The SPAC King Is Doing Just Fine Even as the Bubble Starts to Burst
(Bloomberg Businessweek) -- One morning last October, as wildfires raged across Northern California, President Donald Trump convalesced from Covid‑19, and Congress debated how big of a stimulus bill would be needed to rescue the economy, Chamath Palihapitiya went on TV to pitch investors on the latest stock he was taking public.
In a blue blazer and glasses, and accompanied by a bulletpointed slide deck, the Facebook-executive-turned-venture-capitalist explained how Clover Health Investments Corp. uses powerful machine-learning software to recommend treatments that keep people healthier. He predicted confidently that the insurer’s revenue would triple in two years and that its stock would increase tenfold in a decade. He granted that, yes, he’d received a stake in Clover for setting up the deal to take it public, but he said his interests were aligned with those of other investors, because he and his partners had also put about $171 million into the company themselves. “There is no way that I can win unless the stock goes up,” he told CNBC’s Squawk Box, slicing his hand through the air to punctuate each word. “This is not some get-rich-quick scheme, at least for me.”
What Palihapitiya said was partially true, in that someone who’s already wealthy enough to be part-owner of the Golden State Warriors can’t by definition get rich quick. But the way the deal was structured made it almost impossible for him to lose. Even as investors who bought the stock after watching him on TV would lose 28%, as of May 11, Palihapitiya and his partners would almost double their money, much of which was borrowed to begin with.
This kind of financial virtuosity has made Palihapitiya a billionaire, not to mention a hit on social media. He has 1.5 million Twitter followers, a popular weekly podcast, and an audience of day-trading millennials and zoomers who hang on his every word. He’s 44, cocky, blunt, and seems like the kind of guy who’d take pleasure in calling BS on current stock market hype—if he wasn’t the one behind it.
Instead, Palihapitiya argues that traditional value investors, who say some stocks are massively overpriced, are morons. Markets, he says, are all but guaranteed to go up as long as the Fed keeps printing money, and individual investors who buy popular stocks are outsmarting Wall Street. His take may be questionable, but it’s entertaining as hell.
In late January, when sober-minded financiers warned that the mania around GameStop Corp., the once-beleaguered video game retailer beloved by Reddit users, would end badly, Palihapitiya took the fun side of the bet. He invested in it himself, then criticized the brokerage firm Robinhood Markets Inc. when it temporarily suspended trading, causing the price of the company’s shares to fall. “These motherf---ers should go to jail,” Palihapitiya said on his podcast, All-In, where he and several friends talk about technology, politics, and investment strategies. Their catchphrase—“Wet your beak!”—was once gangster slang for extortion. As used by Palihapitiya it means “make tons of money on the stock market and feel awesome about it.”
Social media influencers of Palihapitiya’s stature and charisma tend to monetize their following by promoting some sort of salable product—say, a detox tea or a line of home goods. Palihapitiya has the SPAC, or special purpose acquisition company; the Clover investment was one of them. When he called for the incarceration of Robinhood’s C-suite, he suggested his fans pull out their money and put it into a competitor, Social Finance Inc., better known as SoFi, which is merging with another one of his SPACs.
Think of a SPAC as a pile of money with a ticker symbol. An investor puts in $10 and gets back one share of publicly traded stock. Then the SPAC’s sponsor uses the stash to merge with a company like Clover, taking a shortcut around the IPO process and turning a private company public. Besides the speed, the structure offers two other important advantages: First, the sponsors get to keep 20% of the stock for themselves as a kind of fee. And second, unlike in a traditional initial public offering, even an unprofitable company can make ambitious projections about all the money it’s about to make. With SPACs, pretty much any amount of boasting goes.
Although they’ve been around for decades, SPACs exploded in popularity in 2020, after Palihapitiya’s first blank-check company—originally known by the ticker symbol IPOA—saw its stock price triple four months after merging with Virgin Galactic, a Richard Branson-founded enterprise that aims to blast tourists into space. Palihapitiya has since started five more SPACs—known as IPOB, IPOC, IPOD, and so on—raising more than $4 billion. He says he’ll eventually do 26 deals, one for every letter of the alphabet.
Today it seems almost every rich, underemployed man with a bit of name recognition has raised, or is raising, a SPAC, seeking to earn a big payday by finding a company to buy. There are SPACs advised by retired athletes (Alex Rodriguez, Shaquille O’Neal), SPACs advised by washed-up politicians (Paul Ryan, John Delaney), and one SPAC advised by a dream team of NBA great David Robinson and former Senate Majority Leader Bill Frist. About 600 SPACs have raised more than $186 billion since the beginning of last year. Some double or triple in price even before announcing any plans as investors trade tips about which electric-truck or flying-taxi startup the SPAC might buy. Palihapitiya “created a template that all SPACers could follow,” says Mark Cuban, the Shark Tank host and fellow NBA owner. “He knew what made them work and created a narrative that new investors could understand.”
Palihapitiya’s ego has seemed to expand along with the market for the hot new investment structure. In November he bought a $75 million Bombardier Global 7500, the longest-range business jet available, according to public records. On Dec. 30, 2020, he tweeted that when the price of Bitcoin—another one of his interests—hit $150,000, he’d buy the Hamptons and turn the whole region into affordable housing. In January, he hinted at a run for governor of California and began funding a campaign to recall current Governor Gavin Newsom. In February, when someone on Twitter praised Jeff Bezos’ physique, Palihapitiya replied with a shirtless selfie. “You’re welcome,” he wrote.
While longtime money managers wince at these antics, Palihapitiya’s fan base has been eating it all up. Arnav Naik, a 17-year-old from Troy, Mich., says he got into SPACs after his high school went remote and his swim season was canceled. He started reading the Reddit day-trading forum WallStreetBets and trading stock options, parlaying about $5,000 in savings into $35,000 within six months by betting on an electric-truck SPAC and GameStop.
After seeing Palihapitiya tweet about Clover, Naik doubled down. In January he put almost all his money into Clover call options—an all-or-nothing bet that the shares would go up. If they climbed to, say, $35 he could turn his savings into $130,000. “When you slap a name like ‘Chamath’ on there, it has a lot of potential to rocket up, like how Tesla did with Elon,” he says. “He’s going to join the WallStreetBets meme god pantheon.”
In 2007, Palihapitiya, who was working as a venture capitalist, sat for an interview with video artist Sylvie Blocher for an installation titled Living Pictures/Men in Gold. “I have not had my revenge yet on the insiders,” he told her. “I’m still working to get inside. And once I get inside, I will do my best to completely explode it from the inside.”
In the years since, even as he’s become a consummate insider, Palihapitiya has cultivated this image further, presenting himself as a brash outsider unafraid to tell harsh truths. His rants have tended to follow a pattern. Some group of people, often one he’d recently belonged to, is actually a craven bunch of hypocrites. His targets over the years include Facebook Inc.: “Ripping apart the social fabric of how society works.” Venture capitalists: “A bunch of soulless cowards” who pump money into “useless, idiotic companies.” Charitable giving: It’s done for “branding” and “validation.” Politicians: “They’re all f---ing puppets.” The startup economy: “An enormous multivariate kind of Ponzi scheme.” The traditional IPO process: “Negative value.” Hedge funds: “Those suck.” Big banks: “No smart person goes and works at Goldman.” Government: “Just a large validation of one’s personal ego.” Consultants: “Useless.”
Presented in opposition is Palihapitiya, who, in his telling, is interested in making money only so he can solve the world’s biggest problems, such as climate change and inequality. “Get the money, get the money, and then let’s get around a table and let’s create new rules,” he told Stanford business students in 2017. “And don’t wrap yourself in all this, like, liberal kind of bullshit about ‘oh, my God, money, blah.’ ”
Palihapitiya declined to be interviewed, but his story, as he’s often told it, begins in Ottawa in a two-bedroom apartment above a laundromat. The family had immigrated to Canada from Sri Lanka and received refugee status. His parents got by on welfare, and his father struggled with drinking. In high school he worked at Burger King and ran a blackjack game in the cafeteria for cash. (He still hosts high-stakes poker games; poker pro Phil Hellmuth has said Palihapitiya usually wins.)
He went into banking after studying electrical engineering at the University of Waterloo, but quit when he received no bonus, he said on a podcast in December. He dreamed of making the Forbes billionaires list, and at his first tech job, at AOL, according to Josh Felser, who hired him, he’d say he expected to hit that number before he turned 30. “He knew little about tech, yet he had chutzpah and was an in-your-face negotiator, which we needed,” Felser says. He adds that Palihapitiya regularly stole his parking spot.
Palihapitiya joined Facebook in 2007, when it was just starting to expand to users beyond its base of college and high school students, and persuaded the then-23-year-old Mark Zuckerberg to make him head of growth. By the time he left, four years later, the company had added almost a billion users.
His next move was to use the connections he’d made at Facebook and as an angel investor to start his own venture capital firm, Social Capital. As he would later do with SPACs, Palihapitiya said his venture fund would change the world, transforming health care and education and disrupting the investment process by using data to pick companies instead of gut instinct. He called it “activist capitalism” in an interview with Bloomberg Businessweek at the time, and said he hand-picked investors who shared his mission. Among them were Zuckerberg and Facebook board member Peter Thiel.
Two former employees, who asked not to be identified because they still work in the industry, say the data project never got beyond the testing stage. And its most successful bets weren’t particularly socially minded. Palihapitiya and his partners backed Slack Technologies early on, and he said he invested in Bitcoin in 2012 (up at least 500 times since then), Amazon.com in 2014 (10 times), and Tesla in 2015 (15 times). His funds have had annual returns that are double those of the S&P 500 before fees, according to his yearend 2019 investor letter. That’s served as a rebuke to critics who portray Palihapitiya as a bigmouth. He may talk a lot, but he has the returns to back it up.
As Palihapitiya got richer, he seemed to lose interest in the day-to-day work of running a venture capital firm. He divorced his wife, who’d been Social Capital’s chief operating officer, and fell in love with a glamorous Italian pharmaceutical executive. When his top partners quit, he said investing wasn’t a team sport. When investors balked, he said he didn’t need them anyway. In September 2018 he announced he wouldn’t raise any more outside funds. “I would rather spend time with the people that are 100% aligned with what I want to do,” he told the tech news site the Information. “And the person that’s most aligned with what I want to do is me.” He later compared his decision to Michael Jordan quitting basketball to try baseball.
Palihapitiya now likes to say the upheaval at Social Capital came from upheaval in his personal life, which he’s gotten over with the help of two therapists. “I realized how emotionally broken I was and incapable of really connecting with people,” he told the Recode Decode podcast in 2019. Whatever the cause, with his firm reduced to a much smaller size, Palihapitiya had more time to work on SPACs. He’d raised $690 million for his first one in 2017, saying he wanted to buy a tech company. In 2019, with an approaching deadline to find an acquisition or return the money, he decided to merge it with Branson’s Virgin Galactic.
The music-mogul-turned-airline-founder had been talking about space tourism since 2004. But Virgin Galactic had suffered two fatal accidents, still had no tourists in orbit, and was down to a few months’ worth of cash. Palihapitiya wasn’t dissuaded, pitching it as a sure thing. The business was “largely now de-risked and ready to commercialize and monetize,” he told CNBC, saying it would be as profitable as a software company. (Virgin Galactic has yet to make a commercial flight.)
Some investors were skeptical—“This isn’t the right stuff,” said the Wall Street Journal—and the stock was volatile, but it was up more than 50% in April 2020, when Palihapitiya raised more than $1 billion for two more SPACs. Much of it came from large hedge funds, who see SPACs as low-risk because the investors are allowed to redeem their shares for the $10 they paid if they don’t like the deal that gets announced, and they’re given valuable stock options to keep either way. Their only concern is that a sponsor might not be able to find a company to buy. But that wasn’t a problem for Palihapitiya. In September, one of the SPACs merged with an online real estate venture. The Clover merger came a month later.
Like Virgin Galactic, Clover wasn’t a startup. Since its founding in 2012 it had been hyped as the next big thing in health care, an insurer that would use the latest technology to hold down costs and improve care. But Clover had burned through the hundreds of millions of dollars in venture capital it had raised from Google, Sequoia, and other top investors, churning through a series of executives and continually missing growth targets. Social Capital had invested $500,000 in Clover in 2015, but it passed on investing more recently because of the company’s performance, according to a former partner.
The company struggled, according to the metrics set by the government to determine how much insurers get reimbursed, ranking among the bottom 15% of plans in the U.S.’s star-rating system. An effort to expand outside New Jersey resulted in few new customers. In 2018, Clover set a goal of about 7,500 patients in Georgia, according to a former employee, but signed up just 63. A spokesman said Clover ranks more highly on a metric the government is developing that takes into account that many of its members come from underserved minority or low-income groups. It’s typical for a startup to sometimes miss its aggressive growth targets, he added.
By 2020, after almost a decade in business, Clover could have been accurately described as a small, money-losing insurer that almost exclusively operated in New Jersey and sold Medicare Advantage plans—a privately run, government-funded alternative to traditional Medicare for retirees. The outlook, in other words, wasn’t ideal. But the company had developed a software tool called Clover Assistant, which it said was the culmination of years of research. The tool uses machine learning to scan patients’ records, suggesting medications and offering possible diagnoses, according to Clover President Andrew Toy, who joined from Google in 2018. And because Clover works with a wide network of doctors, he says, it has the potential to grow as quickly as a software company, improving the entire U.S. health-care system. “We believe in software powering primary care,” he says. “Clover Assistant is the basis of our company.”
Clover had already hired JPMorgan Chase & Co. to help it go public. Then, Palihapitiya presented the possibility of merging with his SPAC instead. A deal with him offered the company the ability to enthusiastically talk up the prospects of Clover Assistant rather than dwell on its losses, as it would’ve had to do in an IPO prospectus. “There’s a different dynamic in how you can go out and talk about the company,” Toy says.
As part of its pitch, Clover said 61% of its members see a doctor who’s “contracted” to use Clover Assistant, suggesting the tool had been adopted quickly. But according to former employees, many who signed up don’t use the tool themselves. Businessweek spoke with four doctors or their assistants who were among hundreds tagged on the company’s website as “Clover Preferred,” which it says means they’ve been “recognized for their dedication to using the Clover Assistant tool.” Only one said he used it, adding that he didn’t find it helpful. “I’ll be honest, I’ve never seen it,” said another. “This is the first I’ve heard of it,” said a third. His office manager said she took his notes and copied them into Clover Assistant at the end of each day, then faxed the notes to Clover.
Emily Evans, a managing director at Hedgeye Risk Management LLC, a research firm, says most insurers offer doctors similar tools. “This software system they’re developing—they’re at the starting line, and everyone else is halfway through the marathon,” she says, adding that if Clover Assistant were already working, the company would be spending less on claims. Andy Robinson, a spokesman for Clover, says the company’s data show that only a small minority of doctors are ignorant of the tool. He says doctors are regularly using it, making, for example, 28,900 prescription changes so far based on its recommendations. Doctors who use it have medical cost ratios 11 percentage points lower than those who don’t, he says.
“While some of our doctors might not know ‘Clover Assistant’ from the name, our data clearly shows they are interacting with the product in a meaningful way,” says Mark Spektor, Clover’s chief medical officer.
Around the time of Palihapitiya’s October 2020 CNBC appearance, Nate Anderson, founder of Hindenburg Research, came across a newspaper article about a previous business started by Clover’s co-founder. Anderson is a short seller who bets against publicly traded companies and attempts to persuade the market to take his view. It’s an unpopular business, especially amid an historic bull market. Reddit traders and corporate executives blame short sellers when stocks go down. One of Anderson’s highest-profile compatriots, Andrew Left of Citron Research, quit in January after GameStop investors, angry that he’d bet against the company, hacked his social media accounts and sent obscene texts to his children.
Anderson says the SPAC boom has given the market more frauds to expose than at any time in the past decade. In September, he’d caught Nikola Corp., an electric-truck company that went public in a 2020 SPAC deal, faking a video test drive by rolling one of its trucks down a hill. After his exposé was published, the stock plummeted and the founder resigned. “The strategy with SPAC sponsors has been to take just about any company public regardless of whether it’s complete trash,” he says.
As Anderson and a member of his team dug into Clover, they spotted more red flags. On Feb. 4 he published a report: “Clover Health: How the ‘King of SPACs’ Lured Retail Investors Into a Broken Business Facing an Active, Undisclosed DOJ Investigation.” Anderson decided not to short any Clover shares but said he was releasing the report to prove the value of skeptical research. His report quoted several anonymous doctors saying Clover Assistant was useless or designed to increase billing. It cited news articles showing that Vivek Garipalli, Clover’s co-founder, also ran a hospital chain in New Jersey that had been criticized for price gouging. (The chain has said it charged insurers more so it could cover the uninsured.)
Most important, Anderson’s report included a copy of a letter that some former Clover employees had received from the U.S. Department of Justice seeking information on its sales practices. Hindenburg called it “an existential risk” for a company that gets its revenue from the government.
The stock dropped 12% that day, even as the company said it was aware of the government inquiry and had not violated any rules. Clover also said its lawyers had decided the request for information wasn’t important enough to mention, because regulators are always scrutinizing health plans. Clover Assistant, the company said, is designed to improve care, not increase billing, and often recommends treatments that actually cost Clover more. “We pay more money now in order to decrease costs and patient suffering down the line,” Garipalli said in a post on Medium.
Clover also said that criticism of Garipalli’s hospital chain was irrelevant and that other points Hindenburg had made about its sales practices were wrong. The next day, Palihapitiya wrote on Twitter: “Yesterday’s report was rife with personal attacks, thin facts, and bluster that has been rebuked by the company.” His post didn’t stop the slide. (In an email to Businessweek, Palihapitiya added that Clover “is executing on its mission to leverage its scalable technology to create better health outcomes at lower costs in a rapidly growing market. I am confident in its business and believe that Clover will compound for shareholders over the long term.”)
The SPAC boom turned to a bust not long after the Hindenburg report. Since then, SPAC shares have dropped 17% on average as of May 11, as measured by the IPOX SPAC Index. Palihapitiya’s SPACs, which had climbed quicker, fell faster, too, dropping 50% on average. Virgin Galactic was the worst of the group, crashing 68% as it delayed a planned test flight and Palihapitiya sold $200 million in stock.
As the stocks slid, the same individual investors who’d pushed them higher lost interest. Bank of America Merrill Lynch customers, for example, bought just a couple million dollars’ worth of SPAC shares in the first week of April, after loading up on as much as $120 million a week in January. In April, for the first time in a year, an entire week passed without a new SPAC raising funds in the U.S.
Naik, Palihapitiya’s teenage fan, has lost almost all his money and won’t get it back unless Clover’s stock rebounds. But he doesn’t blame Palihapitiya. “He’s doing the best he can,” Naik says. “It’ll keep growing. I really think I’ll get a huge return.” Regardless of the outcome, he plans to become an investment banker.
Unlike Naik, the hedge funds that invested in the SPAC that merged with Clover made money—filings show most sold and pocketed a quick gain around the time the deal was announced. Palihapitiya and his partners did even better. Because they gave themselves 20.7 million shares for putting the deal together, their $171 million investment has almost doubled to $320 million. A week after the Hindenburg report, Palihapitiya said he controlled a $10 billion to $15 billion fortune, triple what he’d told another interviewer 10 months earlier, and compared himself to Warren Buffett.
“A reminder to myself and others: If it were easy everyone would do it. In reality, it’s hard and most people give up,” he tweeted on March 25. “Good luck to all the players in the arena. Be proud of the dust on your face. Back to the grind ...” The next week, Palihapitiya’s jet left on a trip to Milan and then a Caribbean island. When it returned, Bloomberg News reported Palihapitiya was in talks to merge one of the SPACs he’d raised earlier in the year, known as IPOF, with Equinox Holdings Inc., the fancy gym chain.
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