Former Goldman Sachs CEO Lloyd Blankfein sees trouble ahead for SPACs, the special purpose acquisition companies being used to take companies public.
While the SPAC trend shows no sign of cooling down amid high demand for shares of new companies, investors need to be careful, Blankfein said Monday on Squawk Box. That’s because the SPAC process circumvents the rigorous due diligence of the normal IPO process, according to Blankfein.
“You’re getting companies public, but you’re getting them public in a two-step process where one of the elements of an IPO is dropping out,” Blankfein said.
“When the initial SPAC goes public, you are scrutinizing a shell company, possibly the reputation of the sponsor,” he continued. “When that company then de-SPACs and mergers, it’s a merger, it’s not an IPO that carries with it a lot of diligence obligations.”
SPACs have been around for years, but they exploded in popularity last year. SPACs raised $64 billion in 2020, nearly as much as traditional IPOs, according to Renaissance Capital.
Blankfein, who as former CEO of Goldman led one of Wall Street’s top IPO advisers for more than a decade, suggested that SPAC participants weren’t incentivized to prevent overpaying for their target businesses. That could lead to situations where “some people make a lot of money and investors lose money,” he said.
“In the absence of diligence, that’s going to be what will happen,” Blankfein said. “There are going to be things that go wrong.”
The larger backdrop is that behavior seen in SPACs and other areas like bitcoin are signs of “bubble elements” because of central banks’ reaction to the coronavirus pandemic, a point Blankfein has made in the past.