Former Goldman Sachs CEO Lloyd Blankfein envisions problems for SPACs, the special-purpose acquisitions companies that bring companies public.
While the SPAC trend shows no signs of cooling down amid high demand for new company shares, investors need to be careful, Blankfein said on Squawk Box on Monday. This is because, according to Blankfein, the SPAC process bypasses the rigorous due diligence of the normal IPO process.
“You take companies public, but you take them public in a two-step process in which one of the elements of an IPO goes down,” said Blankfein.
“If the first SPAC goes public, look into a shell company, possibly the sponsor’s reputation,” he continued. “If this company then breaks SPACs and mergers, it is a merger, not an IPO, with a lot of due diligence.”
SPACs have been around for years, but they have become increasingly popular over the past year. According to Renaissance Capital, SPACs raised $ 64 billion in 2020, almost as much as traditional IPOs.
Blankfein, who as the former CEO of Goldman led one of Wall Street’s top IPO advisors for more than a decade, suggested that SPAC attendees had no incentive to prevent overpayment for their target companies. That could lead to situations where “some people make a lot of money and investors lose money,” he said.
“That will happen without diligence,” said Blankfein. “There will be things that go wrong.”
The bigger background is that behavior in SPACs and other areas like Bitcoin are signs of “bubble elements” as central banks react to the coronavirus pandemic, a point that Blankfein has highlighted in the past.