Almost 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 NYSE—or any exchange, for that matter—and was so successful that it almost immediately sparked a SPAC craze.
The beauty of the mechanism, like Palihapitiya suggested to us last year is that SPACs are not burdened with the same disclosures associated with the traditional initial public offering process. While old-school IPOs look back and tell investors what a company has accomplished, SPACs “actually allow you to raise a really large amount of money, go to a broad base of institutional investors, and let you tell them what you think the future it might look like this,” he said.
The good times could only last so long though. In late spring of last year, the frenzy cooled as the SEC introduced new accounting guidelines for SPACs and hinted that tougher rules were on the way. By the time the broader stock market slump hit last March, fueled by rising inflation, SPACs were no longer seen as a panacea for taking private companies public. Instead, related deals were seen as toxic for retail investors, many of whom lost money by investing in overly optimistic forecasts of companies that quickly failed to deliver on their promises.
Now, in a bookend of sorts for the era, Palihapitiya — who has raised money for a total of 10 SPACs — announced in blog post today that it will terminate two SPACs that raised $460 million and $1.15 billion, respectively, after failing to find a suitable merger candidate for either.
Palihapitiya is hardly the only one who has to return money to investors. Hedge fund manager Bill Ackman, billionaire real estate mogul Sam Zell and baseball executive Billy Beane are among others who have shuttered companies with blank checks this year as enthusiasm for the vehicles faded.
Many more SPAC sponsors are expected to do the same. A total of 247 SPACs closed in 2020, and another 613 of them folded in the first half of last year, before the SEC made it so clear it planned to do more on the regulatory front.
These many companies with blank checks must find suitable targets in a bear market, and the clock is ticking. Whereas blank-check companies are typically expected to merge with a target company within 24 months of investors funding a SPAC, if those hundreds of SPACs cannot complete mergers with candidate companies within the first half of next year , they will either have to terminate (which could mean millions of lost dollars for SPAC sponsors) or else seek shareholder approval for an extension.
Given that the time between when a deal is announced and when the SEC has time to review it can take up to five months, according to SPACInsiderthe picture looks bleak for many of these efforts.
As for Palihapitiya, you have to respect his time. He’s losing the money he spent on the two SPACs he’s now closing, but he reports the WSJ that his investment firm, Social Capital Holdings, has made about $750 million by sponsoring half a dozen other SPAC deals. In addition to Virgin Galactic, they include online real estate business Opendoor, insurer Clover Health, financial services company SoFi and two biotech companies: Akili and ProKidney Corp.
All have had a volatile time in the public market, although the same is currently true of many companies that went public through the traditional IPO process.
In his post earlier today — a 273-word investor update — Palihapitiya called SPACs “one of many tools in our toolbox to support companies as they enter the next stages of growth.” The language was significantly muted in contrast to Palihapitiya’s many CNBC appearances in recent years, during which he has aggressively extolled the virtues of SPACs.
It is also consistent with what Palihapitiya says throughout, including the A New Yorker in May last year and live an interview with TechCrunch a year ago when we talked at length about his SPAC deals.
When asked early on, for example, if Palihapitiya imagined the frenzy that started his deal with Virgin Galactic, he said he didn’t expect there to be “so much activity. But it kind of makes sense,” he continued, “because whenever there’s any innovation of any kind, you tend to see this euphoric fervor, right? Always the first phase of anything is just to get all these people extremely excited. And then you have what kind of people sometimes [call] this valley of disappointment. And then you have a long-term business. . .”
“The big takeaway,” he insisted about SPACs at the time, was that “in the hands of the right people” they were “a really important tool.”
Time will tell if investors still agree. Palihapitiya is still looking for targets for two other SPACs, with almost a year to work its magic. The two SPACs, each holding $250 million, face deadlines next summer.