Clover Health, a San Francisco based Medicare Advantage Insurer is going public through a SPAC or Special Purpose Acquisition Company by merging with Social Capital Hedosophia Holdings Corporation III (NYSE: IPOC). The deal is expected to close in the first quarter of 2021 and is expected to generate about $728 million in transaction proceeds with a new valuation of $3.7 billion.
Why the III at the end of SPAC? It’s because this is not the first time Founder and CEO of Social Capital, Chamath Palihapitiya, has taken a company public through a SPAC. In fact, he took Richard Branson’s Virgin Galactic public in October 2019 through his first SPAC, Social Capital Hedosophia Holdings Corp. I. Then later, Social Capital Hedosophia Holdings Corp. II was used to acquire and take public Opendoor, the real estate platform, at a valuation of $4.8 billion. Palihapitiya has actually reserved stock tickers IPOA through IPOZ. It is not unbelievable to expect that he might follow through with several more SPACs by the end of next year. The fourth SPAC (NYSE: IPOD.U) just listed to raise $400 million for its next acquisition or merger. Talk about being in the business of SPACs!
Who is Palihapitiya: A first generation Canadian, he became AOL’s youngest vice president in 2004 just 5 years after graduating University of Waterloo with a degree in electrical engineering. He quickly left AOL to join the Mayfield Fund in 2005 but only for a few months before joining Facebook just a year after its founding and helping the company with its tremendous scaling until his departure in 2011. While at Facebook, he made some impressive personal early investments in Palantir, Playdom and others which prompted him to start the investment firm Social Capital. Social Capital invested in the likes of Yammer, Slack, and Carta, hinting that Palihapitiya’s time at Facebook likely gave him insight into what an exponential growth company looks like. What’s more intriguing is that Social Capital closed itself off from new investors and rebranded as a technology holding company in 2018 with a deeper focus in healthcare, education, and frontier technology. This coincided with an annual letter (Warren Buffet style)
What about Clover?Clover Health has 57,000 members in Arizona, Georgia, Mississippi, New Jersey, Pennsylvania, South Carolina, Tennessee and Texas. If you think that’s a small number, keep in mind it only takes a few hundred members to generate millions in revenue of which Insurers are allowed up to a 15% net income. What gives confidence to investors that Clover would reach that upper limit and continue to grow as rapidly as it has is by scaling its core technology platform: a data aggregator that synthesizes claims and medical charts to provide member specific insights through an online portal (called Clover Assistant) to support primary care doctors at the point of care. To understand Clover Health is to understand that they are not in the business of maximizing revenue from seniors. In fact, they offer plans with $0 premiums and copays. They are in the business of reducing total costs, because they get a fixed payment from Medicare (i.e. the federal government) for each patient enrolled and get to keep the difference if they spend less. They do this by removing barriers to care such as implementing Telehealth and auto-refills for mail-order pharmacy as well as through a more personalized care approach through nurse visits and concierge services to manage the patient journey in additional to the Clover assistant (which will likely play a more significant role later in value based care).