LONDON – Special purpose procurement companies, or SPACs, are showing signs of “foam” in the United States – and that does not bode well for investors, warned the head of the London stock exchange on Friday.
“There has been some recognition of 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 for investors, regulators and market participants to use SPACs properly,” he said.
Excess in the US SPAC market “can end badly” for investors, Schwimmer told reporters later in the day, according to Reuters.
SPACs are shell companies that raise funds in a public offering to go public with a private company through reverse takeover. They have become an increasingly popular route for some companies – particularly those in the technology industry – looking to list their stocks.
Last year, SPACs listed in the U.S. raised a total of $ 78.2 billion in 244 IPOs, according to data from Refinitiv. They have collected more than half of that in just two months in 2021.
There are growing concerns about highly speculative investments in Wall Street’s hottest new vehicle. A leisure-focused SPAC recently entered into a biotechnology deal, while a cannabis blank check company merged with a space company.
The CEO of Goldman Sachs – one of the biggest beneficiaries of the SPAC boom – said recently that he does not think the excess in the market would lead to a “crisis”.
“The market will naturally release some of that excess,” David Solomon told CNBC earlier this year.
Europe has largely lost the SPAC advertising campaign. In Britain, a government-backed review called for reforms to the London listing regime to allow SPACs structured in a similar way to New York.
A common complaint about SPACs listed in London is that negotiations are 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 opportunities to adjust the rules in the UK regime to avoid … suspending trading when a transaction is announced for a SPAC,” Schwimmer told CNBC.
“With these types of adjustments, SPACs can 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 investment in heavily sold shares like GameStop.
GameStop’s shares went through highly volatile trades earlier this year due to what is known as “short squeeze” – in which investors raise share prices, forcing short sellers to cover their positions.
The change was largely attributed to the board of Reddit WallStreetBets, which had pumped a number of unloved actions, including GameStop, AMC and BlackBerry.
“We have seen speculative foam in the markets periodically over the years,” said Schwimmer, when asked about GameStop.
“There are some reasons for concern in some specific areas of the markets today,” he added. “I’m not in the investment advisory business, but I think it’s important for investors to proceed with caution and make some thoughtful decisions when investing in the market.”
The London Stock Exchange Group reported on Friday a profit of £ 1.1 billion ($ 1.5 billion) in 2020, an increase of 5% over the previous year. Stock exchange revenues increased 3% to £ 2.1 billion. LSEG also increased its dividend by 7%.
However, this was not enough to impress investors, as the company’s stock price fell 9% on Friday.