While special purpose acquisition companies (SPACs) have been around for years, they really burst onto the mainstream investor’s consciousness in 2020.

That year there was an explosion of so-called “blank check” company deals completed, some 248 in all with a cumulative value of $336 million. That was more than the previous 10 years combined. The following year, even more SPACs were brought to the public markets. Over 610 deals were completed, but their total value fell to $265 million. 

There was probably no one more responsible for the frenzy surrounding SPACs than former Facebook executive Chamath Palihapitiya, the founder of venture capital firm Social Capital. Seeking to fix what he saw as the broken, traditional banker-led initial public offering system, he championed SPACs as a means of taking power away from bankers and giving it to company founders. SPACs purported to level the playing field, allowing small investors to profit instead of just Wall Street financiers.

Unfortunately, most SPACs have been horrible investments. According to SPACInsider, the average return of SPACs across all company sizes is a loss of 85% of value. It helps explain why the mania surrounding them has since cooled off. So far in 2024, only 34 deals have been finalized, though their total value is more than $172 million, the most of any year since their heyday.

Key Points About This Article:

• Special purpose acquisition companies (SPACS) bypass the traditional IPO route to the public markets. Although they were very popular in 2020-2021, the mania around them has died as their performance faltered.
• Chamath Palihapitiya’s Social Capital venture fund was largely responsible for the hype around SPACs and he brought a dozen companies to market, though most have been terrible investments.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential

The SPAC King no more

Through his Social Capital Hedosophia Holdings fund, Palihapitiya used SPACs to take a dozen companies public, earning him the nickname “the SPAC King.” 

Among his most high-profile investments was Clover Health (NASDAQ:CLOV), Opendoor Technologies (NASDAQ:OPEN), SoFi Technologies (NASDAQ:SOFI), and Virgin Galactic (NASDAQ:SPCE). Every one of them has lost at least half of their value since going public. His most recent SPAC, Akili, a video game maker for ADHD patients, was recently delisted.

Not every SPAC is a disaster. Vertiv Holdings (NYSE:VRT) has grown fourfold in value while BlueBird (NASDAQ:BLBD) has nearly tripled. Palihapitiya, though, was not affiliated with them.

An unhealthy disadvantage

Health technology stock Clover Health is one of the least-worst of Social Capital’s spawn. It has only lost half its value since it began trading in January, 2021. Year-to-date, though, CLOV stock has nearly tripled, rising from $0.61 per share to $2.78 per share.

Clover provides PPO and HMO Medicare Advantage (MA) insurance plans in several states and operates as a direct contractor with the U.S. government. Its Clover Assistant AI software seeks to streamline the healthcare provision process, yet the Medicare Advantage market is a tricky one due to changing admission rules and reimbursement rates.

Cigna (NYSE:CI) recently sold its MA business for $3.7 billion to free itself from the vagaries of compliance while Humana (NYSE:HUM) is leaning into it. It derives 86% of its revenue from Medicare products, primarily MA coverage, making it and UnitedHealth Group (NYSE:UNH) the two largest MA insurance providers. Combined, they provide coverage for nearly half of the MA population, or over 15 million insured.

And therein lies Clover Health’s problem. It is a very small fish in a very big pond. Compared to UnitedHealth’s 9 million enrollees and Humana’s 6 million, the 80,000 insured that Clover Health has is tiny. It was one of the reasons Cigna decided to no longer compete. With around 1.5 million insured, it was a smaller operator that saw the programs restrictions make it an unattractive market.

Key takeaways

While the pond is getting larger, and should continue to grow as demographics see an aging population, betting on the big health insurers serving the Medicare Advantage population makes sense. While Clover did report its first-ever profit in the second quarter on strong member retention allowing it to raise its full-year guidance, investors need to see if this is repeatable. A single quarter does not make a trend.

It seems Palihapitiya’s investment in Clover Health has been a big miss so far, but foreseeing the growth trend in an aging population for insurers was right on the mark. 

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