Guru watch

Higher interest rates have

”created a wave of destruction with many unintended consequences”, says Chamath Palihapitiya, the investor known as the “Spac king” for his role in backing several special purpose acquisition companies. “The amount of absolute value destruction, not just in companies, but entire sectors … was alarming,” he writes in the latest annual letter to investors in Social Capital, his investment firm.

The US market for Spacs – or cash shells as they are commonly known in the UK – boomed in 2021, but many have since slumped. Notable flops include space tourism business Virgin Galactic, online real-estate investor Opendoor, healthcare firm Clover Health and online bank SoFi – all of which were among the 10 deals in which Palihapitiya was involved. In addition to the Spac bust, crypto, software as a service (SaaS) and biotech all saw enthusiasm fade and valuations decline during 2022. “The era of excess, abundance and zero interestrate policy has come to an end. Last year, we likened it to ending the best party in town – but instead of simply turning on the lights, the past year has been more akin to getting cold water thrown in our faces.”

The end of cheap money is a “generation-defining economic regime change” that will alter how much investors are willing to pay for loss-making growth stocks. “The mathematical truth of high interest rates is that it renders your company valueless,” he says. “A company’s success will be judged by its profits and market leadership—not faux ‘profitability’ metrics or your ability to latch your company on to the latest trend or fad.”

Leverage will also be more perilous – a lesson that Palihapitiya himself learned after falling share prices put pressure on a loan that was collaterialised by his investments. “What initially seemed like access to free money became a liability that we managed carefully so we could continue to do business as usual.”