Bookending the blitz, Chamath Palihapitiya begins unwinding two SPACs • TechCrunch

About three years ago, a special purpose acquisition vehicle (SPAC) led by investor Chamath Palihapitiya took space tourism company Virgin Galactic public. It was the first human spaceflight company to trade on the New York Stock Exchange or any exchange — and it was so successful that it set off a SPAC mania almost immediately.

The beauty of this mechanism, as Palihapitiya once suggested to us, is that SPACs are not bogged down by the same disclosures associated with the traditional IPO process. Whereas traditional IPOs are backward-looking and tell investors what a company has accomplished, SPACs “can actually allow you to raise a lot of money, get access to a broad range of institutional investors, and it allows you to tell them what you think the future is going to be. what that looks like,” he said.

Still, the good times can only last so long. By the end of last spring, the frenzy cooled as the SEC introduced new accounting rules for SPACs and signaled that tougher rules for blank-check companies were on the way. By March, when the stock market tumbled due to rising inflation, SPACs were no longer seen as a panacea for getting private companies public. Instead, the deals were seen as harmful to retail investors, many of whom lost money by investing in overly optimistic forecasts in companies that soon failed to deliver on their promises.

Now, in the bookends of an era, Palihapitiya, who has raised funds for 10 SPACs, blog post Today, after failing to find a suitable merger candidate, he will close two SPACs that raised $460 million and $1.15 billion, respectively.

Palihapitiya isn’t the only company that has to return money to investors. Hedge fund manager Bill Ackman, real estate billionaire Sam Zell and baseball executive Billy Beane, among others, are closing blank-check companies this year after their enthusiasm for cars faded.

More SPAC sponsors are expected to do the same. After 247 SPACs were fully closed in 2020, 613 of which merged in the first half of last year, the SEC made it clear that it planned to do more on the regulatory front.

Those blank-check companies need to find suitable targets in a market that has turned bearish, and time is running out. Given that blank-check companies are typically expected to merge with targets within 24 months of investors funding a SPAC, if these hundreds of SPACs fail to complete their mergers with candidates in the first half of next year, they will either wind up (which could mean SPAC sponsors lose millions) or seek shareholder approval for an extension.

Given that the time between when the deal is announced and when the SEC has time to review it could be as long as five months, according to SPACInsiderfor many of these efforts, the picture looks especially bleak.

As for Palihapitiya, you have to trust his timing.He’s losing money on two SPACs he’s ending now, but he tell the Wall Street Journal His investment firm, Social Capital Holdings, made about $750 million from sponsoring six other SPAC deals. In addition to Virgin Galactic, the companies include online real estate business Opendoor, insurance company Clover Health, financial services firm SoFi and two biotech companies: Akili and ProKidney Corp.

Everyone has had a rough time in the public markets, although so are many companies currently going public through the traditional IPO process.

In a 273-word investor update published earlier today, Palihapitiya called SPACs “one of many tools in our toolkit to support companies as they move into subsequent growth stages.”

The language was markedly understated in contrast to Palihapitiya’s multiple appearances on CNBC in recent years, during which he actively praised the virtues of SPACs.This is also in line with what Palihapitiya has been saying, including New Yorker Last May, in a live interview with TechCrunch a year ago, we discussed his SPAC deal in detail.

For example, when asked at the outset if Palihapitiya foresees a frenzy when his deal with Virgin Galactic begins, he said he didn’t expect “so much activity. But it makes sense because every You tend to see this ecstatic enthusiasm when there’s any kind of innovation, right? It’s always the first stage of things, it’s just that all these people get really excited. And then you have what people sometimes [call] The valley of disillusionment. Then you have a long-term business. . . “

He went on to stress that the “important takeaway” of SPACs is that, “in the right hands,” they are “a very important tool.”

Time will tell if investors still agree. Palihapitiya is still looking for targets for two other SPACs, nearly a year to work his magic. The two SPACs, each holding $250 million, will both face deadlines next summer.

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