LONDON – Special Purpose Acquisition Companies, or SPACs, are showing signs of “foam” in the United States, and that doesn’t bode well for investors, the head of the London Stock Exchange warned on Friday.
“There has been some recognition of foam in the US market,” London Stock Exchange Group (LSEG) CEO David Schwimmer told CNBC’s “Squawk Box Europe.”
“I think it is important that investors, regulators and market participants use SPACs appropriately,” he said.
SPAC’s glut in the US 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 a private company public through reverse acquisition. They have become an increasingly popular route for some companies, particularly those in the technology sector, seeking to list their shares.
Last year, US-listed SPACs raised a total of $ 78.2 billion from 244 IPOs, according to Refinitiv data. They have already raised more than half of that just two months after 2021.
There is growing concern about highly speculative investment in Wall Street’s hottest new vehicle. A leisure-focused SPAC recently made a biotech deal, while a cannabis blank check company merged with a space company.
The chief executive of Goldman Sachs, one of the biggest beneficiaries of the SPAC boom, said recently that he does not believe that a glut in the market will lead to a “crisis.”
“The market will naturally remove some of this excess,” David Solomon told CNBC earlier this year.
Europe has largely missed the SPAC hype. In Britain, a government-backed review called for reforms to London’s listing regime to allow SPACs to be structured similarly to New York’s.
A common complaint about London-listed SPACs is that trading is suspended once a merger is announced.
A view of the London Stock Exchange Group sign in the City of London.
Vuk Valcic | Images SOPA | LightRocket via Getty Images
“There are opportunities to adjust the rules in the UK regime to avoid … suspension of trading when a transaction is announced for a SPAC,” Schwimmer told CNBC.
“With those kinds of adjustments, the SPACs could be used as one of the tools in the toolkit here for the UK market.”
Meanwhile, regulators have raised the alarm about speculative investment in very short stocks like GameStop.
GameStop shares experienced tremendously volatile trading at the beginning of the year due to what is known as a “short squeeze,” where investors drive up share prices, forcing short sellers to hedge their positions.
The move was largely attributed to the Reddit WallStreetBets board, which had fueled a number of neglected stocks, 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 to be concerned in some particular areas of the markets today,” he added. “I am not in the investment advisory business, but I think it is important for investors to exercise caution and make some thoughtful decisions when investing in the market.”
London Stock Exchange Group on Friday posted a profit of £ 1.1bn ($ 1.5bn) for 2020, up 5% from the previous year. Revenue on the exchange increased 3% to £ 2.1bn. 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.