London Inventory Trade boss sounds the alarm on SPAC ‘froth’

LONDON – Special Purpose Acquisition Companies (SPACs) are showing signs of “foam” in the US – and that is not a good sign for investors, the head of the London Stock Exchange warned on Friday.

“The foam in the US market has been partially recognized,” David Schwimmer, CEO of the London Stock Exchange Group (LSEG), told CNBC’s “Squawk Box Europe”.

“I think it is important that investors, regulators and market participants use SPACs appropriately,” he said.

According to Reuters, a surplus in the US SPAC market could “end badly” for investors, Schwimmer told reporters later in the day.

SPACs are Shell companies that raise funds in a public offering to bring a privately held company to the public through a reverse takeover. They have become an increasingly popular route for some companies – especially in the tech space – looking to list their stocks.

Last year, US-listed SPACs raised a total of $ 78.2 billion in 244 IPOs, according to Refinitiv. You have already collected more than half of them in just two months by 2021.

There are growing concerns about highly speculative investments in Wall Street’s hottest new vehicle. A leisure-focused SPAC recently closed a biotech deal, while a blank cannabis check company merged with a space company.

Goldman Sachs CEO – one of the biggest beneficiaries of the SPAC boom – recently said he doesn’t believe that an excess of the market will lead to a “crisis”.

“The market will of course wash away some of that excess,” David Solomon told CNBC earlier this year.

Europe largely missed the SPAC hype. In the UK, a government-backed review called for reforms to the London listing regime to allow SPACs structured similar to New York’s.

A common complaint about SPACs listed in London is that trading will be suspended as soon as a merger is announced.

A view of the sign for the London Stock Exchange Group in the City of London.

Vuk Valcic | SOPA pictures | LightRocket via Getty Images

“There are ways to adjust the rules in the UK regime to avoid suspending trading when a transaction for a SPAC is announced,” Schwimmer told CNBC.

“With such adjustments, SPACs could be used as one of the tools in the toolkit for the UK market.”

GameStop mania

Meanwhile, regulators have been sounding the alarm when it comes to speculative investments in sharply-discounted stocks like GameStop.

The video game company’s shares were exposed to extremely volatile trading earlier in the year due to a so-called “short squeeze” that saw investors push share prices higher and force short sellers to cover positions.

Short selling is a strategy in which an investor sells borrowed stocks in order to buy them back in the future at a lower price. You return the borrowed shares and pocket the price difference – if the share price actually goes down.

The move was largely attributed to Reddit board WallStreetBets, which helped pump up a number of unloved stocks like GameStop, AMC, and BlackBerry.

“We’ve seen speculative foam in the markets on a regular basis over the years,” said Schwimmer when asked about GameStop.

“There are a few reasons to be concerned in certain areas of today’s markets,” he added. “I’m not into investment advice, but I think it’s important for investors to be careful and make some thoughtful decisions when investing in the market.”

The London Stock Exchange Group posted a profit of £ 1.1bn ($ 1.5bn) for 2020 on Friday, up 5% year over year. Exchange turnover rose 3% to £ 2.1 billion. The LSEG also increased its dividend by 7%.

That wasn’t enough to impress investors, however, as the company’s share price fell 9% on Friday.

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