LONDON – Special-purpose procurement firms, or SPACs, are showing signs of ‘foaming’ in the US – and it promises nothing to investors, the London Stock Exchange has warned.
“There is some recognition for the foam in the US market,” David Schwimmer, chief executive of the London Stock Exchange Group (LSEG), told CNBC’s “Squawk Box Europe”.
“I think it’s important that investors, regulators and market participants use SPACs appropriately,” he said.
According to Reuters, Schwimmer told reporters later in the day that an excess in the US SPAC market could have a bad end for investors.
SPACs are shell companies that raise funds in a public offering to take over a private public through reverse takeover. It has become an increasingly popular route for some businesses – especially those in the technology sector – who want to list their shares.
Last year, US-listed SPACs raised a total of $ 78.2 billion over 244 IPOs, according to data from Refinitiv. They have already increased more than half of it in just two months to 2021.
There is growing concern about many speculative investments in Wall Street’s hottest new vehicle. A recreational SPAC recently struck a biotech deal while a cannabis check firm merged with a space company.
The CEO of Goldman Sachs – one of the biggest beneficiaries of the SPAC boom – recently said that he does not think that excess in the market would lead to a ‘crisis’.
“The market will naturally flush out of the surplus,” David Solomon told CNBC earlier this year.
Europe has largely missed the SPAC hype. In Britain, a government-backed review called for reforms in London’s listing regime to allow for SPACs similar in structure to those in New York.
A common complaint about SPACs listed in London is that trading is suspended as soon as a merger is announced.
A view of the London Stock Exchange group 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 suspension of trade when a deal is announced for a SPAC,” Schwimmer told CNBC.
“With such 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 investments in stocks such as GameStop.
GameStop shares traded wildly volatile earlier this year due to a ‘short press’ – where investors are pushing up stock prices and forcing short sellers to cover their positions.
The move was mainly attributed to the Reddit board WallStreetBets, which pushed up a number of beloved stocks, including GameStop, AMC and BlackBerry.
“We have regularly seen speculative froth in the markets over the years,” Schwimmer said when asked about GameStop.
“There are some reasons to be concerned in some specific areas today,” he added. “I’m not in the investment advisory industry, but I think it’s important for investors to work carefully and reflect when investing in the market.”
The London Stock Exchange Group made a profit of £ 1.1 billion ($ 1.5 billion) for 2020 on Friday, up 5% from a year earlier. Revenue on the exchange rose by 3% to £ 2.1 billion. LSEG also increased its dividend by 7%.
However, that was not enough to impress investors as the company’s share price fell 9% on Friday.