The Israeli fintech company Pagaia , which last month completed a merger with a Wall Street SPAC, continues to “crazy” investors. On Friday, the stock jumped 119%, completing a 334% increase on the Nasdaq in just three trading days.
Thus, from a drop of more than 50% in the stock since it began trading in June, which set the stock price at only $2.7 last Tuesday (which reflected a company value of less than $2 billion for Pagaya), the stock reached $11.7 at the end of the trading week , a price that reflects an astronomical company value of approximately 7.7 billion dollars.
Assaf Natan, founder and manager of the hedge fund Eden Discovery, believes that this is a move that started from an investor’s long position, who took advantage of the low float in the stock (the floating commodity), and in fact led the shorts to distress, which jumps the Pagaya share price.
Short selling is a method of making a profit from a security that is in decline. The merchant borrows the paper from its owner, sells it in the market, and then repurchases it to return to the owner. If there is a decrease in the price of the paper, the short seller makes a profit.
According to Natan, “Fagaia started life in a SPAC, a ‘financial entity’ without business activity, which consists of shares and the public that owns them, and is looking for a company to merge into. When you find a company to merge into, it is bigger than the SPAC. That is, in a merger, the structure changes – let’s say , from a million shares to 100 million shares.
“All the existing holders of the merged company supposedly own the SPAC shares, and they need to be registered, a process that takes several months. This is what is happening now: the shares are not listed for trading, and Fagaia recently submitted a prospectus to register the shares of the warrants. It is a process that takes time , and there is ‘ping pong’ with the US Securities and Exchange Commission. I hope for the shorts that it happens quickly.”
In his estimation, “a smart investor saw that the share price drops after the merger and attracts shorts like a butterfly to fire. As the price drops, an interesting situation arises: less money is needed to control the entire float. In Pagaya, the entire float was less than $200 million. Probably someone who saw that most of the float was short, bought a larger portion of the short.The float is low enough that the purchase does not make him an interested party.
“What happens is that brokers automatically lend to shortists, but the same party that purchased can call his broker and say not to lend any more, and then the broker must return the shares he lent. The shortists, for their part, some lend from other brokers, and some – obviously they won’t find, because there isn’t enough and the blanket is short Too much for everyone. There is a shortage, and they have to buy in the market (“Short Squeeze”, SH)”.
Theoretically, according to Natan, “the stock can reach infinity. Every day another part goes out of circulation and we have to buy in the market, every time someone has to cover up. It’s like a hot potato that passes from hand to hand.” He emphasizes that he has no position in Pagaia, and adds that “if I had to bet, I bet it’s not over yet.”
The similar case of Porsche and Volkswagen
Natan mentions a similar case that happened in 2008, at the Volkswagen automobile company. Porsche bought shares and one day revealed that it owns 75% of the shares. Another 13% of the shares were short and about 6% were floating commodities. The stock doubled its value in a few days, until finally Porsche itself announced the sale of a small portion of the shares, to help funds stuck with short positions.
“This is what will happen in Pagaya as well until someone breaks,” assesses Nathan. That is – until the person who bought the shares in the first place and created the spin for shortists decides to sell, or until the founders and other shareholders can sell their own shares (this also depends on the time of their blocking).
Natan warns of the possibility of a collapse of funds due to this event, as was the case at the beginning of last year with funds that were affected by investors who traded shares based on recommendations in forums on the social network Reddit, when private investors created a frenzy around small shares such as that of Gamestop, significantly raising their prices and forcing funds specializing in short be covered. For example, the hedge fund Melvin lost billions of dollars.
Natan says that “Pagaia is a company that does not have options, so it is impossible to hedge. With a 100% increase in a day, it is difficult for funds to react, and I assume that we will see funds that will be hit hard, but that will become clear in a few weeks, when they report the returns to investors.” That’s why he says, “The key point is that whoever makes a short, must know what he’s doing. When we make shorts, it’s for a fenced world. Otherwise, you never know what will happen.”
completed the merger despite the cooling of the SPAC market
Fagaya provides solutions based on machine learning and big data, designed to allow financial entities to more accurately manage their credit allocation process. The company was founded in 2016 by CEO Gal Krobiner, Technology Director Avital Pardo and Revenue Director Yahav Yolzari.
Fagaya signed the SPAC merger agreement last September at a value of 8.5 billion dollars, a year after raising capital in the private market at a company value of 500 million dollars. This is after the SPAC market had already cooled down in the months that passed until the merger was completed.
Despite the cooling of the SPAC market and the significant declines in the global capital markets in the months that have passed since then, Fagaya completed the merger at the original agreed upon value, raising $350 million. The bulk of the fundraising was through a private placement (PIPE) because an overwhelming majority of the shareholders in the SPAC company preferred to cash out their money rather than participate in the deal.
In a conversation with Globes just before Fagaia began trading, CEO Krobiner was asked what his expectations were regarding the share price, against the background of the sharp declines in the shares that were merged into the SPAC, and replied that “we are not messing with that. Unfortunately or fortunately, we do not control or schedule stock prices. It is important to understand that the question is the long term – what will the performance be in five years.”
Even before the completion of the merger, the share of the SPAC that absorbed Pagaia fell to a price of about 6 dollars, compared to 10 dollars in the merger, and since the completion of the merger until last week, as mentioned, the stock fell another 56% to a low of 2.7 dollars. Since then, as mentioned, it has made an incredible leap that is hard to explain in the market.