According to sources familiar with the subject, Goldman Sachs Group Inc (GS.N) has launched a new product that allows investors to wager on special purpose acquisition companies (SPACs), which is the firm’s latest attempt to cash in on the deal making boom.
As per the sources, the asset is organized as a two-year bond that provides interest and permits investors to gain access to SPACs without really owning them. Institutional investors who desire consistent income from a portfolio of multiple SPACs may be interested in it, according to the sources.
According to one of the individuals, Goldman Sachs has only organized a small number of these “SPAC-linked structured notes” so far.
For the offering, Goldman does not impose a management fee. According to the sources, the bank makes money by financing investors’ participation in the product and keeping a portion of the returns on the SPAC equities for itself, depending on how well they do.
According to the sources, investors also receive a reward based on the SPAC equities’ performance at the conclusion of the two years. If they are willing to take on additional risk in order to boost their returns, they can borrow money from Goldman to leverage the offering, but they will have to reimburse the bank for any losses, according to the sources.
The surge in the SPAC sector, which has grown from $13.6 billion two years ago to $137.4 billion last month, has already benefited Goldman Sachs’ investment banking division. The bank claimed in April that, although being a small portion of its overall company, financing SPAC mergers helped improve revenue, and that advising SPACs on acquisitions will be a “tailwind” for future revenues.
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As per the source, this new SPAC asset is being provided by a department in Goldman Sachs’ world markets department, which is also the bank’s sales and trading department, rather than investment banking.
According to the sources, investors might bet on the shares of SPACs where Goldman Sachs bankers played a significant role. Goldman Sachs-sponsored SPACs are not included.
Losses are mitigated to some extent for investors. As per the sources, SPAC equities can be redeemed for their initial public offering value when shareholders vote on their mergers, and investors can give Goldman Sachs instructions to carry out such redemptions.
Goldman Sachs’ involvement as both consultant and lender of SPAC projects, as well as vendor of this new product, offers a conflict, according to Mike Stegemoller, a banking and finance professor at Baylor University in Waco, Texas, who has examined SPACs.
This is because SPACs will be unable to complete their mergers with corporations if too many investors redeem their shares, leaving them cash-strapped. Goldman Sachs is relying on a practice that is a thorn in the side of some of its investment banking clients – SPACs and the corporations that do deals with them – by offering redemptions of SPAC shares as a safety net for its investor clients.
Stegemoller compared it to a doctor selling donuts in the workplace.
SPAC shares have already been redeemed by a number of investors, and Goldman Sachs’ new offering will not alter that. It was unable to determine whether Goldman Sachs had informed its SPAC clients about the new product or how they would react.
Some hedge fund managers are already irritated by Goldman Sachs’ new product since they had wanted to avoid competing for investors with a major Wall Street bank.
Julian Klymochko, founder and CEO of Accelerate Financial Technologies Inc, which handles an ETF that invests in SPACs stated:
“If you’re an investment bank insuring a SPAC IPO and instructing on a business conjunction, soliciting investors to redeem SPACs can be perceived as effectively working against clients and potential clients”