David Solomon, managing director of Goldman Sachs, has said the boom in list of blank check companies on Wall Street is unsustainable, casting doubt on a funding tool used to raise nearly $ 79 billion from investors. last year.
Speaking to analysts as Goldman announced a doubling of its fourth quarter profits, Solomon said on Tuesday he did not expect special purpose acquisition companies, or Spacs, to continue listing at their current rate and raised the question of whether the show had “gone too far.”
“Although I believe these activity levels continue to be very robust and continue as we approach 2021.. . I don’t think it’s viable in the medium term, ”he said.
More than 250 shell companies listed on U.S. exchanges last year, raising a record $ 78.7 billion, half of the total initial public offerings for 2020, according to data provider Refinitiv. The biggest Spacs eclipsed some of the flagship IPOs of the year.
Spacs use the proceeds of a public listing to find a private company to acquire. They can generate significant costs for banks as underwriters in the listing process and as advisers when Spac finds an asset to buy.
The founders of Spac are increasingly under scrutiny for the lucrative compensation they receive. They typically receive a 20% stake in the business for a nominal amount of $ 25,000.
Mr Solomon said Spacs could be a good alternative to the traditional public offering process, but believed the structure “was still evolving”.
“The ecosystem is not without flaws,” he said. “I think the incentive system is still evolving. One of the things that we are watching very, very closely is the incentives for the sponsors and also the incentives of someone selling.
Mr. Solomon also drew a distinction between companies which use Spacs by choice and those which have no other alternatives. “These are things the market will have to grapple with,” he said.
Goldman has been ranked among the top IPO underwriters on Wall Street for years, and last year led the floats for food delivery company DoorDash and cloud-based database startup Snowflake.
It was slower to take advantage of the Spacs boom. Before the last surge of interest, these transactions were typically underwritten by smaller players such as Cantor Fitzgerald, Deutsche Bank or EarlyBird Capital.
But Mr. Solomon’s group advised 30 blank check IPOs last year that raised $ 7.7 billion, behind Citigroup and Credit Suisse alone.
It was not an underwriter of a shell company backed by former Goldman chairman and Trump administration adviser Gary Cohn, who worked with Credit Suisse on his list last year.
Fundraising for Spacs is part of Goldman’s equity underwriting business, whose fourth quarter revenue grew 195% to $ 1.1 billion.
This is the best performance of Goldman’s investment banking division, which saw a 27% increase in revenue in the quarter compared to a year earlier, a performance so far beaten only by JPMorgan Chase, whose investment banking income grew 37% on the same basis. .