David Solomon, Goldman Sachs chief executive, says the boom in listings of blank-cheque companies on Wall Street is unsustainable, casting doubt on a financing tool used to raise nearly $79bn from investors last year.
Speaking to analysts as Goldman announced a doubling of its fourth-quarter profits, Mr Solomon on Tuesday said he did not expect special purpose acquisition companies, or Spacs, to continue to list at their current pace and raised questions about whether issuance had “gone too far”.
“While I think these activity levels continue to be very robust and that they do continue as we head into 2021 . . . I do not think this is sustainable in the medium term,” he said.
More than 250 shell companies listed on US exchanges last year, raising a record $78.7bn, half of the total in 2020 initial public offerings, according to data provider Refinitiv. The largest Spacs dwarfed some of the year’s marquee IPOs.
Spacs use proceeds from a public listing to hunt for a private company to acquire. They can generate significant fees for banks as underwriters in the listing process and as advisers when the Spac finds an asset to buy.
Spac founders have come under increasing scrutiny for the lucrative compensation they receive. They are typically awarded a 20 per cent stake in the company for a nominal sum of $25,000.
Mr Solomon said Spacs could be a good alternative to the traditional public offering process but that he 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 we’re watching very, very closely is the incentives for the sponsors and also the incentives of somebody that’s selling”.
Mr Solomon also drew a distinction between companies that go public through Spacs by choice and those that do not have other alternatives. “Those are things that the market will have to wrestle with,” he said.
Goldman has for years ranked among the top IPO underwriters on Wall Street, and last year led the flotations of food delivery company DoorDash and cloud database start-up Snowflake.
It has been slower in moving to capitalise on the boom in Spacs. Before the latest upsurge in interest, such deals were typically underwritten by smaller players such as Cantor Fitzgerald, Deutsche Bank or EarlyBirdCapital.
But Mr Solomon’s group advised on 30 blank-cheque IPOs last year that raised $7.7bn, behind only Citigroup and Credit Suisse.
It was not an underwriter on a shell company backed by former Goldman president and Trump administration adviser Gary Cohn, who worked with Credit Suisse on its listing last year.
Raising money for Spacs sits within Goldman’s equity underwriting business, where revenues rose 195 per cent in the fourth quarter, to $1.1bn.
That was the strongest performance in Goldman’s investment banking division, which posted a 27 per cent jump in revenues in the quarter versus a year earlier, a performance so far bested only by JPMorgan Chase, whose investment banking revenues rose 37 per cent on the same basis.
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