(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

 

NEW YORK - Goldman Sachs has hit on a way to give its clients exposure to the blank-check firm frenzy. Its new SPAC-backed structured note takes what has become a free-money game and opens it up to certain investors who don’t normally engage in speculative leveraged trades. Including, in a way, itself.

Listed special-purpose acquisition companies merge with existing businesses, often young and fast-growing ones, and effectively take them public. The success of SPACs rests on hedge funds, which buy stock knowing that when the vehicle identifies a target they will be offered the option to get their money back. That puts a floor under potential losses or, in some cases, ensures a gain regardless of the SPAC's success. Of the 504 SPACs issued in 2021, over 40% trade below their issue price, according to Dealogic, meaning an investor buying now and redeeming later would be guaranteed a profit.

Goldman’s structured note allows investors who don’t want to buy SPAC shares directly to take part in this money-go-round, with David Solomon’s firm buying, holding and selling SPAC shares on clients’ behalf. Only a couple have been sold so far, and the details will depend on what Goldman agrees with its customers. But the Wall Street firm can help fund their investment with debt, which leverages their return and also brings in a slug of revenue for Goldman on top of the fees it already gets from underwriting roughly 10% of all SPAC issues, according to Refinitiv data.

There’s a further benefit for Goldman. Unlike hedge funds, the bank can’t just buy a bunch of blank-check vehicles' shares to participate in the free-money trade. That's because regulations restrict Wall Street’s ability to bet its own capital. In this case, though, the terms of the SPAC notes include a cap on investors' potential profit, which means that Goldman pockets some of the upside when things go well. So the firm indirectly plays the golden-goose game too.

The whole idea does not put Goldman or its clients on quite the same footing as the specialist hedge funds that make up the so-called SPAC mafia. But it’s something like associate membership of the club.

CONTEXT NEWS

- Goldman Sachs has sold a small number of investors a structured note that gives exposure to special-purpose acquisition companies without the need to buy their shares directly, Reuters reported on Nov. 1.

- Investors stand to receive a payout based on the underlying SPACs’ performance after two years. The notes would include blank-check firms where Goldman had a deal role, but not those where it acts as a sponsor.

- SPACs go public and raise money before seeking out mergers with unlisted companies and then offering investors the option to redeem their money or participate in the merger. The right to redeem protects against losses and offers an arbitrage trade for specialist hedge funds.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Richard Beales and Sharon Lam) ((For previous columns by the author, Reuters customers can click on FOLEY/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe | john.foley@thomsonreuters.com; Reuters Messaging: john.foley.thomsonreuters.com@reuters.net))