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SPAC Investing: Why Social Capital Picked Clover Health

By Keith Speights - Jan 22, 2021 at 8:15AM

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Here's the explanation from Social Capital CEO Chamath Palihapitiya.

Technology-focused health insurer Clover Health (CLOV -0.72%) considered going public via a traditional initial public offering (IPO). But special purpose acquisition company (SPAC) pioneer Social Capital had another idea. In this Motley Fool Live video recorded on Nov. 16, 2020, Tom Gardner, co-founder and CEO of The Motley Fool, talks with Social Capital co-founder and CEO Chamath Palihapitiya about why his company picked Clover Health.

Tom Gardner: Chamath, can you just describe the process that you went through in determining to go with Clover Health, rather than the previous charter of international tech business? What were a couple of the factors that caused you to make that shift? We generally like it when somebody changes their game plan if they see a better alternative. What are the steps you went through?

Chamath Palihapitiya: I'll be really honest with you. I've never invested in China, and so it's always been a black box. We've always had connectivity into China. One of my earliest partners in the version 1.0 of social capital is a gentleman, Li Ka-Shing, who he and his team have been great supporters of mine and I've been able to use them to really help me understand China, because even though he's Hong Kong-based he has deep relationships there. One of my partners is really well-connected into China, Ian Osborne.

When we framed IPOC upfront, we didn't make it the exclusive mandate, but we said we're going to really look internationally. We looked in Western Europe and we looked in China. The thing in Western Europe is that a lot of it are fintech businesses, and to be very honest with you, the fintech landscape is very complicated, and we can talk about why, but investing in fintech companies that are going public, you need to navigate tremendous land mines in the United States.

One is unit economics and LTV cut, which is getting increasingly heated and competitive, because even the laggard incumbents are waking up and giving everything away for free; free stock trading, free stock, free this, free that, so costs are going up. Then the regulatory oversight of these businesses is getting tighter. New York DFS and all these folks have a much more heightened sophistication and awareness of how they put it.

It almost took all the European companies off the radar, we couldn't do anything. Then somewhere along the way I'm like, "Holy [expletive], China is just a [expletive] show. We're not taking a company public, we're trying to do a deal with the government." There is zero edge that I have, and then I don't know how to be honest to myself, let alone everybody else.

We're actually doing the right thing here. It became very quickly obvious to us, not very, very quickly, but within a few months that, wow, we are not probably going to do an international deal odyssey. Then when we met Clover, we go back to how we underwrote Virgin, how we underwrote Tesla, how we underwrote Amazon, how we underwrote Opendoor, and it just checked a lot of the boxes.

At some point, we can talk about this, there's another part of this for me, which I haven't talked about a lot, but I am happy to, which is constructing a modern portfolio, what is the replacement of 60/40? If met one of these other boxes as well, which is disruptive innovation in these big pillar categories of how economic GDP gets created. To me, this idea of the healthcare business that right at the core of it just goes right to the heart of better outcomes, lower costs, using technology, I think just had enormous implications for the future, so that's how I got there.

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