U.S. stocks rose in early Monday trading as investors considered another set of earnings reports from major companies and looked ahead to a week of key central-bank meetings.
The S&P 500 advanced 0.9% after the broad index on Friday ended higher, snapping a five-day losing streak. The blue-chip Dow Jones Industrial Average added 0.7% while the technology-heavy Nasdaq Composite Index gained 1.4%.
Big financial firms kicked off a bumper week of earnings reports Monday.
Bank of America
rose 2.4% after it said second-quarter profits declined 32%.
Goldman Sachs
advanced 5.3% after reporting better-than-expected earnings.
Synchrony Financial
rose 3.9% after reporting earnings per share that fell year-over-year but were better than analysts had expected.
Charles Schwab
gained less than 1% after reporting second-quarter profits rose by 42%, also beating Wall Street expectations.
IBM
will report later in the day. Companies due to provide updates later this week include
Johnson & Johnson
on Tuesday,
Tesla
on Wednesday and
Twitter
on Friday.
Investors are trying to reconcile a dire economic outlook with earnings forecasts that remain relatively positive. Economic growth is showing signs of slowing while inflation is soaring, last week reaching a fresh four-decade high. Meanwhile, central banks are raising interest rates rapidly, adding another cloud on the economy’s horizon. So far, corporate reports have been lackluster.
“It feels like something is wrong: Either the economic story is wrong or analysts are being too optimistic on earnings, and it feels like the latter,” said Altaf Kassam, head of investment strategy for Europe, the Middle East and Africa at State Street Global Advisors. “If you scrape the text of company earnings announcements, many are complaining.”
WSJ’s Dion Rabouin breaks down how inflation rises and why the Federal Reserve, Congress, the president and large corporations can all be held accountable. Illustration: Ryan Trefes
Data due Monday were expected to show declining confidence among U.S. home builders as mortgage rates are rising. Economists surveyed by The Wall Street Journal expect the National Association of Home Builders to report a seventh consecutive month of declining confidence in July.
The European Central Bank is expected to raise interest rates for the first time in 11 years at a meeting Thursday. The region’s economy is feeling the effects of the war in Ukraine and an energy crisis more acutely than other economies. The Bank of Japan is expected to buck the trend among global central banks and keep rates unchanged on Thursday.
The Federal Reserve has signaled it will raise interest rates by 0.75 percentage point for the second time in a row later this month.
Commodity prices rebounded following a stretch of weakness. Brent crude, the international oil benchmark, rose 3.8% to $105.03 a barrel. Copper prices in London rose 2.6% to $7,362 a metric ton. Gold prices rose 0.6%.
In bond markets, the yield on the benchmark 10-year U.S. Treasury note rose to 2.978% from 2.929% on Friday. Bond yields and prices move in opposite directions.
Traders worked on the floor of the New York Stock Exchange last week.
Photo:
Michael M. Santiago/Getty Images
Overseas, global markets were higher across the board. In Europe, the pan-continental Stoxx Europe 600 rose 1.1%. Oil-and-gas and mining stocks led the gains as commodity prices rose, while banks also rose. Commodity trader and miner
Glencore
rose 2.5% while oil major
Shell
gained 2.6%. Germany’s
Commerzbank
and
Deutsche Bank
each rose around 4%.
In Hong Kong, the Hang Seng Index jumped 2.7% while in mainland China, the Shanghai Composite Index rose 1.6%. Markets in Japan were closed for a holiday.
Federal prosecutors are investigating whether short-sellers conspired to drive down stock prices by sharing damaging research reports ahead of time and engaging in illegal trading tactics, people familiar with the matter said.
The U.S. Justice Department has seized hardware, trading records and private communications in an effort to prove a wide-ranging conspiracy among investors who bet against corporate shares, the people said. One tactic under investigation is “spoofing,” an illegal ploy that involves flooding the market with fake orders in an effort to push a stock price up or down, they said. Another is “scalping,” where activist short-sellers cash out their positions without disclosing it.
A former unit of student loan giant Sallie Mae said it would cancel $1.7 billion in private student debt for about 66,000 borrowers to resolve claims that it engaged in deceptive lending practices.
Navient Corp.
NAVI 0.37%
, a student loan servicer that split off from Sallie Mae in 2014, agreed to the sum in a settlement with 40 state attorneys general. The loans are private loans, so the losses will be covered by Navient’s investors rather than the federal government.
Nearly all the canceled loans originated at Sallie Mae from 2002 to 2010, at a time when student debt soared, on its way to becoming the second-highest form of household credit after mortgages. Sallie Mae was at the forefront of that boom, both as the biggest originator of private loans as well as the biggest lender under a federal program that guaranteed student loans.
The loans primarily went to borrowers with poor credit, and who attended schools with shaky records, including many for-profit schools, according to a website run by the settlement administrator. All of the loans forgiven in the agreement were in default.
“For too long, Navient contributed to the national student debt crisis by deceptively trapping thousands of students into more debt,” said New York Attorney General
Letitia James.
As part of the agreement, Navient continued to deny the claims or that the company has harmed any borrowers. “The company’s decision to resolve these matters, which were based on unfounded claims, allows us to avoid the additional burden, expense, time and distraction to prevail in court,” said
Mark Heleen,
Navient’s chief legal officer.
Navient has faced numerous lawsuits in recent years that alleged the company engaged in unfair and deceptive conduct against borrowers, including steering those with federal loans toward plans that would allow them to stop making payments but in which interest continued to accrue, rather than toward plans in which monthly payments are tied to borrowers’ income.
Last March, a Seattle-area judge ruled that the company had broken a consumer protection law in a case brought by Washington’s attorney general.
“Navient repeatedly and deliberately put profits ahead of its borrowers—it engaged in deceptive and abusive practices, targeted students who it knew would struggle to pay loans back and placed an unfair burden on people trying to improve their lives through education,” Pennsylvania Attorney General
Josh Shapiro
said.
WSJ higher-education reporter Melissa Korn breaks down the select groups of borrowers who are currently eligible for student debt relief and what borrowers can expect next year. Photo: Getty Images
The agreements resolve all six outstanding state lawsuits against Navient, the company said. As part of the settlement, the company will make a one-time payment of approximately $145 million to the states.
In addition to loan cancellation and some restitution for borrowers with private loans, Navient will pay $95 million to about 350,000 federal loan borrowers—or about $260 each—who were placed into certain types of forbearance programs that caused them to accumulate more debt rather than entering income-based repayment plans, the states said.
States will distribute restitution to borrowers within their jurisdictions. Massachusetts, for example, will receive more than $6 million, including $2.2 million in restitution for more than 8,300 federal loan borrowers, state Attorney General
Maura Healey
said.
Federal loan borrowers eligible for restitution will be notified by mail this spring, with checks going out in the middle of the year, according to the settlement administrator’s website. Private borrowers who qualify for discharge will be notified by July.
Private loans without federal backing make up less than 10% of the total $1.7 trillion student-loan industry. About 43 million people owe $1.6 trillion in federal student debt, Education Department data show. About 5.2 million of those federal borrowers are in default. Those borrowers, unless they also held private student loans, aren’t affected by Thursday’s settlement.
Navient recently announced its exit from federal student-loan processing. It had been one of the primary federal contractors, serving around six million borrowers. Its accounts were transferred to a new contractor,
Maximus,
whose role was approved by the Education Department.
The Education Department also has taken steps to forgive billions in debt held by disabled borrowers, as well as borrowers who went to institutions that federal regulators say practiced deceptive recruiting practices, such as ITT Technical Institute. The piecemeal moves have resulted in $11.5 billion in canceled debt for around 600,000 borrowers over President
Biden’s
first year in office. Student loan payments have been suspended by the government during the pandemic, with the latest extension now set to expire on May 1.
The Biden administration is in the midst of restructuring its student-loan processing system. In November it announced it was ending its relationship with private collection agencies that had been tasked with recovering payments from federal student-loan borrowers in default to improve collections and provide borrowers with more support.
The Consumer Financial Protection Bureau has been suing Navient since 2017 over allegations that it steered borrowers into postponing payments instead of entering lower-cost, income-driven repayment plans. The CFPB has said the practice cost borrowers $4 billion in interest expense. Navient has disputed the government’s claims.
—Melissa Korn contributed to this article.
Write to Gabriel T. Rubin at gabriel.rubin@wsj.com
in U.S. court filings of orchestrating transactions that rendered worthless a $440 million investment the fund had made to finance a SoftBank-backed company.
The filing, made Thursday in a U.S. District Court in California, asks a federal judge to permit the Credit Suisse fund to serve a subpoena on a U.S. arm of SoftBank. The filing, which says that the fund is preparing to sue SoftBank in the U.K., deepens the dispute over the demise of Greensill Capital, a supply-chain finance company that tumbled into insolvency earlier this year.
Greensill made loans to companies that served as advances on expected payments from those companies’ customers; Greensill packaged the loans into securities, which investment funds run by Credit Suisse bought.
One such company was Katerra Inc., a U.S. construction startup. The Credit Suisse fund held $440 million in notes backed by Greensill’s lending to Katerra, and when Katerra ran into financial trouble last year, Greensill forgave the lending.
SoftBank was an investor in both Greensill and Katerra, and in the U.S. court filing the Credit Suisse fund said SoftBank “orchestrated a deal” that cut the fund out of any possible proceeds without telling the fund.
A SoftBank spokesman declined to comment, as did a spokeswoman for Credit Suisse.
SoftBank put money into Greensill at the end of 2020, and Credit Suisse executives expected that money would go to their funds to make good on the Katerra loan—instead, it ended up in Greensill’s German banking unit, The Wall Street Journal reported in April.
In June, the Journal reported that Credit Suisse had dissolved a personal banking relationship with SoftBank founder
Masayoshi Son
and clamped down on transactions with the company.
The court filing made Thursday is known as a Section 1782 petition, in which a party can ask a U.S. court to order evidence-gathering for a proceeding outside the U.S. The Credit Suisse fund argues that it has taken enough steps toward suing SoftBank in the U.K. to justify the subpoena, which seeks a variety of documents.
Write to Charles Forelle at charles.forelle@wsj.com
Investors who bet against stocks are targeting special-purpose acquisition companies, one of the hottest growth areas on Wall Street. The dollar value of bearish bets against shares of SPACs has more than tripled to about $2.7 billion from $724 million at the start of the year, according to data from S3 Partners.
Some of the stocks under attack belong to large SPACs that surged in recent months, in part because they were backed by high-profile financiers. A blank-check company created by venture capitalist
Chamath Palihapitiya
that plans to merge with lending startup Social Finance Inc. is a popular target, with 19% of its shares outstanding sold short, according to data from S&P Global Market Intelligence. The short interest in
Churchill Capital Corp. IV,
a SPAC created by former investment banker
Michael Klein
that is merging with electric-vehicle startup Lucid, more than doubled in March to about 5%.
Others are wagering against companies after they combine with SPACs. Muddy Waters Capital LLC announced last week it was betting against
XL Fleet Corp.
, a fleet electrification company that went public in December after merging with a SPAC. XL has since said Muddy Waters’s report, which alleged XL inflated its sales pipeline and made misleading claims about its technology among other issues, had “numerous inaccuracies.”
XL’s stock price dropped the day Muddy Waters released its report by about 13%, to $13.86, from its prior close on March 2. Shares closed Friday at $12.79.
Shares of
Lordstown Motors Corp.
fell nearly 17% Friday after Hindenburg Research released a report saying the electric-truck startup had misled investors on its orders and production. The company, which merged with a SPAC in October, said the report contained half-truths and lies. The short interest in Lordstown shares rose to 5% from 3.4% in the week before the report’s publication, according to data from S&P.
“SPACs are an area of focus,” said Muddy Waters’s
Carson Block.
The veteran short seller said SPACs largely make up the universe of companies he views as both “abysmal” and relatively free from technical challenges, such as high short interest, which can make betting against them difficult.
SPACs are shell firms that raise capital by issuing stock with the sole purpose of buying or merging with a private company to take it public. They are dominating the market for new stock issues, becoming a status symbol for celebrities while pumping the value of acquisitions, like betting company
DraftKings Inc.,
into the tens of billions of dollars.
Hedge funds that buy into SPACs early see them as a way to make lofty returns without much risk. Individual investors are attracted by the chance to get positions in newly public companies that they could rarely purchase through traditional IPOs. The Securities and Exchange Commission issued a statement on Wednesday warning that it “is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it.”
A monthslong rally in the stocks lost steam recently amid a broad selloff in technology and high-growth companies. An index of SPAC stocks operated by Indxx fell about 17% from mid-February to March 10, while the Nasdaq Composite Index declined about 7.3% over the same period.
“These are all momentum stocks, and a lot of people want to short them,” said
Matthew Tuttle,
whose firm Tuttle Tactical Management runs an exchange-traded fund that allows investors to hold a portfolio of SPAC stocks. Mr. Tuttle is preparing to launch an ETF that bets against “de-SPAC” stocks of companies that have merged with a SPAC—like electric-truck manufacturer
Nikola Corp.
and baked-goods maker
Hostess Brands Inc.
—and a separate fund that invests in the stocks.
Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ
Postmerger companies are particularly attractive to short because they have larger market capitalizations, making their shares easier to borrow, and because early investors in the SPACs are eager to sell shares to lock in profits, analysts and fund managers said.
Short sellers borrow stocks they believe are overvalued and immediately sell them, hoping to repurchase the shares for a lower price when they need to be returned and to pocket the difference. The strategy proved dangerous in recent months when individual investors organized on social media to push up stocks like GameStop Corp., forcing short sellers to buy shares and cap their losses, helping to drive prices still higher.
Continued strong investor demand for SPACs could catch short sellers in a similar squeeze. Shorting SPACs can also be risky because their shares have a natural floor at $10, the price at which they can be redeemed before a merger, and because they are prone to sharp price moves, analysts said.
Still, the portion of shares sold short in SPACs and their acquisitions is climbing.
A blank-check company created by venture capitalist Chamath Palihapitiya that plans to merge with lending startup Social Finance Inc. is a popular target.
Photo:
Brendan McDermid/Reuters
Some are betting against stocks they believe rose too fast, to unsustainable valuations. The price of bioplastics company
Danimer Scientific Inc.
nearly tripled to $64 in the first six weeks of the year after it was bought by a SPAC. The short interest in Danimer stock has climbed to 8.5% from around 1% in January, and its share price has traded down to about $42, according to data from S&P.
Others are making bearish bets to hedge against potential losses in SPAC stocks they own.
Veteran short seller
Eduardo Marques
cited SPACs and their boosting the number of U.S.-listed stocks as a short-selling opportunity, according to a pitch for a stock-picking hedge fund called Pertento he plans to launch this year. America’s roster of public companies had shrunk from the mid-1990s onward, but that trend has recently reversed, partly because of SPACs.
Their popularity has helped spark new Wall Street offerings.
Goldman Sachs Group Inc.
this year started offering clients set baskets of similar stocks to short, pitching them as a way to hedge SPAC exposure, people who have seen the offering said. Clients typically customize the baskets Goldman offers, which are thematic and sector-focused, such as on bitcoin and electric vehicles.
Kerrisdale Capital founder
Sahm Adrangi
started shorting postmerger SPAC companies earlier than most, with a public bet in November against the stock of frozen-food maker
Tattooed Chef Inc.,
which still trades above its price at that time. But the stock has fallen about 13% during the recent market slump.
“We saw these stocks go up a lot and now that people are de-risking, these highflying SPACs are coming down to earth,” Mr. Adrangi said.
—Amrith Ramkumar and Mike DeStefano contributed to this article.
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How long do you think the SPAC boom will continue, and why? Join the conversation below.
Write to Matt Wirz at matthieu.wirz@wsj.com and Juliet Chung at juliet.chung@wsj.com
General Electric Co. is nearing a $30 billion-plus deal to combine its aircraft-leasing business with Ireland’s
AerCap
AER 1.62%
Holdings NV, according to people familiar with the matter, the latest in a string of moves by the industrial conglomerate to restructure its once-sprawling operations.
Though details of how the deal would be structured couldn’t be learned, it is expected to have a valuation of more than $30 billion, some of the people said. An announcement is expected Monday, assuming the talks don’t fall apart.
The
GE
GE 0.29%
unit, known as GE Capital Aviation Services, or Gecas, is the biggest remaining piece of GE Capital, a once-sprawling lending operation that rivaled the biggest U.S. banks but nearly sank the company during the 2008 financial crisis. GE already took a major step back from the lending business in 2015 when it said it would exit the bulk of GE Capital, and a deal for Gecas would represent another big move in that direction.
It would also represent another significant move by GE Chief Executive Larry Culp to right the course of a company that has been battered in recent years by souring prospects for some of its top business lines and a structure that has fallen out of favor with investors.
With more than 1,600 aircraft owned or on order, Gecas is one of the world’s biggest jet-leasing companies, alongside AerCap and Los Angeles-based Air Lease Corp. It leases passenger aircraft made by Boeing Co. and
Airbus SE
as well as regional jets and cargo planes to customers ranging from flagship airlines to startups. Gecas had $35.86 billion in assets as of Dec. 31.
AerCap has a market value of $6.5 billion and an enterprise value—adjusted for debt and cash—of about $34 billion, according to S&P Capital IQ, and around 1,400 owned or ordered aircraft. The company has experience in deal making, paying around $7.6 billion in 2014 to buy International Lease Finance Corp. AerCap’s revenue last year was about $4.4 billion, down from around $5 billion in the previous few years.
The aviation business has been hit hard by the Covid-19 pandemic, which has resulted in a sharp drop in global travel and prompted airlines to ground planes. Some airlines have sought to defer lease payments or purchases of new aircraft. Gecas had an operating loss of $786 million on revenue of $3.95 billion in 2020. GE took a roughly $500 million write-down on the value of its aircraft portfolio in the fourth quarter.
Combining the companies could afford cost-cutting opportunities and help the new entity weather the downturn.
Separating Gecas could help GE with its efforts to shore up its balance sheet and improve cash flows. Despite a recent increase, GE’s share price remains below where it was before significant problems in the company’s power and finance units emerged in recent years.
The Boston company has a market value of around $119 billion after the shares more than doubled in the past six months as it posted improving results. Still, the stock has fallen by about three-quarters from the peak just over 20 years ago.
Mr. Culp became the first CEO from outside of GE in late 2018 after the company was forced to slash its dividend and sell off businesses. The former
Danaher Corp.
boss has sought to simplify GE’s wide-ranging conglomerate structure further, as other industrial giants such as Siemens AG and
Honeywell International Inc.
have done in recent years.
Activist investor Trian Fund Management LP, which has owned a significant position in the company since 2015 and holds a seat on its board, has supported such changes.
Early in his tenure, Mr. Culp said he had no plans to sell Gecas, a move his predecessor
John Flannery
had considered after the unit drew interest from private-equity firms pushing further into the leasing business.
Mr. Culp has sought to even out cash flows and refocus on core areas. Operations he has parted with include the company’s biotech business, which was purchased by Danaher in a $21 billion deal that closed last year. GE also sold its iconic lightbulb business in a much smaller deal last year, and previously said it was unloading its majority stake in oil-field-services firm Baker Hughes Co.
GE has cut overhead costs and jobs in its jet-engine unit while streamlining its power business. The pandemic continues to pressure the jet-engine business, GE’s largest division, however.
The company also makes healthcare machines and power-generating equipment, and the rest of GE Capital extends loans to help customers purchase its machines and contains legacy insurance assets too.
AerCap is based in Ireland and Gecas has headquarters there as well. The aircraft-leasing industry has long had a significant presence in Ireland due to the country’s favorable tax regime and the importance of Guinness Peat Aviation in the development of the sector. (A deal between GE and AerCap would reunite two companies that bought their main assets from GPA.) The industry has gotten more competitive as Chinese companies have gained market share, however, and the combination could help the new group stem that tide.
Shares in aircraft-leasing companies plummeted along with much of the market in the early days of the pandemic as demand from major airlines, who lease planes to avoid the costs of owning them, evaporated. But many of the major lessors’ stocks have recovered lost ground and then some in the months since as lockdowns ease and the outlook for travel improves.
AerCap’s Chief Executive Aengus Kelly said on its fourth-quarter earnings call this month that he expects airlines to shift more toward leasing planes as they rebuild their balance sheets, in what would be a boon to the company and its peers.
“Their appetite for deploying large amounts of scarce capital to aircraft purchases will remain muted for some time,” he said. “The priority will be to repay debt or government subsidies.”
—Thomas Gryta contributed to this article.
Write to Cara Lombardo at cara.lombardo@wsj.com and Emily Glazer at emily.glazer@wsj.com
It was Jan. 4, and Chamath Palihapitiya was ready to tease another deal. “Shooters Shoot,” he tweeted to his followers, along with a GIF of Alec Baldwin berating weary salesmen to “Always Be Closing.” The retweets and likes for the “Glengarry Glen Ross” reference came fast and furious. “We’re ready,” one follower replied.
Three days later, when Mr. Palihapitiya announced his intention to take online lender Social Finance Inc. public via a “blank-check” company, Reddit message boards popular with the day-trading crowd lit up. One fan called it a “stock that you buy with hopes of transforming you into a millionaire”—even though SoFi did not expect to be profitable until 2023 and faced stiff competition.
Mr. Palihapitiya is the man of the market moment. The founder of tech-investing firm Social Capital Holdings Inc. has charmed Wall Street to raise billions of dollars to bring startups public. Amateur traders hang on his every word for clues about his next target—and for the insults he hurls at the high-finance elite. (Hedge funds, he said last April, deserved to get wiped out when coronavirus shutdowns devastated the economy.)
Wall Street has always had its rock stars.
Warren Buffett’s
carnival-like annual meeting, after all, is nicknamed “Woodstock for Capitalists.” But Mr. Palihapitiya, a former
Facebook Inc.
executive who now has 1.4 million
Twitter
followers, belongs to a new class of market influencers—social-media savants who’ve figured out how to take shots at the establishment while taking its money.
Mr. Palihapitiya, left, is a Sri Lankan immigrant to Canada whose family got by on welfare payments when he was a child. He moved to the U.S. during the dot-com era and eventually worked for Facebook Inc.
Photo:
Brian Ach/Getty Images for TechCrunch
No one has marshaled the twin forces reshaping markets—the blank-check boom and the retail-trading surge—quite like Mr. Palihapitiya. So far this year, as of Thursday, 225 companies that use money from initial public offerings to buy established businesses have raised roughly $71 billion—a figure that accounts for more than 70% of all public stock sales, according to Dealogic data. These outfits are known as “blank-check” firms or SPACs, an acronym that stands for special-purpose acquisition companies.
Ordinary investors, homebound and flush with cash, are fueling the surge. Social Capital raised $3.7 billion for five SPACs last year and filed confidentially to raise money for seven more, according to people familiar with the matter. They have helped make Mr. Palihapitiya a fortune—at least on paper. Their structure gives Mr. Palihapitiya the right to buy one-fifth of its outstanding shares at discount prices. That means he is sitting on a mountain of gains.
SoFi, a decade-old startup that made its name refinancing student loans, is his latest prize. He and his bankers pitched some of Wall Street’s top firms to participate in the deal, and Mr. Palihapitiya’s pull with stalwarts like money manager
BlackRock Inc.
was a big reason why the lender spurned other SPAC suitors and accepted Mr. Palihapitiya’s offer, according to people familiar with the matter.
He unveiled the $8.7 billion deal to the public on Jan. 7—on CNBC and on Twitter, naturally. Nearly 65 million shares of Mr. Palihapitiya’s
Social Capital Hedosophia Holdings Corp.
V changed hands that day, more than all but 22 U.S.-listed stocks, according to Dow Jones Market Data. IPOE, as it is known, closed up 58% at $19.14, even though the deal wasn’t final and the SPAC had no real assets yet.
Leaving Facebook
A Sri Lankan immigrant to Canada whose family got by on welfare payments when he was a child, Mr. Palihapitiya graduated from the University of Waterloo and worked at
Bank of Montreal
before moving to the U.S. during the dot-com era. He joined Facebook in 2007 to help grow its user base after stints at a venture-capital firm and America Online; he left in 2011 after he said Mark Zuckerberg denied his request to start a mobile-phone business and later emerged as a critic of his former employer.
He used the money he made at Facebook to fund a lifestyle of billionaire whimsy. He is a partial owner of the Golden State Warriors, a three-time contestant in the World Series of Poker and a cryptocurrency evangelist who said he paid $1.6 million in bitcoin for an undeveloped property in Lake Tahoe. “When BTC hits $100k, I’m going to buy @GoldmanSachs and rename it Chamathman Sachs,” he recently tweeted the weekend before he also publicly toyed with running for governor of California.
Chamath Palihapitiya, far left, is a partial owner of the NBA team Golden State Warriors and a three-time contestant in the World Series of Poker.
Photo:
Poker Go
Recently, Mr. Palihapitiya has been touting a plan to “fix climate change,” as he tweeted last month. He has approached potential investors about raising billions of dollars for a partnership with tech giants on climate efforts, people familiar with the matter said.
The year he left Facebook, he founded Social Capital with a mission of backing young startups that want to solve the world’s toughest problems. He gravitated to SPACs as a way to provide an alternative path to the public markets for startups that didn’t want to deal with the costs, hassle and uncertainty of a prolonged registration process.
Mr. Palihapitiya called the idea “IPO 2.0.” A SPAC avoids many of the rules governing a traditional IPO by executing a reverse merger between a corporate shell that raised the money and a private company that takes both the cash and the shell’s stock listing. Mr. Palihapitiya raised money for his first SPAC, Social Capital Hedosophia Holdings Corp., in 2017.
Not everyone was enamored with that first SPAC attempt. Tech companies, including
Slack Technologies Inc.
where Social Capital was an early investor, rebuffed Mr. Palihapitiya’s efforts to take them public via his SPAC, according to people familiar with the matter.
During this period Mr. Palihapitiya often frustrated his colleagues with his extended absences from the office and meetings. Those absences would occasionally cause him to miss fundraising meetings he had set up for himself and
Tony Bates,
a former Skype CEO who joined Social Capital to lead a growth-investing unit Mr. Palihapitiya launched in 2017, some of the people said.
Mr. Palihapitiya’s now ex-wife was a partner at Social Capital. While they were still married, he traveled with a new woman he was dating, according to people familiar with the matter. Partners left. Many other projects, including a credit-investing fund, fell by the wayside. Nonetheless, Social Capital was able to earn an annualized internal rate of return of 33% in its first eight years, it said in its most recent annual letter.
Mr. Palihapitiya got his big break as a SPAC investor from billionaire Richard Branson.
Mr. Palihapitiya, fourth from left, got his big break as a SPAC investor from billionaire Richard Branson, pictured here with a gavel in his hand.
Photo:
Richard Drew/Associated Press
Virgin Galactic Holdings Inc., Mr. Branson’s space-tourism company, called off a roughly $1 billion financing deal with Saudi Arabia’s Public Investment Fund in October 2018, after the Saudi government was linked to the disappearance of journalist Jamal Khashoggi.
Throughout 2019, Mr. Palihapitiya, Mr. Branson and their teams spent months negotiating a deal to take Virgin Galactic public through a SPAC merger. Over meetings in Park City, Utah, and at Mr. Branson’s Necker Island in the Caribbean, the two sides hammered out an arrangement that included a $100 million personal investment from Mr. Palihapitiya. The deal, which valued the company at roughly $2 billion, closed that fall.
Mr. Palihapitiya went viral in April 2020, just as he began fundraising for two additional SPACs. After appearing on CNBC to urge the government not to bail out wealthy investors in airlines and other hard-hit companies, he gained about 100,000 new followers on Twitter, according to social-media data company Captiv8 (Social Capital is an investor in Captiv8).
“We’re talking about—a hedge fund that serves a bunch of billionaire family offices? Who cares?” Mr. Palihapitiya said. “They don’t get to summer in the Hamptons? Who cares!”
The rant endeared him to amateur investors. “Through all the pain watching all of our portfolios go up in flames the past few weeks, this motherf—er came in and spoke for all us and really put a smile on my face,” one trader wrote in a post on Reddit’s WallStreetBets that was upvoted about 2,000 times.
Meanwhile, Mr. Palihapitiya was reeling in Wall Street investors. Before coronavirus lockdowns put an end to schmoozing, he hosted dinners and meetings to pitch his SPACs to hedge funds. When the SPACs made their market debut in April, hedge funds, the target of his flamethrowing, were the primary buyers.
Mr. Palihapitiya found big targets for two of his SPACs last fall, taking house-flipping startup Opendoor Labs Inc. public in a deal worth $6.3 billion and insurance-tech startup
Clover Health Investments Corp.
to market at a $4.4 billion valuation. Big institutional investors including BlackRock, Fidelity Investments and Healthcare of Ontario Pension Plan pumped hundreds of millions of dollars into the deals alongside Mr. Palihapitiya.
Mr. Palihapitiya took insurance-tech startup Clover Health Investments Corp. public via a SPAC at a $4.4 billion valuation. Here a nurse practitioner for Clover Health takes a patient’s blood pressure.
Photo:
John Taggart/Bloomberg News
“It was like this guy walks on water,” said Michael Edwards, deputy chief investment officer of Weiss Multi-Strategy Advisers LLC, who invested in Mr. Palihapitiya’s first SPAC. “Everything he does is going to be oversubscribed.”
In December and March, Mr. Palihapitiya sold 10 million shares of Virgin Galactic to free up more than $300 million for other ventures, according to securities filings. (He indirectly co-owns another 15.75 million shares through an investment vehicle). Mr. Palihapitiya and the other managers of the SPAC that took Opendoor public are sitting on paper gains of about $475 million on the warrants and discounted shares they received through the IPO of the SPAC, as well as for their participation in a related private placement of the SPAC shares, according to estimates based on an analysis of securities filings by Michael Ohlrogge, a professor at New York University’s law school.
Mr. Palihapitiya is separately looking to start a new family of SPACs for biotech companies, some of the people said.
How much Mr. Palihapitya earned or invested personally is more difficult to discern from the filings. He highlights that he invests hundreds of millions of dollars in private placements accompanying his SPAC deals, a decision that helped sway Opendoor and SoFi to take his offers, according to people familiar with the matter. But it is sometimes unclear how much of that money is coming directly from him or from investment firms he helps manage. The Securities and Exchange Commission proposed new guidance in December for SPAC sponsors to provide more disclosure around their compensation arrangements.
Hype Man
People who know and have worked with Mr. Palihapitiya describe him as a great salesman but a poor manager. When Social Capital decided to transition away from a traditional venture-capital firm in 2018 to be more of a holding company for startups, many employees learned they would be losing their jobs from a Medium post Mr. Palihapitiya published, a person familiar with the matter said.
Mr. Palihapitiya’s skills as a hype man, though, are particularly well-suited to the features of SPACs. Unlike in a traditional IPO, executives and sponsors of SPAC transactions can make projections about the company’s future revenue and profits. Because such deals are structured as mergers, SPAC sponsors don’t have to worry about restrictions on talking openly about a business before its shares start trading.
Mr. Palihapitiya takes advantage of these loopholes. He talks his deals up on Twitter, which his lawyers then submit to the Securities and Exchange Commission to comply with stock-solicitation rules. Mr. Palihapitiya arranged with CNBC extended airtime on the days his deals were announced and went through slides from his investor presentation, according to people familiar with the matter. CNBC declined to comment. YouTube and
Amazon.com Inc.’s
Twitch have also approached him about moving his deal announcements to their live-video streaming services, some of the people said.
Mr. Palihapitiya talks his deals up on Twitter, which his lawyers then submit to the Securities and Exchange Commission to comply with stock-solicitation rules. Mr. Palihapitiya also arranged with CNBC extended airtime on the days his deals were announced, according to people familiar with the matter.
Photo:
David Paul Morris/Bloomberg News
As many as 70% of the investors in Mr. Palihapitiya’s SPACs are everyday investors, these people said. He allocates a small percentage of the shares in the offerings of his SPACs for that crowd, with an eye toward getting his underwriters to increase their share above 50%, the people said.
Alex Cruzado watched each of Mr. Palihapitiya’s CNBC clips after seeing his April 2020 rant. The 20-year-old university student living in Geneva, Switzerland, bought shares in IPOE on the day of the SoFi announcement and later posted positive reviews of it on WallStreetBets.
“For companies like Opendoor and SoFi, the fact that he talks about it and makes a public announcement directs people in,” Mr. Cruzado said in an interview. “He’s really great at marketing… [but] there’s no significant value he adds but that branding and packaging,” Mr. Cruzado said.
During his Jan. 7 appearance on the business network to elaborate on SoFi’s merits, Mr. Palihapitiya offered his thoughts on how SPACs are helping to reduce wealth inequality by letting ordinary Americans get earlier access to future blue-chip companies.
“How do you do that? You’re not going to do that by owning
American Express.
Those companies are dormant legacy businesses. That game is over. You need companies like SoFi. You need companies like Opendoor, like Clover and others,” he said.
The moderators of WallStreetBets later banned its millions of members from posting about SPACs. “They are too easily pumped to allow on a subreddit of our size,” one wrote at the time.
Mr. Palihapitiya jumped into the fray in late January when traders, inspired by posts on WallStreetBets, bid up
GameStop Corp.
and other beaten-down stocks, dealing painful losses to hedge funds that had bet the stocks would fall.
“This is some insane, crazy, baller shit: r/wsb just ran over one of the most successful hedge funds around,” Mr. Palihapitiya tweeted, linking to a Wall Street Journal article about hedge fund Melvin Capital Management’s emergency cash infusion.
In solidarity, he bought GameStop call options. He closed his position the next day and donated the proceeds.
When Robinhood Markets Inc. and other online brokerages restricted trading in hot stocks, enraging investors, Mr. Palihapitiya went on the attack. Robinhood executives were “corporatist scumbags” who “should go to jail,” he said on his podcast, “All-In.”
On Jan. 28 and 29, he told his Twitter followers that he turned Robinhood down when the startup was raising money years ago—and that Robinhood was misleadingly monetizing user data. He suggested they ditch the app and use SoFi, instead. A Robinhood spokeswoman declined to comment.
Over each of the two days, shares of the SPAC merging with SoFi notched double-digit gains. Retail interest was so strong that Robinhood placed limits on users’ ability to purchase them lest the brokerage have to deposit additional collateral with its clearinghouse to cover the trades. Of the 51 stocks in which Robinhood restricted trading on Jan. 29, Mr. Palihapitiya was tied to four.
In early February, investors in Mr. Palihapitiya’s SPACs were reminded that there is risk in taking unproven companies public quickly. Short seller Hindenburg Research published a report on Feb. 4 accusing Clover Health of failing to tell investors about a Justice Department investigation into its practices and misleadingly marketing its services to the elderly. Hindenburg previously exposed irregularities at electric-truck startup
Nikola Corp.
after it merged with a SPAC.
“Chamath has done a masterful job marketing himself, capitalizing on the recent chaos with GameStop and WallStreetBets to align himself with “everyday” investors – but his public persona strikes us as the sugar that helps the poison go down,” Hindenburg wrote in the report.
Clover said the report was full of inaccuracies and mischaracterizations. In a response published last month on Medium, Clover’s CEO and president said Hindenburg framed its report around Mr. Palihapitiya “in order to sensationalize what is otherwise a rather underwhelming piece of research.” Mr. Palihapitiya took to—where else—Twitter to defend Clover, saying he and the company would have been happy to have met with Hindenburg: “Instead, they chose to take the cheap path of screaming into the ether.”
The tweet got more than 3,000 retweets and 17,000 likes, but, since then, Clover shares are down 44%.
—Amrith Ramkumar contributed to this article.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com and Maureen Farrell at maureen.farrell@wsj.com
