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What's going on?
There was a $600 million tech IPO on Thursday, but it wasnt the typical case of a tech company going public
What does this mean?
Social Capital Hedosophia (SCH) raised $600 million from new investors, but the company does virtually nothing. The investors were writing a check to SCHs management led by a well-known venture capital fund manager who was also an early Facebook executive on the basis that SCH will go out and buy a private company (or companies). Investors in todays IPO will then own shares in the company being acquired, and the acquired company will automatically go public. Its an approach that puts a huge amount of faith in SCHs ability to decide which company to buy (why are they doing this? see below)!
Why should I care?
The bigger picture: Valuable private companies have a problem: theyre too valuable!
There are reportedly more than 100 private tech unicorns (companies valued at more than $1 billion) that are waiting to go public, and yet its been a slow year for tech IPOs. One major problem is that public market investors, e.g. those who buy stocks, appear unwilling to value tech companies at the same (or higher) levels that the private investors, e.g. venture capitalists, have in recent years. SCH is betting that, in some specific cases, public market investors are being too pessimistic and that it can offer a private company a more attractive route to becoming a public company by buying it outright (i.e. it may not be able to pay as much as the startup wants to be valued at, but perhaps it will be attractive enough and just get the darn IPO done!).
For the market: Investors are paying SCH a 20% finders fee.
The new investors will own 80% of SCH for $600 million. SCHs initial backers, i.e. its founders, will own 20% of SCH for virtually no cost. So investors in SCH have essentially agreed to give SCHs management a 20% finder’s fee in whatever company it buys. Whether thats a good deal or not depends on how well they do choosing their investment!
Originally posted as part of the Finimize daily email.
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