Former Goldman Sachs CEO Lloyd Blankfein sees problems with SPACs, with special purpose procurement companies being used to make companies public.
While the SPAC trend shows no signs of cooling amid the high demand for shares of new companies, investors need to be careful, Blankfein said Monday at Squawk Box. This is because the SPAC process circumvents the rigorous diligence of the normal IPO process, according to Blankfein.
“You make companies public, but you make them public in a two-step process where one of the elements of an IPO gives up,” Blankfein said.
“When the original SPAC goes public, look at a shell company, probably the sponsor’s reputation,” he continued. “When that company takes SPACs and mergers out of business, it’s a merger, not an IPO that carries with it a lot of due diligence.”
SPACs have been around for years, but exploded in popularity last year. SPACs raised $ 64 billion in 2020, almost as much as traditional IPOs, according to Renaissance Capital.
Blankfein, who as Goldman’s former chief executive has led one of Wall Street’s top IPO advisors for more than a decade, suggested that SPAC participants were not motivated to prevent overpayment for their target businesses. . This could lead to situations where “some people make a lot of money and investors lose money,” he said.
“In the absence of diligence, it will be what will happen,” Blankfein said. “There will be things that will not go well.”
The bigger background is that the behavior observed in SPACs and other areas such as bitcoin are signs of “bubble elements” due to central banks’ reaction to the coronavirus pandemic, a point Blankfein has made in the past.