Former Goldman Sachs CEO Lloyd Blankfein sees problems ahead for SPACs, the special-purpose acquisition companies used to go public.
While the SPAC trend shows no signs of cooling amid high demand for shares in new companies, investors need to be careful, Blankfein said on Monday at Squawk Box. That’s because the SPAC process bypasses the strict due diligence normal IPO, according to Blankfein.
“You are going public, but you are going public in a two-step process where one of the elements of an IPO is being eliminated,” said Blankfein.
“When the initial SPAC goes public, you are looking at a shell company, possibly the sponsor’s reputation,” he continued. “When that company removes SPACs and merges, it is a merger, it is not an IPO that carries many due diligence obligations.”
SPACs have been around for years, but have exploded in popularity last year. SPACs raised $ 64 billion in 2020, almost as much as traditional IPOs, according to Renaissance Capital.
Blankfein, who as a former Goldman CEO led one of Wall Street’s top IPO consultants for more than a decade, suggested that SPAC participants were not encouraged to avoid overpayments for their target businesses. This can lead to situations where “some people make a lot of money and investors lose money,” he said.
“In the absence of diligence, it will happen,” said Blankfein. “There will be things that will go wrong.”
The broader scenario is that the behavior seen in SPACs and other areas like bitcoin are signs of “bubble elements” because of central banks’ reaction to the coronavirus pandemic, a point Blankfein has made in the past.