LONDON – Special purpose takeover companies, or SPACs, are showing signs of “foam” in the US – and that doesn’t bode well for investors, the London Stock Exchange chief warned Friday.
“There is some recognition for the foam in the US market,” David Schwimmer, CEO of the London Stock Exchange Group (LSEG), told CNBC’s “Squawk Box Europe.”
“I think it is important that investors, regulators and market participants use SPACs properly,” he said.
According to Reuters, the surplus in the US SPAC market could “end badly” for investors, Schwimmer told reporters.
SPACs are shell companies that raise money through a public offering to make a private company public through a reverse takeover. They have become an increasingly popular route for some companies – especially those in the tech sector – who want to list their shares.
Last year, US-listed SPACs raised a total of $ 78.2 billion through 244 IPOs, according to data from Refinitiv. They’ve already picked up more than half of those two months through 2021.
There are growing concerns about highly speculative investments in Wall Street’s most exciting new vehicle. A leisure-focused SPAC recently struck a biotech deal, while a blank-check cannabis company merged with an aerospace company.
The CEO of Goldman Sachs – one of the biggest beneficiaries of the SPAC boom – recently said he does not think market overload would lead to a “crisis”.
“The market will, of course, wash out some of this surplus,” David Solomon told CNBC earlier this year.
Europe has largely missed the SPAC hype. In Britain, a government-backed review called for reforms to the London listing regime to allow for SPACs structured similarly to those in New York.
A common complaint about London-listed SPACs is that trading is suspended as soon as a merger is announced.
A view of the London Stock Exchange Group sign in the City of London.
Vuk Valcic | SOPA images | LightRocket via Getty Images
“There are options for revising the rules in the UK regime to avoid … trade suspension when a trade is announced before an SPAC,” Schwimmer told CNBC.
“With tweaks like that, SPACs could be used as one of the tools in the toolkit here for the UK market.”
GameStop mania
Meanwhile, regulators have raised the alarm about speculative investments in high-short stocks, such as GameStop.
GameStop stocks underwent hugely volatile trading earlier this year due to what is known as a “short squeeze” – where investors drive up stock prices, forcing short sellers to hedge their positions.
The move was largely attributed to the Reddit board WallStreetBets, which pumped up a number of unloved stocks, including GameStop, AMC and BlackBerry.
“We’ve seen speculative foam in the markets on a regular basis over the years,” Schwimmer said when asked about GameStop.
“There are some reasons to be concerned about certain areas of the current markets,” he added. “I’m not in the investment advisory business, but I think it’s important for investors to exercise caution and make informed decisions when investing in the market.”
The London Stock Exchange Group posted a profit of £ 1.1 billion ($ 1.5 billion) for 2020 on Friday, 5% more than a year earlier. Stock market revenues were up 3% to £ 2.1 billion. LSEG also increased its dividend by 7%.
However, that was not enough to impress investors as the company’s stock price fell 9% on Friday.