Firms and investors rushed to market to capitalise on the Special Purpose Acquisition Companies (SPACs) hype- a strategy that culminated in $38billion worth of SPACs demerging in 2021. Combined with public markets cooling in anticipation of the fed raising rates, and tech valuations in particular drop from their 2021 heights, the outlook for fintech is uncertain.
John Clark is a Managing Director, and the head of US operations, for fintech-focused corporate finance advisory firm, Royal Park Partners. Clark joined Royal Park Partners in 2021, bringing with him over a decade of investment banking and private equity experience in the fintech sector. He has previously held senior roles at Long Ridge Equity Partners, global entrepreneurial network Techstars, and most recently at Financial Technology Partners. Throughout his career, Clark has developed trusted relationships and deep expertise working with companies and investors across the fintech space, and has been involved in dozens of fintech deals.
In his role, Clark focuses on generating advisory mandates and connecting investors to fast-growing fintech companies across the Americas, EMEA, Europe and Asia. He is based in New York.
Talking to The Fintech Times, Clark analyses fintech funding in 2021 and looks towards SPACs as the primary funding source:
SPACs were the defining fintech trend of 2021. They were a huge contribution to what ended as a record IPO year, and in 2021 alone, we saw a total of 613 SPAC listings which raised $145billion – a 91 per cent increase from 2020.
Fast forward to 2022, the outlook is quite different. The combination of creeping inflation and adjustments to interest rates are likely to slow down public activity in the first half of the year. This, combined with SEC and other regulators increasing their regulatory oversight following high profile SPAC failures Nikola and Lordstown, has burst the SPAC bubble.
The question for VCs, fintech founders, and financial institutions is: if SPACs are dead, what will replace them, and what will the 2022 funding landscape look like?
Fewer IPOs
All the signs are pointing to a slowdown in IPOs this year. With growing disparity between private and public markets, private companies are likely to delay going public until market volatility fades – in particular, clarity over incoming Fed rates, which are rumoured to have a half-point hike in March, and continued tapering, which doubled at the end of last year, and are expected to wrap up in Q2 2022.
These factors mean that the market isn’t sitting quite right for fintechs to go public. But that doesn’t mean it won’t come back around, the question is how long will it take? By some estimates, we could be looking at a slowdown for the full year.
But that doesn’t mean activity will cease. Private companies can, and should, use the time to focus on financial performance. And for financial advisors, the challenge and the value, remains about how to best position fintechs in the crowded market.
Capitalising on private opportunity
As more companies delay going public, this presents further opportunities in the private market. An unusual chance may emerge for mature firms to close additional funding round, or even two.
The longer big fintech firms remain private, the more opportunities are presented for late-stage investors to capitalise. With private markets remaining buoyant, 2022 could see further records broken for private company valuations.
We saw massive developments in 2021. March saw Stripe close a record breaking $600million funding round – becoming the world’s most valuable private fintech at $95billion. And such skyrocketing valuations have also been seen across the pond, with Klarna and Checkout.com closing recent rounds with valuations of $46billion and $40billion respectively. The longer these firms delay hotly anticipated public debuts, the more potential remains for these numbers to rise.
But as the pendulum shifts from higher to lower public comps, firms at the other end of the spectrum may struggle. In 2022, early-stage companies may find it harder to attract investment and subsequently struggle to shore up their balance sheets.
This environment offers a favourable M and A space, with big players poised to move in on companies struggling to raise capital, further consolidating their market share. For major players, acquisitions are now part of a scale game, but getting the decision right on who, when and how much is still key.
Changing investor attitudes?
Although 2022 brings unique opportunities for private fintechs, venture capitalists, and would-be acquirers, competition will be fierce. A more volatile, high-interest, and contracted market makes speculative investments less attractive. We’ve seen that the situation for large fintechs is profitable, but how will that translate to early and growth-stage businesses?
We know high growth businesses will continue to attract funding and reach even greater valuations: investors are still attracted to a safe bet. But for those further down the scale, a few challenges await to convince investors and attract funding.
Investors will zero in on 2021 performance, particularly during the height of the pandemic. For those that had a period of stunted or rocky growth, the struggle will be convincing VCs that they’re worth the investment in a tight market.
These companies will be looking at an internal bridge round, or maybe even putting the funding round on hold until they have two or three solid, steady quarters to prove their value. If any of these companies can come out in 2022 with a strong performance, the reward is still to be reaped by investors, particularly with companies in emerging markets.
The SPAC legacy
Large parts of the fintech community have turned their back on SPACs. We’ve seen several high-profile SPAC fails, and many investors have been left with a sour taste in their mouths by companies that soared in 2021, and then crashed in the first months of 2022.However, the sheer amount of money raised by SPACs in the last two years will not soon be forgotten, and the idea that SPACs are completely dead is premature.
The same advantages that fuelled their rise still apply today – speed to close being the key factor. For companies who are still looking to go public, SPACs should still be an option on the table, but it’s called a SPAC bubble for a reason – it must burst.
Finally, with competition for listings increasing, the SPAC legacy might be one of how market regulators adapt their outlook towards IPO requirements. Regulators will be facing a choice over whether to take a less flexible approach, which could manifest as removing the ability for companies to use forward looking financial projections as a tool for going public. The same choice will have to be made over the thresholds for financial performance. These are all on the table. For the investor community, it’s a case of watching, waiting and adapting.
About Royal Park Partners:
Royal Park Partners is the fintech industry’s strategic financial advisor – trusted by innovators, investors and institutions to execute with precision and pace.
The company’s role delivers guidance, support and deal journeys that generate both volume and value. Over 45 years of combined fintech experience brings expertise and insight – of capital raising, Mergers and Acquisitions (M&A) and lead IPO advisory – to drive the future of ambitious fintech businesses.
