Why Some SPACs Win Big and Others Don't

Special purpose acquisition companies (SPACs) appear to be taking the investing world by storm. And Chamath Palihapitiya, venture capitalist and CEO of Social Capital, is at the center of that storm. In this Motley Fool Live video recorded on Nov. 16, 2020, Bill Mann, director of small cap research for The Motley Fool, talks with Palihapitiya about why some SPACs win big while other's don't.

Bill Mann: When you came out with IPOA, I think it's fair to say that the SPAC path to going public did not have the best reputation. As we've come along, we've seen a bit of a wave and over this year we will raise, by the end of the year, manifold what has ever been raised through this process before. Do you see excess in that on a deal by deal basis?

Chamath Palihapitiya: I think that we're going to have a distribution of outcomes in SPAC land that is no different than the distribution of outcomes in any other part of the capital markets.

When you look at hedge funds, there are some great hedge funds and there are some crappy hedge funds. The same with private equity, same with venture capital, same with ETF's. There's no free lunch, right? Some will be expensive some will be cheap.

Then there will be people over the course of years and tens of years that just are consistently better. They'll have a process that may sound easy to understand or hard to understand. But you know, to the extent that you can participate with them, you'll do better. I think that that's what's going to happen. I think that there will be some really, really tragic outcomes in SPACs. But I also think that there's going to be a lot of home runs and grand slams in SPACs as well.

It's going to come back to more data that allows the investors to make better decisions. Just to give you an example you know, we now have enough SPACs to have an early read of how to discern sponsor quality. For example, going back to what I said, sponsors who invest their own money generate meaningfully better returns than sponsors who don't. Now there's a litmus test that people can use to start grading, right, into start predicting future performance based on past results to the extent you want to believe in that.

Another thing that's come out as a body of knowledge around the experienced set of the sponsor. Sponsors who are operators and who've run businesses before like myself and Adam Bain, who runs our IPO 2.0 platform, generate outcomes that are 40 percent better than the average than folks who are just financial engineers running SPACs. Those sponsors generally tend to underperform by 10 percent.

So all of these data points will get further refined over time. Then the reality is that you can pick based on who performs. There'll be a bunch of data points that allow you to understand that. We all could sit around the table and say, I think there's a lot of, for example, over-focus on the promoting the fees. I think it's stupid.

The reason is because I'm in the market to make a market to put my money at risk and I think I should get compensated if I'm right. But if you allowed me to put literally all of my money into Jim Simons' Medallion Gold, which charges 550, I would do it. I would walk away and I wouldn't complain about the fact that Jim Simons is going to tax my money 550. Because he's proven over 30 or 40 years is going to generate high thirties net on my capital.

So I just think that over time we're going to replace the discussion of the promote with really what is the net return to me as an investor? What are the dimensions that allow me to pat manager selection? That's the same dynamic that exists in every other part of the capital markets ecosystem, and I think it'll happen here.