Financial technology special purpose acquisition companies' roller coaster ride in 2021 parked at the bottom toward year-end, presenting dealmakers with a steep climb in 2022 through regulatory delays and price fluctuations.
Merging with a special purpose acquisition company has attracted fintech companies looking to raise capital and go public, since SPAC vehicles were able to offer frothy valuation in early 2021. Longer-than-expected regulatory reviews delayed SPAC deal closures, which need to be completed within a certain time frame. Broad valuation correction across growth stocks in the technology sector also complicated the picture for SPACs on the hunt for fintechs.
In the U.S., 33 fintech SPAC mergers were announced since 2020, and 15 are pending regulatory approval, according to data by S&P Global Market Intelligence. The past year has seen volatility in the S&P U.S. Financial Technology index. As of Feb. 10, 2022, the market was down 5.38% from a year ago, but saw jumps as high as 15.39% from its Feb. 10, 2021, level in July 2021. In January, however, it saw a drop of more than 8%.
"There is a possibility that a couple of these other deals also get terminated," said Vikas Shah, managing director in fintech investment banking at Rosenblatt Securities.
On Jan. 19, investing app Acorns Grow Inc. and blank-check company Pioneer Merger Corp. announced the cancellation of their merger agreement in May, with Acorns paying $17.5 million in termination fees. On Nov. 30, 2021, blank-check company Northern Star Investment Corp II said its merger partner Apex Clearing Holdings LLC decided to terminate the deal signed in February 2021, as the parties were unable to have it cleared by the Securities and Exchange Commission after their best efforts over almost eight months, according to a Form 8-K filing.
Other fintechs that targeted the end of 2021 and have not closed their SPAC mergers include stablecoin issuer Circle Internet Financial Limited, trading software company Pico Quantitative Trading LLC and mortgage lender Better Mortgage Corp., according to press releases and filings.
Technology stocks are likely to continue to drop for another quarter or so, and in the meantime, regulatory reviews are not getting through fast enough, Shah said. Some fintechs and SPACs waiting on the sidelines could find it no longer worthwhile or appropriate to stick with the high valuation formulated in a more bullish market condition a few months ago.
The value drop of fintech stocks has given rise to price renegotiation in SPAC mergers. On Dec. 30, 2021, Betsy Cohen-backed Fintech Acquisition Corp. V said in a Form 8-K that it would not be able to meet the original deadline to close the merger with trading app eToro Group Ltd by Dec. 31. The parties agreed to extend the target closing date to June 30, 2022, and lower eToro's post-money valuation to $8.8 billion from $10.4 billion.
"The delay between announcement and closing of SPAC mergers means that the chance of mispricing a SPAC merger is very high, even in moderately volatile markets," Todd Baker, senior fellow at Columbia University's Richard Paul Richman Center, wrote in a blog post Jan. 27. While SPACs' "structural mechanisms worked well in a rising stock market, they have faltered badly in a market turning down," Baker wrote.
Downward pressure on valuation
Most of the fintechs that recently went public through SPACs have struggled with stock performance. Of the 16 fintechs that began trading since the second half of 2020 following a SPAC merger, shares of 10 of them have plummeted by over half as of Jan. 31. Challenger bank Dave Inc., who began trading Jan. 5, was the only fintech seeing a price uptick since its SPAC merger was closed. This trend could make fintechs more wary of going public via SPAC mergers, said Alan Bickerstaff, partner at Shearman & Sterling.
Notably, the value drop is not specific to fintechs on the SPAC track. It comes as growth stocks in the technology sector experienced atypical volatility in recent months. Among 18 fintech companies that went public via an IPO or direct listing in 2021, the majority of them traded below their IPO price as of Jan. 31. Coinbase Global Inc.'s market capitalization declined by 23.9% since its direct listing in April, while Robinhood Markets Inc.'s market value shrank by two-thirds since its July IPO, after posting flat growth in the fourth quarter. Robinhood and Coinbase were two of the largest fintech IPOs in 2021, according to Market Intelligence data.
The valuation of a group of selected fintech companies is on par with where they were before the pandemic, said Abdul Abdirahman, senior associate at venture capital firm F-Prime Capital. While the need to digitize financial services due to the pandemic helped boost some fintechs' valuation, multiples appear to have regressed to the mean as of Jan. 31, according to Abdirahman.
For fintechs facing uncertainty in deal closing, the dry powder of investors in the private market provides them with feasible if not better options to raise capital amid the current market turbulence. While Acorns terminated its SPAC merger, it intends to raise capital from the private market.
"Given market conditions, we will be pivoting to a private capital raise at a higher pre-money valuation as we continue on our path to 10 [million] paid subscribers saving and investing for a better future," said CEO Noah Kerner in a statement emailed to S&P Global Market Intelligence.
Not as liquid as the public market, the private market tends to lag in valuation adjustment. The lag could be six to nine months sometimes, Shah said. Although the valuation offered by private equity and venture capital investors today may be lower than what SPACs offered a few months ago, it still could be quite attractive, he added.
Pipeline has to move forward
In spite of the backlog, the driver to close deals in a timely manner is built within the working mechanisms of blank-check companies. They typically have 12 to 24 months to close a business combination, otherwise they will be dissolved with investments returned to shareholders. For those facing a deadline in 2022, they will be wanting to pursue deals now with potentially lower valuations in this volatile market, Bickerstaff said.
Currently 22 blank-check companies listed in the U.S. are targeted to complete a merger by January 2023 in fintech or adjacent fields, according to Market Intelligence data.
While the public market is taking a breather after strong performance in the last 12 to 18 months, it is necessary to understand the fintech sector with a long-term view, said Roshan Punjabi, managing director at Guggenheim Securities.
"If I take a step back and look at the secular trends with fintech, those aren't going anywhere. We're still in the early innings of penetration of technology and digitalization within the financial services ecosystem," Punjabi said.
