Hedge-fund manager William Ackman is winding up the largest-ever special-purpose acquisition company after failing to find a target.

In a letter to shareholders in Pershing Square Tontine Holdings Ltd. on Monday, Mr. Ackman said the company couldn’t find a target that met its investment criteria and was returning $4 billion in shareholder capital.

The vehicle had raised $4 billion in an initial public offering on the New York Stock Exchange in July 2020. A shell company that raises money from outside investors, a SPAC trades on a stock exchange and merges with a private company to take public. It typically has two years to do a deal or it must return the money to investors. The deadline for Mr. Ackman’s SPAC is fast approaching.

Investors initially poured money into SPACs but hundreds are now facing looming deadlines to find deals amid a selloff in their share prices. Meanwhile, some companies that merged with SPACs are already warning they might go bust.

Mr. Ackman said in the letter that high-quality businesses had been taking the traditional IPO route to go public, owing to the quick recovery of capital markets since the pandemic. He also blamed the poor performance of SPACs that have done deals, which he says contributed to negative perceptions of the vehicles, as well as high redemption rates of SPACs and regulatory scrutiny.

Pershing Square Tontine last summer backed away from plans to invest in Universal Music Group, saying the Securities and Exchange Commission couldn’t be convinced the deal met the rules for SPAC investments.

Mr. Ackman also last summer told shareholders he might have to wind up the SPAC owing to a lawsuit questioning the vehicle’s legality. Mr. Ackman called the lawsuit meritless at the time.

Mr. Ackman in the letter said he is working on launching a new vehicle called a SPARC, or special-purpose acquisition rights company, through which investors could buy stock in a company once it has already merged with the vehicle. Such structures have “many favorable attributes” compared with SPACs that should increase the chances of getting deals done, he said.

Write to Julie Steinberg at julie.steinberg@wsj.com