Spac implosion: Palihapitiya’s retreat marks the end of an era
Investor says companies to return $1.5bn to backers
Silicon Valley mainstay Chamath Palihapitiya was the embodiment of the blank cheque craze between 2019 and 2021. He may now be the face of the subsequent bust. On Tuesday, Palihapitiya announced that two of his outstanding special purpose acquisition companies (Spacs) would return $1.5bn to backers. They are unable to meet a coming deadline to find private companies with which to merge.
Palihapitiya coined the term “IPO 2.0” to describe his strategy of taking hot upstarts to public markets via mergers with Spacs. The trend appeared to muffle complaints from ordinary investors previously deprived of the chance to profit from high growth start-ups.
Yet five of the half-dozen companies that Palihapitiya has taken public are at least 40 per cent below their $10 per share listing price. They include such fallen stars as Opendoor, SoFi and Virgin Galactic.
Palihapitiya himself seems to have done just fine. In a recent interview, he claimed that his $750mn of Spac profits represented double his outlay. Therein lies the rub of blank cheque deals. Sponsors are typically granted 20 per cent of the shares simply for arranging the mergers. Such incentives can result in questionable companies being brought to market. The sponsor tends to profit no matter how poorly a business performs in the public sphere.
It is not just Spac companies that are floundering at the moment. The traditional tech IPO market has effectively shut down, as has the market for risky corporate debt. Palihapitiya said underlying market conditions prevented him from being comfortable signing any new deals.
In theory, this should be the perfect time for sages, real and imagined, to scoop up assets on the cheap. Palihapitiya was one of several serial Spac issuers who claimed a unique ability to identify good companies at good prices across industries. In reality, this cohort looks like bull market opportunists who found a clever way to score a windfall for themselves.