Former Goldman Sachs CEO Lloyd Blankfein sees problems ahead for SPACs, the specialty acquisition companies used to disclose companies.
While the SPAC trend shows no signs of cooling amid high demand for new company stocks, investors should be cautious, Blankfein said on Squawk Box Monday. That’s because the SPAC process bypasses the rigorous due diligence of the normal IPO process, Blankfein said.
“You make companies public, but you make them public in a two-step process that removes one of the elements of an IPO,” said Blankfein.
“When the first SPAC goes public, you’re investigating an empty firm, possibly the reputation of the sponsor,” he continued. “Then when that company lifts the SPACs and mergers, it’s a merger, it’s not an IPO that involves a lot of due diligence.”
SPACs have been around for years, but gained popularity last year. According to Renaissance Capital, SPACs raised $ 64 billion in 2020, almost the same amount as traditional IPOs.
Blankfein, who led one of Wall Street’s top IPO advisers for more than a decade as the former Goldman CEO, suggested that SPAC participants were not incentivized to avoid overpaying for their target companies. That could lead to situations where “some people make a lot of money and investors lose money,” he said.
“If there is no diligence, it will,” said Blankfein. “There will be things that go wrong.”
The larger background is that behaviors seen in SPACs and other areas like bitcoin are signs of “bubble elements” due to the central banks’ response to the coronavirus pandemic, a point Blankfein has made in the past.