SPAC frenzy takes on wealthtech

SPAC deals are dominating the market as a convenient shortcut that allows fintechs to go public without the hassles involved in pursuing an initial public offering.

Special purpose acquisition companies, known as blank-check companies, are all the rage these days — even celebrities like baseball legend Alex Rodriguez, former NBA star Shaquille O’Neal and pop star Ciara are loaning their star power to these reverse merger companies.

SPACs raise money through an initial public offering to acquire a private company, which then becomes public as a result of the merger. As of Wednesday, SPACs have already raised more than $53 billion in 2021 through 171 SPAC IPOs, according to SPACInsider.

In 2020, SPACs accounted for more than half (55%) of IPOs, up from 28% in 2019, according to Tiburon Strategic Advisors.

The SPAC frenzy isn’t just for celebrities — it’s pouring into the wealth management sector as billionaires and innovators funnel cash into wealthtech and elevate more firms to go public.

Digital custodian Apex Clearing is the latest wealthtech company to go public via a blank-check merger with Northern Star Investment Corp. II, in a deal that put the combined company’s value at $4.7 billion.

Northern Star Chairwoman and CEO Joanna Coles, former chief content officer for Hearst Magazines and former editor-in-chief of Cosmopolitan Magazine and Marie Claire, and Jon Ledecky, co-owner of the NHL team the New York Islanders, will lend their vast networks of branding experience to push the fintech to new highs.

“[SPACs are] just cheaper and it’s more efficient,” Coles said in an interview. “John Ledecky, who’s a SPAC veteran, and I are not looking to ‘SPAC and pack,’ which is what some people do — we ‘SPAC and stay.’”

Coles is joining Apex’s board of directors and Ledecky will be a board observer, she said. “We’re looking to stay involved with the company and share our networks and be useful where it’s needed.”

Apex’s application programming interfaces and its clearing relationships with popular fintech firms like Stash, SoFi, Webull and Betterment has Tiburon Strategic Advisors Managing Partner Charles Roame anticipating that Apex’s deal will pave the way for more wealthtech SPACs to follow.

“Apex is a well-run firm at an important spot in the industry,” Roame said in an email. “Its potential to push into custody for more traditional RIAs (at the opportune time that Schwab and TD Ameritrade are merging), and its high margins make it an exciting company. I suspect this SPAC goes well, and many more SPACs follow.”

In January, Social Finance Inc. agreed to be taken public by a blank-check company backed by billionaire venture capital investor and Social Capital CEO Chamath Palihapitiya in a deal that values the upstart at around $8.7 billion. Palihapitiya is also minority owner of the Golden State Warriors basketball team and has a large influence on social media, with more than 1.4 million followers on Twitter.

Digital investing and banking platform MoneyLion, too, announced Feb. 12 that it is going public through a merger with SPAC Fusion Acquisition Corp. in a deal that puts the combined company’s value at $2.9 billion.

WHY SPACs?

The simple reason that SPACs deals are dominating the market is that they are a convenient shortcut allowing these fintechs to go public without the hassle of pursuing an IPO, said Justin Mattos, a senior analyst at Corporate Insight.

“When they go this route, they get immediate, predictable funding, not to mention a favorable valuation for their current offering with the promise of plans to grow beyond it,” Mattos said. “By bringing in significant funding from the deals and relying on the SPAC to handle the public listing, these fintechs end up having the time and resources to capitalize on their current momentum and turbocharge their growth.”

These deals certainly point to a shift in the strategic planning for going public, but it’s likely that only a select cohort of maturing fintechs will be able to take advantage, he said.

“Where firms like SoFi and MoneyLion have concrete plans to offer full-service financial platforms that allow clients to spend, save and invest all in one place, many others are still justifying their initial offerings and are far from ready for public listings,” Mattos said. “I expect a few more late-stage startups in the fintech space will go the SPAC route, but that may taper off under increased regulatory scrutiny of this approach.”

SPACs are also more popular when markets are volatile because they afford the ability to negotiate a price primarily with one party — the SPAC — making price discovery more efficient, said Roame.

While there are multiple ways for a private company to go public, another reason SPACs are popular among wealthtechs is because oftentimes these firms do not have a direct public company comparable, making a SPAC seem like the most practical path, said Matthew Berkowitz, managing principal at Capco.

Moreover, SPACs provide a speedier market entry by about two to four months compared with an IPO as there are typically fewer Securities and Exchange Commission comments given the lack of financial statements and a shortened audit process, Berkowitz said.

In addition, companies can more effectively provide not only near-term but longer-term forecasts in cases where they have multiple lines of businesses with different growth rates and profitability.

In the case of Apex, the fintech provides not only digital custody and clearing but real-time crypto solutions, fractional share-trading and other services to an array of clients, including online brokerage firms, traditional wealth managers, wealthtech platforms, professional traders and consumer brands.

“Therefore, this supports Apex’s ability to ensure the value of the company is best reflected in the price by affording the ability to take investors through the required level of detail,” Berkowitz said.