One of the biggest promoters of SPACs is shutting down two deal-making efforts that combined for more than $1.6 billion after the market collapsed, wiping out tens of billions in startup market capitalization and penalizing individual investors.
Chamath Palihapitiya will wind up and return cash from the two special purpose acquisition companies to shareholders after failing to find companies to go public. Giving up is an admission by the brash venture capitalist dubbed the “SPAC King” that the market that helped make him a mainstay on business TV has effectively shut down.
Stock prices for companies he disclosed in previous deals such as space-tourism venture Virgin Galactic Holdings Inc. and personal finance app SoFi Technologies Inc.,
has fallen more than 60%, causing heavy losses to his followers. With that track record, it wasn’t clear that investors would back his deals, making his SPACs less attractive to startups they might try to acquire. SPAC investors have pulled out of nearly every deal lately, making mergers difficult to complete.
Mr. Palihapitiya joins other notable SPAC creators such as hedge fund manager Bill Ackman and baseball executive Billy Beane in closing blank-check businesses during this year’s market turmoil. Rising interest rates and high inflation have slowed new public IPOs through SPACs and IPOs to a fraction of 2021’s record pace.
Sir. Palihapitiya and other executives who created the SPACs, Social Capital Hedosophia Holdings Corp. IV and Social Capital Hedosophia Holdings Corp. WE,
will lose the several million dollars apiece they paid to set up each blank check business nearly two years ago.
The founder and CEO of Social Capital Holdings Inc. said in an interview that the company has raised about $750 million in SPACs, roughly doubling its money. The gains come from the six deals it completed, such as SoFi. SPAC creators are protected from large losses through lucrative incentives. Social Capital creates its SPACs by partnering with other investment companies.
The two SPACs that are winding down had previously indicated in regulatory filings that they might try to seek additional time to find deals before saying on Tuesday that they will not pursue extensions. They had until early October to find mergers, the typical two-year time frame common to SPACs.
Mr. Palihapitiya said the creators considered more than 100 companies to go public but were unable to complete attractive mergers. The blank check firms have $460 million and $1.15 billion, respectively, making them two of the larger SPACs in the market and showing how the boom has turned for many investors.
“It’s a very, very uncertain moment in the public capital markets,” the former Facebook executive said.
Two of his remaining SPACs that have not entered into deals and are focused on biotech companies, Social Capital Suvretta Holdings Corp. II DNAB 0.10%
and social capital Suvretta Holdings Corp. IV,
will continue to look for mergers, he said. Those SPACs don’t face deadlines until next summer. Each of them holds $250 million.
Early last year, when SPACs soared along with speculative stocks like GameStop corp.
, Mr. Palihapitiya was known for promoting his SPAC mergers like SoFi on social media and touting the deals on television. Many retail investors immediately bought the shares, even though many analysts warned that startups going public were overvalued.
The former Golden State Warriors part owner said he never tried to make it seem like investing was easy or that investors should blindly buy the companies he backed without doing their own analysis. Social Capital, whose investments must also provide a benefit to society, also rode the wave of investors’ enthusiasm for companies that prioritize environmental and social issues.
Mr. Palihapitiya sold shares in Virgin Galactic and SoFi when stocks were much higher, including a sale of some SoFi shares last November when he raised concerns about inflation and the market environment.
The other companies his tech-focused SPACs went public with are online real estate firm Opendoor Technologie s Inc. and insurance technology firm Clover Health Investments corp.
Two biotech companies that his SPACs took public are Akili Inc.
and ProKidney corp.
Shares of all the companies the SPACs went public with, except for ProKidney, are down about 40% or more from the blank check company’s original listing price. Sir. Palihapitiya said businesses are doing well and he remains happy with the deals, though he and many others underestimated how unprecedented government stimulus would squeeze markets and fuel inflation coming out of the coronavirus pandemic.
Also called a blank check company, a SPAC is a shell company that raises money and trades publicly for the sole purpose of finding a private company to go public. After the regulatory authorities have approved the deal, the company being listed replaces the SPAC on the stock market.
Sir. Palihapitiya and other investors have helped make such mergers popular in the past few years, but deteriorating investor sentiment has made them nearly impossible to pull off lately.
Social Capital has remained active in private markets, betting big on startups like solar-tech startup Palmetto, which raised $375 million in February.
Many startups such as ticketing company SeatGeek that had previously announced or considered plans to go public have postponed them and also raised money privately.
Write to Amrith Ramkumar at firstname.lastname@example.org
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