Over the past three years, Chamath Palihapitiya refashioned himself from venture capitalist to mogul in the world of special purpose acquisition companies, or SPACS, the once-obscure financial vehicles also known as blank-check funds that rocketed in popularity — and stock market value — during the pandemic.
Mr. Palihapitiya is now making a partial retreat.
The investor announced on his blog on Tuesday that his firm, Social Capital, was winding down two of the SPACs it had co-created, and would return the money they had raised to investors. Together, the two funds oversee roughly $1.6 billion.
The announcement by Mr. Palihapitiya, the financier once known as the “SPAC king,” is the latest sign of how far out of love Wall Street has fallen with blank-check funds.
SPACs are publicly traded shell companies created solely to raise money via initial public offerings and merge with a privately held company, effectively taking them public. Such funds became a popular route to take start-ups public without the heavy regulation and drawn-out legal process of a traditional initial public offering. They raised billions of dollars from public-market investors — and reaped rewards for the vehicles’ creators, who typically get a 20 percent stake in the funds for a nominal investment. SPACs became popular among retail investors, particularly during the boom in stock trading that powered the meme-stock frenzy and lifted the share prices of many blank-check funds.
Financiers like Mr. Palihapitiya and Michael Klein, a veteran deal maker, began to sponsor stables of blank-check funds, and even celebrities like Jay-Z and Serena Williams jumped on the bandwagon. Wall Street rushed to cater to demand, dispatching investment banking teams to help SPACs go public and identify companies to merge with.
But interest in SPACs has recently waned. SPACs raised more than $160 billion in public offerings last year, according to the database SPAC Research. So far this year, SPACs have raised about $13 billion. The largest-ever SPAC, a $4 billion vehicle created by the billionaire investor William A. Ackman, was wound down in July, returning its money to investors.
Fear of rising inflation and recession has driven stock investors toward conservative assets and away from the risky, profitless companies that were the targets of many blank-check mergers. Poor market performance for many of those companies has also been a factor.
And regulators, fearful of individual investors being taken advantage of, opened investigations into blank-check funds and proposed rules that could drastically reduce the money to be made from them.
The reason Mr. Palihapitiya cited for unwinding the two funds, widely known by their stock tickers IPOD and IPOF, was that they could not fulfill their mission of finding suitable companies to buy ahead of a two-year deadline that SPACs commonly face to complete a merger.
“Over the past two years, we evaluated more than 100 targets and while we came close to doing a deal several times, we ultimately walked away each time,” he wrote.
Shutting them down also means that Mr. Palihapitiya will forfeit the money his firm spent creating those funds.
In his post, Mr. Palihapitiya wrote that he remained proud of the six companies he had helped take public through SPACs, including the spaceflight company Virgin Galactic and the online lender SoFi. (Of them, only the medical technology company ProKidney is trading above its debut price.)
And Mr. Palihapitiya said he was still looking for takeover targets for the two remaining funds in his “Bio 2.0” investing strategy, which comprises SPACs focused on biotechnology companies.
But he also downplayed the importance of SPACs to his firm, Social Capital.
“Our view on SPACs remains consistent since our first deal,” he wrote. “SPACs are just one of many tools in our toolkit.”