They're becoming more everyday vehicles for IPOs: JMP Securities CEO on IPOs

JMP Securities CEO Mark Lehmann joined Yahoo Finance Live to break down if there are underlying risks of investing in a SPAC and what investors should look for.

Video Transcript

ADAM SHAPIRO: Mark Lehmann, he is JMP Securities CEO. Mark, good to have you here. And on one hand, it's great that companies that want to go public can generate this kind of revenue. Is there a concern, though, that a SPAC might hide a company that hasn't yet generated any real revenue or any profits to go public. And then, I as an investor make a mistake.

MARK LEHMANN: Well, they're not going to hide it because there's going to be financial disclosure, and there's going be places for you to pay attention as an investor, which I hope all individual investors do. But most of these SPACs are being targeted towards institutional investors. And I think they have the wherewithal and the expertise to pay attention to those.

But I think the kind of moniker that we've put on these SPACs is kind of new and kind of in their own realm. They're becoming much more everyday vehicles for IPOs and for companies to find a way to get public. And so, the institutional response by the buyers has accelerated in the last six to nine months. So I think they are in the realm of every institutional investor. And they're to be here to stay. This is not just a 2020 and '21 phenomena. This is going to be around for a while. And I think investors do need to pay attention.

SEANA SMITH: So investors, Mark, are paying attention to it. I guess, what should they be looking for, just to determine which ones they think could be a potential investment opportunity?

MARK LEHMANN: Listen, I think it's like any other IPO. I mean, the SPAC vehicle, remember, there's two phases to the SPAC. There's the initial investment where you're putting money into a blind pool for, really, the management and their expertise. And then, the second phase when they target a company. Investors and individuals should put the same diligence forward that they do to any market. This is a large untapped market because there are lots of greenfield, and there are lots of ways to win.

And frankly, where the differentiation between the IPOs and the SPAC IPOs, if you will, the back ends, has become much less disparate. They're basically the same. So I think investors need to pay the same amount of attention. And I'll use one example from back in May. There was one for a company called DraftKings, which went public via SPAC. May, not a lot of sports were going on, not a lot of places to gamble.

But for those who paid attention to the legislation that was passing and the reopened trade, if you will, DraftKings was really one of the great examples of how to make money in a market that was large, untapped, and going to benefit the investors. You're going to find other places that you will benefit.

I want to remind the viewers today, I've been in Wall Street for almost 30 years. The IPO window, which is wide open right now, is nothing compared to what it was in the late '90s. There's a very small number of IPOs versus 20 years ago. But if you add in the SPACs, it's getting back to normal. So it's not like there's this crescendo of new companies. We have lots of innovation, lots of great companies, so there's lots of opportunity.

ADAM SHAPIRO: Hey, Mark, very quickly, I mentioned revenue. It was like, verging on hasn't generated. We had a company on yesterday. He's going into a SPAC. It's already generating 0.5 billion and going forward solar panels. The same funnels still apply. SPAC just is a faster, much more equally based way to go public, is it not? Am I missing something?

MARK LEHMANN: You're not. I mean, it's the same. It's instant. It does require attention the same way you look at some other large, untapped markets. I look at a company like Affirm, which went public in the last three months. They didn't have a lot of revenue three, four years ago. When people looked at that, they said, hmm, that doesn't really have an end market.

But for those who would have paid attention back then, now you look at them in their market cap, it's the same opportunity. It's just looking for that large, untapped markets. You'll see something like sciences companies, right? They're not going to have any revenue, but going to have a large potential, given what we've seen in a short time about the innovation in life sciences. That's where you want to pay attention to. It's about management and opportunity. It's not necessarily about the revenue currently.

SEANA SMITH: Mark, I want to ask you about another big thing that's been going on in the markets that we've been watching over the last couple of days. And of course, that's the unusual activity in names like GameStop and also what we're seeing play out in Bed, Bath, and Beyond. Retail investors going up against some of these short sellers here. Do you see this being a broader risk to the market at some point? I mean, how closely should investors be watching activity like this?

MARK LEHMANN: You know, you're not the first person who asked me that over the last couple of days. And I think it is worrisome. We've seen these pockets of surges for stocks and squeezes over time that are worrisome. And I was around in the late '90s when we saw stocks like this jump 20%, 30%, 50% in a day. You talked about your parent company, you know, Yahoo/Verizon. Boy, they were part of that way back when. It is worrisome.

And I think given the phenomena of Robinhood and given the phenomena of Twitter and some of the things that are, frankly, a part of the marketplace like TikTok that wasn't the case a few years ago, it doesn't take much to create that kind of short squeeze. What I will say is, over time, fundamentals always win. And if the fundamentals have changed for GameStop and they're 30 times better than they were a week ago, good for them, but I doubt it.

And so, I think investors got to be really careful. If they want to put some risk capital at stake, it's something that they feel fundamentally will get better. But frankly, you know, people putting their names on top of these things on Twitter and just saying I'm long it, and then the stock goes up, is very scary and very worrisome and something that we are going to have to pay attention to. It's here to stay at least for the near term.

But this bubble will prick. I don't know when that's going to be. It's going to be some time probably in the next six to nine months, but it is worrisome for me because I've seen it before, like a lot of investors. And it does come to a rather difficult ending, and it will.