LONDON – Special Purchasing Companies, or SPACs, are showing signs of “foaming” in the US – and this does not bode well for investors, the head of the London Stock Exchange warned on Friday.
“There has been some recognition of the foam in the US market,” London Stock Exchange Group (LSEG) CEO David Schwimmer told CNBC’s “Squawk Box Europe”.
“I think it’s important for investors, regulators, market participants to use SPACs properly,” he said.
The excess on the US SPAC market “could end badly” for investors, Schwimmer told reporters later that day, according to Reuters.
SPACs are shell companies that raise funds in a public offering to take over a private public firm by reverse takeover. They have become an increasingly popular way for some companies – especially those in the technology sector – to want to list their shares.
Last year, US-listed SPACs raised a total of $ 78.2 billion on 244 IPOs, according to Refinitiv data. They have already raised more than half of this in just two months in 2021.
There are growing concerns about highly speculative investment in the hottest new vehicle on Wall Street. A leisure-oriented SPAC recently signed a biotechnology deal, while a cannabis testing company merged with a space company.
The CEO of Goldman Sachs – one of the biggest beneficiaries of the SPAC boom – recently stated that he does not believe that the excess in the market would lead to a “crisis”.
“The market will naturally eliminate some of this excess,” David Solomon told CNBC earlier this year.
Europe has largely missed the SPAC hype. In the UK, a government-backed review called for reforms to the London listing regime to allow SPACs that are structured similarly to those in New York.
A common complaint about SPACs listed in London is that trading is suspended once a merger is announced.
A view of the London Stock Exchange Group in London.
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“There are opportunities to adjust the rules in the UK to avoid … suspending trading when announcing a transaction for a SPAC,” Schwimmer told CNBC.
“With these types of adjustments, SPACs could be used as one of the tools in the toolkit here for the UK market.”
GameStop mania
Meanwhile, regulators have sounded the alarm about speculative investments in large short-circuit stocks, such as GameStop.
GameStop shares were the subject of a highly volatile transaction earlier this year due to what is known as a “short squeeze” – where investors raise stock prices, forcing short sellers to hedge their positions.
The move was largely attributed to Reddit’s WallStreetBets board, which has garnered a number of popular shares, including GameStop, AMC and BlackBerry.
“We’ve seen speculative foam on the markets regularly over the years,” Schwimmer said when asked about the GameStop.
“There are some concerns in certain areas of the markets today,” he added. “I’m not in the field of investment advice, but I think it’s important for investors to be careful and make some careful decisions when investing in the market.”
The London Stock Exchange Group posted a profit of 1.1 billion pounds ($ 1.5 billion) for 2020 on Friday, up 5% from a year earlier. Stock market revenues rose 3% to 2.1 billion pounds. LSEG also increased its dividend by 7%.
However, this was not enough to impress investors, as the company’s share price fell by 9% on Friday.