Tech investor Chamath Palihapitiya: ‘I reserve the right to change my mind’

[ad_1]

Chamath Palihapitiya carries himself with the trademark confidence of a billionaire tech investor. He flies around on private jets and owns a slice of the Golden State Warriors basketball team. He flirts with a run for California governor on social media.

Unlike traditional fund managers, Palihapitiya loves to court controversy, casting himself as the ultimate insider turned outsider. As a senior executive at Facebook he helped turbocharge its growth before turning on it and publicly condemning its strategy. In a classic exchange, early in the pandemic, he shot back at a CNBC anchor who questioned why the government should allow airlines to go bankrupt, potentially wiping out hedge funds and other investors. “Who cares? They don’t get to summer in the Hamptons?” Palihapitiya responded.

His reinvention of Spacs, or special purpose acquisition companies, as a founder-friendly alternative to an IPO has placed him at the centre of a white-hot market that has captivated Wall Street during the pandemic but has also been marked by allegations of fraud.

In just a few years, Palihapitiya has transformed himself from a Silicon Valley pariah, following the implosion of his venture fund, to a major hit on financial Twitter. There, he encourages his more than 1.5m followers to learn more about his biggest deals and bet on tech. In person, however, he eschews his signature bullishness. “The best investors say: ‘I reserve the right to change my mind,’” he tells me before we are even halfway through our lunch.

Palihapitiya’s critics have accused him of exploiting his large following to promote low-quality companies. Privately, his contemporaries ask: is he one of the savviest investors of his generation or merely the most cynical?


The 45-year-old arrives 15 minutes late for lunch at the offices of his Social Capital fund, steps away from the Stanford University campus in the heart of Silicon Valley.

Palihapitiya chose to host lunch at the office because of concerns about Covid-19. Yet he bounds into the conference room maskless, dressed in a subdued ensemble of light-wash jeans, a fuzzy white hoodie and a pair of grey Allbirds shoes favoured among the tech crowd.

While waiting for his arrival, his chief of staff has laid out a puritan two-course lunch prepared by a personal chef, transferring the components from individually labelled plastic containers to tasteful, green-rimmed plates.

Palihapitiya starts with julienned zucchini dressed in a chunky green pesto, plucking the bowl off the table and taking a quick succession of bites. The courgette strips hold a mild appeal, like adult baby food, with the rocket-infused pesto adding a welcome brightness.

One day earlier, Social Capital released an annual letter that landed with a thud on Twitter, where some commentators accused Palihapitiya of cherry-picking numbers to flatter his performance. Social Capital, the letter said, made an annual internal rate of return of 33 per cent from 2011 to 2020, before any fees, compared with the 13.9 per cent annual return of the S&P 500 index — perhaps not the best benchmark for a venture-heavy fund. The fund has gained 1,441 per cent total since its inception.

“I feel great,” he says with a laugh. “I had wanted to write it and complete it sooner, but the beginning of this year has been . . . there’s just so much stuff going on.”

Palihapitiya says the letters act as a form of accountability for his future self. “Your mind can play tricks on you and you forget and you get these biases that build up,” he says, adding that his office contains copies of every public letter written by the legendary investor Warren Buffett and a book of speeches by his 97-year-old deputy, Charlie Munger. “Those are the things that I’ve really learnt a lot from.”

Tech investors such as Palihapitiya have made a killing since the financial crisis, as low interest rates, advances in internet applications and cheap cloud computing have fuelled the rise of huge new companies such as Airbnb and Uber. How much of Palihapitiya’s success has to do with the favourable market in the past decade? “Probably a lot,” he says, before adding: “My real long-term track record won’t be known for another decade or two.”

While Palihapitiya likes to talk about his performance in terms of decades, his critics tend to be more concerned with the here and now. These days, Palihapitiya’s preferred medium is Spacs, which in effect raise a blind pool of capital to merge with a company and bring it to public markets. Promoters, or “sponsors”, usually receive millions of shares in the merged company at a minimal cost as payment for striking the deal. The set-up is rife with potential conflicts of interest and misaligned incentives, and Washington regulators have made it a priority to clean up the market.

Palihapitiya helped popularise Spacs, inspiring imitators of varying pedigree to jump into the pool. Recently, though, his magic touch has seemingly become a curse.

Several companies associated with Palihapitiya, such as the insurer Clover Health, performed particularly poorly in the weeks leading up to lunch, with Clover alone down one-third from a recent peak. The sell-off appeared to be sparked by a report from the short seller Hindenburg Research that took aim at Palihapitiya himself, declaring that “his public persona strikes us as the sugar that helps the poison go down”.

Palihapitiya points out that his Spacs have generally done well since their mergers. The broader market is doing so poorly, he says, because interest rates are poised to rise, making a popular hedge fund strategy for Spac investing less attractive. Palihapitiya also blames banks for encouraging inexperienced financiers to start blank-cheque companies that went on to strike bad deals.

“What’s happened is you’ve had a lot of folks who are extremely talented, credentialed people do deals that were a bit of a headscratcher,” Palihapitiya says. “That’s caused that market to trade off in a very significant way.”


Deliberate with his words, Palihapitiya has plenty of practice dodging punches. People who know him offer all kinds of explanations for his pugnacious attitude. There’s his hardscrabble upbringing in Canada, where his parents, refugees from Sri Lanka who left the country when Palihapitiya was six years old, struggled to find work. Or his uneasy 2011 exit from Facebook, which he later accused of “ripping apart the social fabric”.

For years, Palihapitiya has in effect staked his net worth on the massive potential of technology. He has advocated a “long-term greedy” approach that prioritises companies that might be unpopular or difficult to manage in the short term but produce huge payouts in the long run, such as those working on cryptocurrencies or climate change. In one Twitter thread, he advocated a “levered long” approach toward fast-growing tech stocks.

Menu

Social Capital offices
Palo Alto, California

Wilted zucchini salad with arugula pesto x2 $15.51
Poached chicken breast with green beans, frisée and artichoke chips x2 $34.49
Total $50

Yet today, Palihapitiya says he is not so sure that the good times will continue for tech, and software companies in particular. He cites near record highs in a measure of inflation expectations maintained by the Federal Reserve Bank of St Louis as a signal that markets might begin to cool down. “I reserve the right to change my mind,” Palihapitiya says, “and what I would say is I may be in the midst of changing my mind.”

By this point, lunch has moved on to the main course: poached chicken, boiled green beans, undressed frisée lettuce and curly artichoke “chips”, apparently dehydrated rather than deep fried to achieve their crispy texture. The ensemble begs for a sauce, though the chicken has been cooked perfectly.

Is this a typical lunch? How does the billionaire investor really eat? “Like this,” Palihapitiya says. “I mean, it’s boiled chicken. I wouldn’t call this fancy.”

On his podcast the other day, Palihapitiya talked excitedly about eating a steak for dinner, something he normally avoids thanks to a family history of heart disease and diabetes. “I have steak once a week,” he says. “It’s very exciting.”

Today is Palihapitiya’s steak day because his friends are coming over to play poker. “I’m not going to lie to you,” Palihapitiya says. “What I like is if you go to [the grocery chain] Draeger’s or Safeway, if you get USDA Prime, that shit’s delicious. I’m not allowed to have it because it’s grain-fed and stuffed with antibiotics, so instead I have to have organic grass-fed blah blah blah. It doesn’t taste as good.”

The response forms a natural segue to one of Palihapitiya’s favourite topics, the purported melding of profit and social good. Rather than embracing the environmental, social and governance movement, which has attracted billions of dollars of institutional capital in recent years, Palihapitiya promotes a more capacious framework that focuses on “impact”. Palihapitiya’s annual letter called out the obesity epidemic in the US as one area where he thinks Social Capital could make meaningful investments, for instance.

On the question of whether Social Capital has made good on its mission, Palihapitiya says the firm has “supported entrepreneurs” and “made a lot of money” but has not yet properly “connected the dots” for the public.

“As long as we can recycle capital and stay solvent, I think in 50 to 60 years we’ll look back and say some of these things really contributed to even the starting line,” he claims. The impact of some investments might not be immediately obvious, such as the space tourism company Virgin Galactic, but Sir Richard Branson’s venture actually plans to reinvest profits into high-speed travel. The exact impact remains unknown, he says, “except that it’s additive, it’s super disruptive and a lot of goodness can come from it”.

Virgin Galactic, the company that made Palihapitiya into the king of Spacs, has also become the source of one of his most unpopular moves to date: dumping about $200m of his personal holdings, supposedly to redirect the capital to a company fighting climate change. Which company received the proceeds? “We haven’t disclosed. It is private,” Palihapitiya says, before adding, “but it’s incredible and growing like a maniac.”

Virgin Galactic still has yet to complete a successful commercial space flight, so to many of Palihapitiya’s critics the move feels premature, especially given his public boosterism of its stock. Palihapitiya had previously said the company’s future profitability would “look as good as one of the best software companies around”, claiming it would eventually make 70 cents of profit for every dollar of sales. By all measures, the company still has a while to go before it gets there.

“In hindsight, I probably didn’t need to do it, but at the moment it seemed like the right thing to do,” Palihapitiya says, noting that he wanted to cut his exposure to public stocks at the time.

Interrupting a question, Palihapitiya quickly points out that he still owns about $600m of Virgin Galactic stock he acquired through the Spac. “Look, this is the problem. That stuff gets misreported. I can’t react. I can’t clear the record up.”

What about MP Materials, a rare earth mining company that received an investment from Palihapitiya as part of a Spac deal last year? Rare earth mining, which supplies materials for components in many high-tech devices, is famously environmentally unfriendly.

Finishing a large bite of chicken, Palihapitiya says the investment would have made sense purely from a purely financial standpoint, claiming “it would be crazy for somebody to look at MP and not have decided to invest” based on their numbers.

Meanwhile, to mitigate climate change, “you have to electrify everything”, and many engineers believe rare earth minerals are the most efficient way to power electric vehicles. “Honestly, it seemed obvious,” Palihapitiya says. “My big regret with MP is that I didn’t buy the whole bloody company.”


Besides his television appearances, Palihapitiya’s most potent forum is Twitter. One of the wealthiest advocates for everyday investors on the site, he seems to alternate between courting their favour and pitching his latest investment. But on the subject of his followers, Palihapitiya abdicates responsibility, arguing that only a “small minority of folks” take his pronouncements as investment advice. Instead, Palihapitiya insists he is merely providing an “avenue of learning for those that want to take it”.

The answer rings a little hollow. One recent report said Palihapitiya arranged extended airtime on CNBC for when he would announce big Spac deals, sending shares in the blank-cheque companies soaring before they had even merged with their targeted companies.

Palihapitiya commands a privileged position in the investment world, with seemingly evergreen access to the CNBC greenroom and a massive following on social media. Does he have a greater duty to not just promote his investments but also to educate followers on proper risk management? Some Twitter users claim they had put their life savings into Clover, which has floundered since going public through a Palihapitiya-sponsored Spac.

“It’s an extremely aggressive decision, and I would advocate that people not do that,” he says. Reddit forums can be useful for learning about investing, Palihapitiya says, but “there is a structured way that the best hedge funds think that will be incredibly valuable for the people”, and he would like to help make that information more public.

Invoking his own investing idol, the legendary hedge fund manager Stanley Druckenmiller, Palihapitiya muses that he has probably “consumed every single thing” the investor has made public, yet he does not “run around and just randomly do everything that Stan says”.

Palihapitiya, who likes to share “one pagers” about his investments on Twitter, sometimes adds a disclaimer that his words are not investment advice. “Maybe that disclaimer needs to be even more bold and in larger font, or better stated, and I’m happy to take that feedback,” he says.

The end of lunch is nearing, and Palihapitiya has eaten his chicken but barely touched the vegetables on his plate. Three years ago, Palihapitiya returned money to outside investors after a succession of Social Capital executives left the firm, blaming what they considered to be his erratic behaviour. However, Palihapitiya has recently gone on a hiring spree, adding a slew of partners to its ranks. Could he accept outside capital again? “Yeah, I would, under the right circumstances,” he says.

What do others most misunderstand about him? “Everything and nothing,” Palihapitiya says. “Everything in the sense that I don’t think my motivations and the complexity of my decision-making is obvious to anybody.” And they misunderstand nothing because they can see he is a competitive person who is “willing to live and die by measurement”.

He adds about his letter: “Those returns could have been negative 1,441 per cent, and I still would have published it.” Whether anybody would have cared, one can only speculate.

Miles Kruppa is the FT’s venture capital correspondent

Follow @ftweekend on Twitter to find out about our latest stories first



[ad_2]

Source link