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London stock exchange boss sounds the alarm on SPAC ‘froth’

LONDON — Special purpose acquisition companies, or SPACs, are showing signs of “froth” in the U.S. — and that doesn’t bode well for investors, the boss of London’s stock exchange warned Friday. 

“There has been some recognition of the froth in the U.S. market,” London Stock Exchange Group (LSEG) CEO David Schwimmer told CNBC’s “Squawk Box Europe.”

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

 

Excess in the U.S. SPAC market “could end poorly” for investors, Schwimmer told reporters later in the day, according to Reuters.

 

SPACs are shell companies that raise funds in a public offering to take a privately-held firm public via reverse takeover. They’ve become an increasingly popular route for some firms — particularly those in the tech sector — looking to list their shares.

Last year, U.S.-listed SPACs raised a total of $78.2 billion across 244 IPOs, according to data from Refinitiv. They’ve already raised more than half of that just two months into 2021.

 

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

 

The CEO of Goldman Sachs — one of the biggest beneficiaries from the SPAC boom — recently said he doesn’t think excess in the market would lead to a “crisis.”

 

“The market will naturally flush some of this excess out,” David Solomon told CNBC earlier this year.

 

Europe has largely missed out on the SPAC hype. In Britain, a government-backed review called for reforms to London’s listings regime to allow for SPACs that are structured similarly to those in New York.

 

A common complaint about London-listed SPACs is that trading gets suspended once a merger is announced.

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

Vuk Valcic | SOPA Images | LightRocket via Getty Images

“There are opportunities to adjust the rules in the U.K. regime to avoid … suspension of trading when a transaction is announced for a SPAC,” Schwimmer told CNBC.

“With those kinds of adjustments, SPACs could 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 investing in heavily-shorted stocks like GameStop.

 

GameStop shares underwent wildly volatile trading earlier in the year due to what’s known as a “short squeeze” — where investors push up share prices, forcing short sellers to cover their positions.

The move was largely attributed to the Reddit board WallStreetBets, which had pumped up a number of unloved stocks including GameStop, AMC and BlackBerry.

“We have seen speculative froth in the markets periodically over the years,” Schwimmer said, when asked about GameStop.

“There are some reasons to be concerned in some particular areas in the markets today,” he added. “I’m not in the investment advice business but I do think it’s important that investors proceed carefully and make some thoughtful decisions when investing in the market.”

London Stock Exchange Group on Friday posted a £1.1 billion ($1.5 billion) profit for 2020, up 5% from a year earlier. Revenues at the exchange rose 3% to £2.1 billion. LSEG also hiked its dividend by 7%.

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


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