Before a few months ago, I couldn't imagine buying a stock before knowing something about the company I was investing in. But special purpose acquisition companies, or SPACs, have changed that calculus for investors.
SPACs provide a quick and easy way for companies to go public without the hassle of the IPO process. And they have given retail investors a chance to get in on exciting companies before they really hit the market.
But the key to buying SPACs before they merge with a company (and are just a cash holding) is to trust the SPAC leaders or sponsors. After three successful SPAC mergers by Chamath Palihapitiya (and another one announced), his SPACs Social Capital Hedosophia Holdings IV (IPOD) and Social Capital Hedosophia Holdings VI (IPOF) are worth buying.
Image source: Getty Images.
Venture investing for the rest of us
The best analogy I can make for SPAC investing is late-stage venture investing. Investors in a venture fund put huge sums of money into a fund and trust the general partner to do what's best with that money. That's effectively what investors are doing by investing in the Social Capital Hedosophia family of companies. They're betting on Chamath Palihapitiya more than anything else, and he has a track record of success. Here are the stocks, listed by their ticker symbols past and present, in this family of SPACs.
IPOA Sold 60 million shares for $10 per share to raise $600 million. Eventually merged with Virgin Galactic Holdings (SPCE -5.47%).
IPOB Sold 36 million shares for $10 per share to raise $360 million. Merged with Opendoor Technologies (OPEN -3.59%).
IPOC Sold 72 million shares for $10 per share to raise $720 million. Merged with Clover Health Investments (CLOV 3.19%).
IPOD Sold 40 million shares for $10 per share to raise $400 million.
Social Capital Hedosophia Holdings V (IPOE) Sold 70 million shares for $10 per share to raise $700 million. Recently announced a merger with SoFi.
IPOF Sold 100 million shares for $10 per share to raise $1 billion.
Each of these stocks originally sold for $10 per share, and you can see below that they've all made money for investors. Virgin Galactic, Opendoor, and the SoFi SPAC have been outstanding performers.
Data source: YCharts.
With IPOD and IPOF, investors don't actually know what they're getting, but if Palihapitiya can find a great company to merge with, they could be big winners.
Getting in before the merger
The risk in getting in before the merger is announced is that as investors, we don't know what we're buying. The upside is that it's like buying a company pre-IPO.
You can see above that IPOE jumped sharply when the SoFi deal was announced, and investors in that SPAC may want to hold on to an emerging growth stock. As I said above, it's like investing in a venture capital fund: You don't really know what you're investing in and have to trust the person with your money.
Two SPACs to buy now
It's a risk, but with Palihapitiya's track record, IPOD and IPOF are SPACs investors can reasonably expect will acquire a great company. That's why these are two SPACs to buy before they find a partner to merge with, and I hope they find the next great growth company to hold for decades.