How fintech SPACs lost their shine

The last two years have given special purpose acquisition company (SPAC) mergers their moment in the sun. 

Also known as a blank cheque merger, the process of taking a company public through a SPAC deal has been hailed as a quicker and easier way to raise funds than the traditional IPO route. 

But experts in the market are now warning that, despite the optimistic deal pipeline for 2022, there is trouble ahead. 

Things are looking especially troubling for a number of fintech firms struggling to get deals across the line, plagued by delays and worries of impending stricter regulation.

According to data compiled by Dealogic, globally there were 55 SPAC deals in 2019, a figure that more than doubled to 121 in 2020. That ballooned again in 2021, with 302 on the slate.  

This glut of new deals meant a nearly twenty-fold increase in the cash being pumped into the market last year compared with two years previous. Total deal size was up from $35.3 billion in 2019 to $624.8 billion in 2021. CB Insights put the median exit value for 2021 at $1.6 billion, double that of 2020.

A large portion of this value came through fintech deals, seen as good targets because many of them have relatively predictable revenue streams — an important factor when regulators look at feasibility.

Twenty-one fintechs chose the SPAC route to raise over the last year, more than double the number that did in 2020, when nine went public. The funding frenzy for fintechs extended to the rest of the market too. According to data firm CB Insights, one in five venture capital dollars raised in 2021 was snapped up by a fintech company. 

Pain in public markets

Despite the funding rush, SPAC deals that have already closed have faced a reckoning in plain sight in recent weeks. Frothy markets have evaporated, with fintechs among the worst-hit equities, leading investors to question the longevity of the SPAC model.  

Companies that have felt the pain include lending platform OppFi and neobank MoneyLion, which have both seen their value drop by more than half since listing. Insurtech firm Hippo is also down from its debut price of $12.35 per share to $1.97 just a year from listing. Meanwhile, the benchmark S&P 500 returned around 29% to the end of 2021 (a lead that shrank to 14.4% as of Monday’s close). 

SPACs that plan to close in 2022 are now plagued by doubts from critics, who claim too many immature businesses have gone public via this route.

The show must go on, however. SPACs, the shell companies holding the money, are created with the purpose of deploying that cash and taking a private company public via merger. There remains around $120 billion left in trusts on the shell company side to spend before SPAC expiry dates later this year. The shell companies must combine with a target or lose the money. 

“That money’s been largely sitting on the sidelines looking at what’s happening to others, and saying ‘this isn’t prudent to actually do the merger.’ It still has to be put to work,” says Hussein Kanji, partner at venture capital firm Hoxton Ventures.

“There’s a ticking clock — you have a finite amount of time to deploy that money until you have to give it back,” he says. “So my guess is there may be more money coming into the market even though the market has been trending downward.”

Acorns, eToro, Circle and Aspiration on hold

But the investors watching from the sidelines clearly have the jitters. Some planned SPACs have already been canceled, while others have needed deadline extensions. 

Last week, spare-change investing app Acorns and Pioneer Merger Corp terminated their $2.2 billion deal due to market conditions, with the Acorns opting to go for a more traditional IPO instead. 

The misstep proved costly, with a termination fee for Pioneer of $17.5 million in aggregate. If Pioneer now fails to merge by December 15, 2022 and seeks to redeem its public shares, Acorns will also be on the hook for $15 million, according to a filing. 

Israeli fintech firm eToro also faced trouble in its deal with FinTech Acquisition Corp V at the beginning of 2022, as its valuation was cut by 15% to $8.8 billion. The deal had been announced in March and attracted investments from big-hitting investors including SoftBank's Vision Fund 2, Fidelity Management & Research Co LLC and Wellington Management.

A filing in December revealed that the companies were not able to meet the required conditions to close the deal by the end of 2021, with the deadline now extended by six months. 

SPAC-related angst has also been felt by Aspiration Partners, the self-branded socially-conscious fintech, whose combination with InterPrivate III Financial Partners was promoted by actors Robert Downey Jr., Leonardo DiCaprio and Orlando Bloom. The fact it has been left waiting in the wings is a rather telling example of the warning from market watchers that some SPAC deals with celeb backers were based on hype. 

“We saw earlier this summer, the SEC put out an investor alert about the downside of investing alongside celebrities,” Vijay Raghavan, senior analyst at Forrester, told The Block. “So if that tells you anything about whether it’s becoming too hyped or a fad… the good thing there is they pumped the brakes.”

What once propelled SPACs to prominence — seemingly readily available cash, celebrity backers and a quick pipeline — have now soured the mood. Despite the push from big financial names such as hedge fund billionaire Bill Ackman and investment banker Michael Klein. 

The stalling of the $2.3 billion deal meant Aspiration raised $315 million as a stopgap, an increasingly common phenomenon as regulators circle the market. 

Blockchain payments firm Circle’s deal was also meant to close by the end of 2021, but that deadline has now passed, too. Circle said it is currently working closely with the SEC and moving through the typical SPAC process.

What happens next?

As for the year ahead, market watchers have warned that SPACs face a regulatory reckoning. 

Forrester's 2022 Wealth Management Predictions report, published in November, says that the proliferation of SPAC deals has made them more vulnerable to regulation. 

“In principle, well-managed SPACs should be able to sort through bad investments to find the promising ones,” analysts wrote. “Even if the SPAC manager is top in the field and incentives are aligned, the sheer amount of money-chasing deals should give investors pause.”

In other words, investors are advised to take a deep breath and reassess the types of companies they are taking public. “Caveat emptor,” warns Forrester.

Beyond cautions against hype, there are suggestions that regulators may ratchet up the disclosure requirements for these deals. Critics have urged the SEC to impose stricter rules, which could put firms with digital assets on their books in an awkward position. 

“They're asking for more clarity, and financials, and if some of the assets are in crypto, or you're dealing with crypto operations, that would probably require a bit more effort,” says Raghavan. 

“It's very opaque,” he says. “And I think you kind of wonder if they had to go the more traditional IPO route — which takes longer, there's more due diligence — how many of them would be able to be successful going that way versus the SPAC route?”

Correction: A previous version of this story referenced reporting that the delay to Circle's SPAC merger was due to the SEC’s concerns over stablecoins, which is inaccurate.