On September 14, US firm Social Capital Hedosophia, created by a group of Silicon Valley entrepreneurs, started trading on the New York Stock Exchange, raising a higher-than-expected $600m from investors. This is unique in that the ‘blank cheque’ company represents a new investment vehicle targeted at tech unicorns that want to go public, while avoiding the spotlight of an IPO.
Essentially, Social Capital Hedosophia will invest the money raised in the market to buy a promising tech company, and then seek to keep a minority share. Thus, the firm is provided with fresh funding from the public market, but through an alternative path, according to The Wall Street Journal. The group, which is led by former Facebook executive Chamath Palihapitiya, said it will now look for US and European tech companies valued between $3bn and $20bn.
Data collected by Dealogic showed that, so far this year, 23 SPACS related to different industries have been listed on US markets
This investment instrument, known as a ‘special purpose acquisition vehicle’ (SPAC), represents an alternative that has been used more and more often during recent months. Data collected by Dealogic showed that, so far this year, 23 SPACS related to different industries have been listed on US markets. Investor response has been positive, supporting SPACs with a record $7.5bn, beating the $5.3bn registered in 2007.
The new vehicle has been launched at a time when the IPO market is picking up after a slowdown. In 2016, with a total of 41 deals raising $8bn, listings activity in the US marked its slowest pace since 2009.
The reason is that in the last few years, an increasing number of tech companies have opted to stay private. For example, Airbnb and Uber have based their growth on venture capital and still remain in private hands. At present, the availability of capital at later stages allows companies to expand without the urgency of going public.
One other example is Spotify, which has said it will opt for a direct listing rather than going through the process of an IPO. This way, the audio streaming company is seeking to save money on the fees involved.