Former Goldman Sachs CEO Lloyd Blankfein sees problems for SPACs, whose specialty ventures are being used to promote companies.
While the SPAC trend shows no sign of cooling off, amid huge demand for shares in new companies, investors should be careful, Blankfein said on Squawk Box on Monday. This is because the SPAC process circumvents the strict due diligence of the normal IPO process, according to Blankfein.
“You make companies public, but you make it known in a two-step process where one of the elements of a stock market fails,” Blankfein said.
“When the initial SPAC becomes known, you’re investigating a shell business, possibly the sponsor’s reputation,” he continued. “When the company then disconnects SPACs and mergers, it’s a merger, it’s not a stock market that carries a lot of due diligence obligations.”
SPACs have been around for years, but they exploded in popularity last year. SPACs raised $ 64 billion in 2020, according to Renaissance Capital, almost as much as traditional IPOs.
Blankfein, who as former Goldman CEO has led one of Wall Street’s leading IPO advisers for more than a decade, suggested that SPAC participants should not be encouraged to avoid overpaying for their target businesses. This can lead to situations in which ‘some people make a lot of money and investors lose money’, he said.
“In the absence of zeal, that will be what will happen,” Blankfein said. “There are going to be things going wrong.”
The larger background is that behaviors seen in SPACs and other areas such as bitcoin are signs of ‘bubble elements’ as a result of central banks’ response to the coronavirus pandemic, a point Blankfein has made in the past.