Chamath Palihapitiya learns there’s no such thing as free money

One big scoop to start: Private equity group KKR is nearing a deal to buy a large stake in FGS Global that will value the WPP-backed financial communications firm at about $1.4bn, said people with knowledge of the matter.

And one more thing: The Swiss government has cut bonuses for about 1,000 senior bankers at Credit Suisse.

In today’s newsletter:

• Chamath learns his lesson

• Ari Emanuel’s Hollywood story

• Venture capital in the doldrums

The price of being a Spac king

Chamath Palihapitiya, an investor who a couple of years ago compared himself to Warren Buffett, recently made an astonishing discovery: there’s no such thing as free money.

It was a hard lesson to learn for the Social Capital founder. He wrote in his annual letter to investors that “a small line of credit that we used to drive incremental returns . . . quickly ballooned as some of the assets we used to collateralize it saw up to a 70 [per cent] reduction in price.” 

There’s a much shorter way of putting this, of course, but we admire Palihapitiya’s creativity.

“What initially seemed like access to free money became a liability that we managed carefully,” he went on. It seems Palihapitiya, who made his name churning out special purpose acquisition companies like they were going out of style (and they did), was required to put up more collateral for the loan.

The Financial Times reported last year that Palihapitiya had borrowed money from Credit Suisse to finance $200mn of his initial share purchases in two signature blank-cheque deals, and pledged his stock in the companies as collateral.

Much of Palihapitiya’s letter was dedicated to how the end of zero-interest rate policy, or ZIRP as he took to calling it (which could easily be a ticker for one of his Spacs), had hit some of his most-beloved sectors — cryptocurrencies, software as a service, Spacs and biotech.

The gist of it is that companies now need to focus on turning a profit rather than pursuing growth at all costs.

The irony isn’t lost on anyone. Many of the companies that Palihapitiya and his cohort of Spac sponsors took public were early-stage businesses that sometimes didn’t even have a product, let alone any profit. Much of this, at least in the Spac heyday, was done with little risk to the backers who got outsize benefits for launching the vehicles if they completed a deal.

That’s why Palihapitiya often waxed lyrical about how Spac sponsors need to have skin in the game. So when he was approached by the FT in 2020 to ask if he had borrowed money to finance his $100mn investment in Virgin Galactic, Palihapitiya denied it with an emphatic: “That is NOT correct.” It turns out VG was one of the deals for which he had borrowed money from CS.

Palihapitiya sold much of his personal stake in the company, which he acquired for a nominal sum when he launched the Spac, for hundreds of millions of dollars in March 2021 when prices were ranging between $31.86 to $38.00. Today, Virgin Galactic’s share price is just above $3.

It isn’t hard to see why Palihapitiya thought there was such a thing as free money.

Hollywood’s most aggressive dealmaker defends his title

Back in the early aughts, Ari Emanuel’s relentless ambition and hot temper was so notorious around Hollywood that it inspired the lead character in HBO’s Entourage.

More than a decade after the show’s final episode, however, the fictional Ari Gold is just a foul-mouthed minnow compared to his modern-day counterpart.

Through aggressive deals, Emanuel has transformed his talent empire Endeavor, which began above a Beverly Hills hamburger restaurant in 1995, into an industry heavyweight that boasts clients such as Oprah Winfrey and Martin Scorsese.

The talent agent turned master dealmaker’s latest play, acquiring World Wrestling Entertainment from founder Vince McMahon and combining it with the mixed martial arts business Ultimate Fighting Championship to create a $21bn juggernaut, has reinforced his chokehold over the entertainment business.

It also underscores the risk Emanuel is willing to take to stay on top. McMahon, who abruptly retired from the business following allegations of secret payments to female employees and sexual misconduct, is a controversial figure, as DD detailed earlier this week.

In a plot twist fit for scripted wrestling, the 77-year-old re-entered the ring in January, installing himself as executive chair. He will also stay on to chair the yet-to-be-named group that Emanuel has dubbed “Endeavor 2.0”.

From writing an FT op-ed calling out Kanye West for antisemitic comments to returning $400mn to Saudi Arabia’s Public Investment Fund following the killing of Jamal Khashoggi (though he’s now back in business with the kingdom because of WWE’s 10-year deal with Saudi’s General Entertainment Authority), Emanuel has always spoken his mind.

So when asked by the FT if he had any concerns about partnering with McMahon, Emanuel said: “Not one.”

“Take all the craziness away . . . I believe in due process. There was an investigation. There was no wrongdoing found,” he said. “So we move on.”

A good wrestling match is nothing without a little controversy, after all.

Dark clouds linger over Silicon Valley

Start-ups can’t catch a break. After their main lender Silicon Valley Bank collapsed last month, this week brings news that venture capital funding has halved in the last year, DD’s George Hammond and Tabby Kinder report.

According to Crunchbase, venture funds invested $76bn in the first three months of this year, down from $162bn a year earlier. Even that lower figure gives an overly optimistic impression, inflated as it is by payment group Stripe’s $6.5bn fundraise last month and artificial intelligence company OpenAI’s $10bn investment, led by Microsoft in January.

Strip out those blockbuster transactions and it’s a grim picture for cash-hungry start-ups, many of which are now expected to go to the wall in a much harsher funding environment. SVB’s failure is an added complication: the bank was a big lender of venture debt, which start-ups used to buy time between equity rounds.

“Even before SVB [collapsed] this was the worst business environment anyone had seen,” says Sam Yagan, the founder of dating website OkCupid and early-stage company investor. “We were telling people you can’t assume there will be more capital waiting for you. Now there are really good companies that can’t get capital.”

Job moves

• Law firm Skadden has named 24 new partners.

• UBS shareholders re-elected Colm Kelleher as chair during its annual general meeting on Wednesday.

• The Raine Group has agreed to acquire San Francisco boutique investment bank Code Advisors, The Wall Street Journal reports. Code co-founders Quincy Smith and Michael Marquez will join the merchant bank as a partner and special adviser, respectively.

• Credit Suisse head of industrials Doug Pierson has left the Swiss bank to join Moelis, according to Bloomberg. Moelis also hired Sound Mark Partners’ Chrystalle Anstett as a managing director in New York.

• Houlihan Lokey has hired former Jefferies vice-chair Alec Ellison as global head of fintech and chief innovation officer of corporate finance in New York.

• UniCredit has hired Nomura’s Patrik Zeigherman to head advisory and capital markets in Germany from Munich, per Bloomberg.

• Pinsent Masons has promoted 25 lawyers to its partnership.

Smart reads

Island life “Britain’s Warren Buffett” Terry Smith has shifted his fortune east through a series of legal entities in tax havens, including Mauritius and the Seychelles, Bloomberg reports.

Checking out European payments start-up Checkout.com has lost six executives in the past nine months, and sources tell Sifted that it’s carrying out dozens of behind-the-scenes lay-offs each week.

The antitrust paradox Former “trustbuster” Tim Wu discussed “the burden of proving that this democracy can make the economy work for everyone” and other pressing challenges with the FT’s Rana Foroohar.

News round-up

Savvy Games buys Scopely for $4.9bn (FT)

Cash App founder Bob Lee fatally stabbed in San Francisco (FT)

Kirkland & Ellis defies dealmaking slump as revenues reach $6.5bn (FT)

US regulator’s $91bn bond book casts shadow over mortgage market (FT)

Vanguard plans exit from China joint venture (FT)

Risky AT1 bonds rebound from plunge after Credit Suisse wipeout (FT)

Rothschild, HSBC worst pay gap offenders as women earn nearly half what men do (Financial News)