This SPAC boom has been absolutely incredible. Investors are throwing money at venture capitalists to bring companies public at a pace that is mind-boggling. In the case of Social Capital Hedosophia Holdings Corp. VI (NYSE:IPOF), investors are hoping Chamath Palihapitiya can take IPOF stock to the moon.
Palihapitiya has become one of the most recognizable names in venture capital. He’s released a series of SPACs, this being the sixth, with the intention of bringing growth companies to market.
His past successes have spurred a wave of investment that have justified his string of SPAC offerings. Investors may remember his first SPAC, Social Capital Hedosophia Holdings Corp. I (NYSE:IPOA), which ultimately became Virgin Galactic (NYSE:SPCE).
To date, IPOF is a SPAC without a target. No announcements on a target have officially been made. Accordingly, investors in IPOF stock are investing in the Palihapitiya brand at the moment.
No News Isn’t Always Good News for IPOF Stock
Investors are impatient these days. The lack of movement on announcing a target has resulted in a loss of altitude for IPOF stock.
Since IPOF’s peak earlier this year, shares are down more than 30% in anticipation of a target announcement. Indeed, this anticipation appears to be killing investors.
There are two schools of thought with respect to SPACs taking their time with announcing a merger. The first is: Palihapitiya and associates are taking their time with their due diligence. They’re looking for the best possible company out there, picking from a wide range of high-quality options right now. Swinging at the first pitch is for rookies.
The second is that maybe the table’s been picked over and there are only scraps left. Maybe potential targets are having second thoughts about the SPAC process as compared to a traditional IPO or direct listing.
The reality is probably somewhere in between. Indeed, Palihapitiya and his team have a lot on their plate right now, and market conditions are still favorable.
The SPAC market isn’t as hot as it was a few weeks ago, but we’re talking about the peak of the mania. Speaking of mania…
SPACs Getting Bigger and Bigger
One of the reasons many believe IPOF is taking its time in finding a dance partner is its size. The three most recent SPACs released by Palihapitiya (IPOD, IPOE, and IPOF) totaled $350 million, $650 million, and $1 billion, respectively.
Apparently, size does matter.
The bigger the deal, the larger the target. Indeed, larger targets tend to be more sophisticated, established companies. Therefore, these companies tend to have their pick of the litter when it comes to SPAC suitors.
It’s a supply and demand game, and with supply restricted and SPAC demand increasing substantially, it’s understandable this deal is taking time to materialize.
That said, a bigger deal provides more potential upside to investors looking for IPO-like returns post-merger. Larger, established venture companies often perform better, or at least with less volatility, compared to smaller, niche offerings.
Given Palihapitiya’s track record, IPOF stock has understandably demanded a premium valuation. This large SPAC could turn out to be exciting, and personally, I’m intrigued.
I think IPOF stock is a perfect option for SPAC investors today. You’ve got an experienced venture capital guru with the golden touch picking a stock on your behalf.
There are IPO-like potential returns on the upside, and little in the way of immediate near-term downside in this market to throw a few shekels Social Capital’s way.
That said, this is a stock for SPAC investors only. I think the degree of volatility with these stocks is outside most investors’ risk tolerance levels.
Yes, recent returns have been great for SPAC investors. However, if the market turns sour on SPACs, these speculative vehicles could provide some real pain for investors who may not have understood the risks to begin with.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.