Palihapitiya blames the Fed for the ‘perverse’ market that benefited him

Chamath Palihapitiya

Olivia Michael | CNBC

Billionaire investor and so-called SPAC king Chamath Palihapitiya said the zero interest rates that the Federal Reserve allowed for years created the “perverse” market conditions it took advantage of at the height of the Covid pandemic.

Speaking to Axios on Wednesday, Palihapitiya explained what he believes contributed to the meteoric rise and collapse of the SPAC market, short for special purpose acquisition companies, which created a way for young companies to go public without any of the usual IPO hurdles. SPACs, which rose in popularity in the first two years of the pandemic, have undergone a reset amid economic and regulatory headwinds. Still, there are more than 450 deals in the market for a merger target before the 2023 deadlines, according to SPAC Research.

The former Facebook Social Capital executive and CEO has helped several companies go public through SPACs, including: Virgo Galactic, which he later sold his personal commitment to before stepping down from the board. Earlier this month, he closed two SPACs after failing to find the merger targets in time.

“We are learning what went wrong, which is that we had interest rates for over a decade,” Palihapitiya said of the market. “That’s what was fundamentally wrong. It distorted the market. It distorted reality. It created manias and bubbles in every part of the economy.”

Low interest rates mean lower returns on savings accounts, which can lead to more spending in the economy, which can be a boon to high-growth assets.

Palihapitiya said the “free money” given by the central bank resulted in a “misallocation of risk”, causing many people to misjudge the risk of their investments.

Still, Palihapitiya pushed back the idea that SPACs were hit harder than other assets, including technology stocks.

“If you give free money to a system, manias will start, and these manias are broad-based,” he said. “And now that we’ve taken money out of the system, these manias will end, and you’ll find the market clearing price for a lot of securities. And I think that’s a healthy process. But I think it’s unfair to just look at one asset class.”

With interest rates rising again, Palihapitiya said, “The most important thing I learned was how much of my early success probably wasn’t due to myself. So in the same way that I kind of blame Jay Powell for zero interest rates, I think that I’ve benefited immensely from Powell and Bernanke and Janet Yellen before,” he said, referring to past Fed chairmen.

“We’ve had a huge tailwind because we had a zero interest environment that allowed us to raise incredible amounts of money from investors who frankly had very few other alternatives because interest rates were zero,” he said. “And what it allowed us to do is penetrate companies. A lot of those companies had incredible valuations. Eventually these unprofitable companies went public and it’s only now that we’re starting to figure out what are good companies and what are not so good companies.”

Yun Li of CNBC contributed to this report.

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WATCH: Chamath Palihapitiya dissolves two SPACs, cites high valuations and market volatility

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