Finance

London Stock Exchange boss sounds the alarm on SPAC 'froth'

Share
Key Points
  • London Stock Exchange Group CEO David Schwimmer warned of "froth" in the red-hot SPAC market.
  • Excess in U.S. SPACs "could end poorly" for investors, Schwimmer told reporters Friday.
  • A U.K. government-backed review is calling for reforms to London's listings regime.
VIDEO5:0105:01
London Stock Exchange Group CEO says clearing is a global business and it should remain so

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 a 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 U.K. market."

GameStop mania

Meanwhile, regulators have raised the alarm about speculative investing in heavily shorted stocks like GameStop.

Shares of the video game retailer 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.

Short selling is a strategy in which an investor sells borrowed shares with the intention of buying them back in the future at a lower price. They return the borrowed shares and pocket the price difference — if the stock price actually declines.

The move was largely attributed to the Reddit board WallStreetBets, which had helped pump 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. Revenue 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% on Friday.