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Analysis | SPACs, the ‘Poor Man’s Private Equity,’ Made Investors Poorer

This week, Virgin Galactic updated investors on its plans to transform a sporadic, loss-making test flight program into a regular, profitable commercial service. The short version: Expect a long wait.

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The company hopes to finally begin carrying paying customers later this year. But it won’t generate positive free cash flow until 2026, principally due to the cost of expanding its fleet of spacecraft. (Until then, it will be capable of fewer than 40 flights a year.) In the meantime, the roughly 750 customers who’ve paid up to $450,000 for a seat will be entertained with earth-bound treats, such as trips to Branson’s Necker Island resort.

Virgin Galactic’s market descent reveals the danger of investing in “story stocks,” whose trajectory is steered more by emotions and money flows than by financial fundamentals.

Retail investors who got caught up in stunts like last year’s space race between Branson and Jeff Bezos partly have themselves to blame. Yet they were also taken for a ride.

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Virgin Galactic insiders have unloaded heaps of stock at inflated prices, the financial projections published at the time of its SPAC merger have proven unreliable, and the company has sometimes been less than candid about problems during test flights.

In fairness, its attempt to bring space flight to the moneyed masses is somewhat inspiring. And the stock is “only” 10% below the $10 price at which it went public, compared to an average decline of about one-third for SPAC deals since  then. Plus, a convertible bond issued last month has boosted the company’s available cash to $1.3 billion, which is plenty to fund several years of capital expenditure. Meanwhile, a commitment to outsource more sub-assembly work to suppliers should de-risk future spacecraft development.

Yet flying humans to suborbital space is inherently pretty challenging, so it’s a pity Virgin Galactic decided to issue such bullish long-term financial forecasts. When it went public in 2019, the company predicted it would generate $210 million in revenue by 2021. In reality, revenues were just $3 million last year. This is why the U.S. Securities & Exchange Commission should prevent such potentially misleading information from being included in SPAC prospectuses (regular IPOs generally shy away from publishing such forecasts for liability reasons).

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Even more discouraging is how Branson and SPAC promoter Chamath Palihapitiya no longer seem entirely invested in Virgin Galactic’s success.

Palihapitiya stepped down from his chairman role last week, citing a desire to focus on other board commitments. He has sold more than $300 million of Galactic stock since 2020, by my calculation, and thereby recouped treble his personal investment. Meanwhile, entities controlled by Branson have netted around $1.5 billion from selling shares.(2)

Both men retain significant shareholdings(1)in the company, and each had their reasons for selling. Branson was forced to prop up ailing travel businesses, while Palihapitiya said he needed the funds for a climate investment. Still, their actions have hurt sentiment toward the stock.

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To be fair, Virgin Galactic still has a $2.3 billion market capitalization, which certainly reflects a lot of hope. The shares briefly soared last week on “news” the company is opening ticket sales to the general public. Even now, some investors haven’t learned their lesson.

SPACs became popular because they offer retail investors the chance to invest in early-stage companies, a domain previously controlled by financial elites. In reality, the “poor man’s” private equity has succeeded in making a lot of neophyte investors even poorer, while the elites have done just fine. Those wondering why investors have gone ice-cold on SPACs need look no further than companies like Virgin Galactic.

(1) Part of that value accrued to co-investor Aabar

(2) Palihapitiya via Social Capital Hedosophia

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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