Venture investor Palihapitiya says SPAC slowdown separated ‘wheat from chaff’

Venture investor Chamath Palihapitiya, whose huge bets on “blank check” acquisition companies earned him the moniker of “SPAC King,” said he remained bullish on the long-term health of such deals despite a recent slowdown.

Palihapitiya has raised billions of dollars in the stock market through SPACs, or special purpose acquisition companies, created to buy unspecified private companies. The targets assume the listing of the so-called blank-check firms to become public companies.

The recent correction, after a boom that lasted several quarters, was needed to separate the “the wheat from the chaff,” he told CNBC in an interview on Wednesday.

The U.S. Securities and Exchange Commission should make SPAC sponsors put up more at-risk capital to “have more skin in the game” and be better aligned with investors, said Palihapitiya, who has so far launched 10 SPACs and backed several other deals.

“The incentives aren’t aligned to create great outcomes from the beginning of a SPAC to the end of a SPAC. And the most important thing we need to do is to force the people that are the sponsors to have much more capital at risk,” he said.

“So if I want to raise a billion-dollar SPAC, I have to come up with $100 million.”

SPAC managers are typically awarded warrants and founder shares that give them a much bigger stake in the combined company than their investment would otherwise allow them.

Palihapitiya’s latest comments on lopsided SPAC incentive structures come days after Elizabeth Warren and other Senate Democrats sent letters to a handful of SPAC sponsors, including him, Michael Klein and Tilman Fertitta, questioning incentive arrangements.

Through his SPACs, Palihapitiya has struck deals with companies ranging from space tourism firm Virgin Galactic Holdings Inc to home-selling platform Opendoor Technologies Inc.

However, since the peak of the SPAC boom in March, investors have lost their enthusiasm because of poor financial performance and scrutiny from lawmakers and regulators.

One of Palihapitiya’s SPAC deals, Clover Health Investments Corp, was accused by short-selling firm Hindenburg Research of concealing a U.S. Department of Justice enquiry into its business.

“I’m going to get a lot of credit when things go up and I’m going to get a lot of the blame when things go down,” he said.

“I think we all have to take a step back and say, we are one year into a pretty meaningful revolution in the capital markets that will take years to play out.”

Reuters