Financial analytics firm Pagaya Investments has become the fifth fintech valued above $1 billion to strike a SPAC deal in six weeks, as the sector benefits from a greater focus on actual revenue among blank-check company sponsors.
Pagaya, which was valued at $8.5 billion in its deal with EJF Acquisition Corp., recorded $175 million in revenue in the first half of 2021. The company followed consumer banking and sustainability services firm Aspiration Partners Inc. and private shares exchange Forge Global Inc. in being able to demonstrate real sales in special purpose acquisition company merger presentations.
A new round of regulatory scrutiny in recent weeks around SPACs' financial projections may be playing to fintechs' advantage since they operate in a well-established sector and typically have revenue in hand before testing the waters of a SPAC deal. SPAC deals to take private fintech companies public froze up during the second quarter, when new SPAC IPOs and mergers across the market slowed from the first-quarter frenzy as regulators called into question how blank-check firms account for their warrants.
"If you operate a [fintech] company ... there is a lot of certainty of revenues well in advance," said Daniel Cohen, a serial SPAC sponsor who is CEO of FinTech Acquisition Corp. VI. "You always have the possibility of a changing marketplace that's changing in ways you didn't expect, and therefore the best companies are the ones that have more predictable revenue."
Providing more certainty about revenue streams and has become more important as regulators and lawmakers turn their attention to the feasibility of SPAC targets' financial projections. In June, Congress proposed eliminating the safe harbor provisions that allow forward-looking statements in SPAC deals, which are not allowed in IPO registrations. More recently, a Securities and Exchange Commission advisory committee on Sept. 9 proposed requiring SPACs to disclose at the onset how much pre-merger accounting diligence they will commit to, once they identify a target. That would address "the practical challenges SPAC investors face in fully assessing the risks and opportunities associated with these investment vehicles," according to a draft of the committee staff's report.
"There has been a concern in the SPAC marketplace, with the regulators in particular, that the projections that have been supplied by targets have not been working out very well," said Douglas Ellenoff, a partner at Ellenoff Grossman & Schole LLP who works with SPACs.
Even so, some so-called pre-revenue companies are still attracting heady valuations in deals with SPACs. MSP Recovery LLC, a startup that uses data analytics to improve bill collection in the healthcare industry, announced a SPAC merger in July with Lionheart Acquisition Corp. II that valued MSP at $32.6 billion. The company does not expect to generate any revenue until 2022.
Pagaya uses data science and artificial intelligence to improve the underwriting process for consumer loans, mortgages and other financial products, while Forge Global runs a platform that startup founders and other holders of private company equity use to buy and sell their shares.
Aspiration is veering farther from traditional finance by offering what it calls sustainability-as-a-service, a set of products that help businesses, primarily consumer companies, reduce or eliminate the carbon footprint of their consumers or employees, CEO Andrei Cherny said in an interview. About 30% of Aspiration's revenue is from its financial products, including interest income, interchange revenue and subscription fees, while the other 70% comes from its sustainability services.
Aspiration "is pioneering the category of sustainability-as-a-service," Cherny said.
While the company is forging a new market vertical focused on environmental, social and governance products, it has sought to give the public market a granular level of detail on its performance. The company projects $254 million in revenue in 2022, but it also broke out its monthly actual revenue for the first five months of 2021 plus an estimate for June when it announced its SPAC deal.
Aspiration started evaluating the SPAC option at the beginning of 2021, Cherny said. Its cash management products are regulated by the Financial Industry Regulatory Authority, and it is a registered financial adviser with the SEC. The existing compliance framework makes the transition easier to become a public company, he said.
The early months of 2021 saw hundreds of new SPACs launch, at a time when many blank-check firms from 2020 were still hunting for targets — a dynamic that has led to a glut of SPACs in the market and stretched the cohort of investors who fund them thin.
During the SPAC spike in February and March, merger private investments in public equity attracted short-term investors who looked to take advantage of trading opportunities through merger arbitrage, Cohen said. They tended to be technical traders providing capital for private investments in public equity without industry expertise and sought to buy shares in the SPAC and sell them when the SPAC's stock price gets bumped up by the merger announcement. But that trading method did not turn out to be lucrative enough, and many of them have dropped that strategy, Cohen said.
Fintech targets tend to have stickier investors, he said.
"We’ve known that people want to invest in fintech companies for longer and we're able to talk to them on a regular basis about what they're interested in," he said.