stock, but it’s also fallen off the SPAC rose as well.
So, what’s an investor to do?
Consider Your Options Other Than IPOF Stock
In fairness, I did say in January that, like venture capital, SPAC investing requires that investors make a lot of bets. If speculative by nature, buying fractional shares (equal-weighted) of all 26 Social Capital Hedosophia SPACs, past, present, and future, wasn’t the worst idea in the world.
If you’ve got fun money, despite @thatstocksgirl dumping on the idea, I think you’ll win in the long run. However, I could say the same about a lot of meticulously constructed 26-stock portfolios.
More and more, I think there are two routes to follow if you want to make money from SPACs.
The first way is to figure out how a retail investor like yourself can buy SPAC units through the IPO. Alternatively, you buy units post-IPO, but before units are split into common and warrants after 45 to 52 days. This way, you can redeem your common shares while holding on to the warrants until a target is announced. At this point, depending on the company, you exercise your warrants for common or sell the warrants. That’s what institutional investors do.
Secondly, you buy an exchange-traded fund (ETF) that invests in SPACs. Right now, there are three that I know of.
The first is Defiance NextGen SPAC IPO ETF (NYSEARCA:SPAK). I recommended it last September, along with nine other IPOs of various flavors. In the six months since its launch, it’s managed to attract $84 million in net assets. It splits the weighting of portfolio 60/40 with 60% invested in SPACs post-combination and 40% in SPACs still looking for a target. At 0.45%, it’s a reasonable price to pay for passive diversification.
The other two SPACs are The SPAC and New Issue ETF (NYSEARCA:SPCX), and Morgan Creek-Exos SPAC Originated ETF (NYSEARCA:SPXZ). Both are actively managed funds. They’ve managed to attract $140.9 million and $35.3 million, respectively.
In January, I recommended SPXZ as a safer way to play Canoo (NASDAQ:GOEV), a post-combination SPAC that I like. It invests one-third of its portfolio in pre-combination SPACs and two-thirds in post-combination SPACs. All are equal-weighted. So, it rebalances monthly to maintain its targets.
As for SPCX, it invests only in pre-combination SPACs. As such, it won’t hold something like DraftKings (NASDAQ:DKNG), which is SPAK’s largest holding at 11.05% of its $84 million in net assets. SPCX currently owns 91 pre-combination SPACs, with Starboard Value Acquisition Corp (NASDAQ:SVAC) its largest holding at 4.67%.
Because SPXZ and SPCX are actively managed, they charge more at 1% and 0.95%, respectively.
The Bottom Line
If you take the best performance and the worst performance out of 14 current Social Capital Hedosophia investments, the average return since inception, the average falls to 48.3% from 60.9%.
What’s interesting about Palihapitiya’s tweet is that he doesn’t try to figure out the S&P 500 return or the Nasdaq return for each of the holding periods relative to the SPACs. I’m pretty sure we’d see that the index’s performed quite well in comparison.
While I continue to find SPACs a fascinating subject for study, I’m not sure they deliver goods for average investors.
Has the bloom fallen off the Social Capital Hedosophia rose? At least a little. I guess we’ll find out how much as we make our way through 2021.
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.