The New Deal in FinTech: SPAC
Flashback to a year ago in Q1 2020, and the industry was red-hot with announcements of acquisitions and IPOs. Big names from wealth management (Charles Schwab, TD Ameritrade), card networks (Visa and Mastercard), and mature fintechs (Lending Club, SoFi) were making deals left and right. Some of the established FinTech leaders (Bill.com) were also going public via an IPO (initial public offering) in the first half of last year (covered in the article, “Let’s Make a FinTech Deal”).
This trend of entering public markets has now taken a different shape with SPACs (special purpose acquisition companies) which acquire a private company through a merger with a public shell company. In this post, we will cover:
What is a SPAC and how do they work?
What differentiates a FinTech-focused SPAC?
What are the benefits for fintechs in working with a SPAC?
Top SPAC announcements and executives from 2020.
WHAT IS A SPAC?
Special purpose acquisition companies, known as SPAC, create public listings through reverse mergers with a private firm. Often referred to as “backdoor listings” (and the acquiring entities as “blank check companies”), SPACs are trending in the market as alternatives to traditional IPOs (initial public offerings).
These shell corporations raise capital through a SPAC IPO so that a privately held company (i.e. fintech) can be acquired directly. This SPAC merger (or initial business combination, SPAC IBC) is highly efficient for late-stage, venture backed firms to go public quickly. Both sides agree upfront on valuation and terms without involving outside investor groups or engaging in a slower process.
The volume of SPAC IPOs jumped in 2020 as a result of financial market uncertainty (related to the pandemic), available liquidity in the market, and an appetite for exit opportunities.
With over double the IPO volume from 2019, 494 debuts raising $174B — SPAC represented 56% and 52% of IPOs in Q3 and Q4, respectively (FactSheet). Overall, technology was the dominant sector with the majority of acquisitions within FinTech.
FINTECH-FOCUSED SPAC
SPACs have various target profiles in choosing companies to acquire. Focus areas can be tied to product, user demographic, or valuation.
Fintech-focused SPAC groups eye a supply of private firms with rising demand for embedded digital banking solutions (due to COVID-19’s impact). There 30 SPAC IPOs in the last half of 2020 emphasized FinTech. Examples of popular fintech sectors are payments in banking, insurance and investment management, data analytics, cryptocurrency custody or transacting, and general financial services.
For those focused on geographic areas, Fintech SPACs may choose targets with exposure to multiple jurisdictions and countries, while others prefer a narrow vision on one region. Outside of the US, companies can focus on northern Europe (Nordic and Scandinavian areas), Baltic countries (Germany, France, Ireland, UK), MENA (Middle East and North Africa), or Southeast Asia (countries south of China).
BENEFITS with SPAC for FINTECH TARGETS
For private FinTech firms being targeted, there are numerous advantages to consider with a SPAC (over a traditional IPO):
Speedy listing process that doesn’t require scheduling multiple roadshows with prospective investor groups;
A defined valuation negotiated between the fintech and their SPAC sponsor prior to listing, which removes uncertainty in listed price;
Flexibility in contract terms as fintechs work directly with their sponsor on the details in the proposed merger;
Experienced management teams in a SPAC provide industry experience and connections that can boost a fintech’s overall value and opportunities (examples below of seasoned veterans running a SPAC);
As fintechs continue to evaluate exits in public markets for 2021, the SPAC option seems to offer an appeal of certainty and efficiency not currently available with the standard IPO process.
TOP fintech SPAC firms and EXECs IN 2020
Here’s a round-up the FinTech-focused SPACs that made headlines last year (with IPO funding):
FinTech Acquisition Corp. V ($250M);
Foley Trasimene Acquisition Corp. II ($1.4B);
SVF Investment Corp. ($525M);
FTAC Olympus Acquisition Corp. ($750M);
Far Peak Acquisition Corporation ($550M);
Dragoneer Growth Opportunities Corp. ($690M);
Many of these companies are run by notable banking and finance veterans, who have held leadership positions in prominent financial institutions. These executives include:
Douglas L. Braunstein (past CFO of JPMorgan Chase) is President and Chairman of Hudson Executive Investment Corp.;
Betsy Z. Cohen (previous CEO of The Bancorp, Inc)., is Chairman of the Board of Fintech Acquisition Corps. IV and V;
Robert E. Diamond Jr. (former CEO of Barclays) is Chairman of Concord Acquisition Corp.;
Xavier Rolet (past CEO of the London Stock Exchange) is a Director of Golden Falcon Acquisition Corp.;
In continuing with the trend from last year, 2021 has seen early success with FinTech SPACs already:
Feb 2021: MoneyLion to be acquired by Fuse Acquisiton Corp (under CEO John James);
Feb. 2021: Payoneer to be acquired by FTAC Olympus Acquisition (also under Betsy Cohen);
Jan 2021: SoFi to be acquired by Social Capital Hedosophia Corp V (run by Chamath Palihapitiya, early Facebook exec)
There is still tremendous uncertainty in public markets — combined with interest in FinTech and cash available in today’s marketplace, more SPAC deals lie ahead.
We should expect the pace of SPAC activity to pick up as mature fintechs ready for an exit, gain comfort with this new model. A strong candidate later this year is Robinhood, who came under fire in recent weeks for restricting trading amidst market turbulence from retail traders. Despite recently raising funds through its own investors, SPAC may be the best exit option.
WHAT’s NEXT FOR FINTECH SPAC?
For SPAC teams moving independent of standard IPOs, there is concern with legal risk (transaction-related litigation) in properly creating agreements (and the increasing cost of insurance to cover this risk). As a space in financial markets that’s still being fully defined, regulator changes and developments will be monitored closely to protect investors and lack of disclosures.
Transactions between FinTech companies and SPACs should thrive in 2021. This growth is expected to expand overseas to international markets, which have robust FinTech hubs ready to get in on the action. Europe features multiple challenger banks that may struggle with traditional public offerings and valuation due to uncertainty in profitability.
What fintechs do you think will go public this year via SPAC? Please comment and share below.
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