Special purpose acquisition companies (SPACs) are all the rage in 2020. I’ve been following the model since 2008 when my friend Jay Myers introduced me to the concept through his work at Oppenheimer.
Years later, I launched a search fund and ultimately acquired HousingWire, which today is part of HW Media and the sister brand to FinLedger. While search funds and SPACs are wildly different, they share the ambitious, entrepreneurial DNA trait of hunting for attractive acquisition candidates with a blank check structure.
The latest SPAC to file an S-1 is Cascade Acquisition Corp. Led by experienced investors and operators Jay Levine and Daniel Hirsch, Cascade will focus its acquisition efforts on sub-sectors of the financial services industry in search of value-oriented and opportunistic transaction opportunities. More specifically, Casade is looking for services that focus on asset management, consumer banking and business lending, CRE technology and services, fintech and BPO, insurtech and insurance services and mortgage origination and housing-related technology.
In an attempt to oversimplify the SPAC model, the investment approach has been described as a ‘search fund on steroids.’ This might explain why I’m pretty obsessed with following SPAC launches and deal making – particularly when the investments or theses focus on financial services, technology and real estate.
The differences between search funds and SPACs are stark. First, search fund entrepreneurs seek to run the acquired business as operators. While SPAC operators are more financially focused with the intent of backing existing management and helping acquired business access public equity for growth.
The second big difference is that SPACs target significantly larger businesses. Where search fund deals often target businesses with enterprise values in the $10-20 million range, SPACs are known to target multi-billion-dollar businesses. Alec Gores’ SPAC, Gores Holdings IV, planned merger with wholesale mortgage lender United Wholesale Mortgage (UWM) is a perfect example. UWM is valued at $16 billion.
FinLedger published a primer on SPACs in August that goes into detail on the model and emphasizes that SPACs aren’t just an alternative to IPOs. They also bring other benefits to the table like enabling deals to be negotiated quietly, in private, and on a more efficient timeline. In the article, Don Duffy, president of ICR, shares a different perspective, “Since SPAC shares trade post-merger announcement, all shareholders – a Robinhood account holder or a Blackrock fund – get to participate, which is a true democratization of the IPO process. This is all much more transparent than a traditional IPO process.”
‘At an inflection point’
Hirsch and Levine are not new names to the financial services, real estate or fintech markets. This also isn’t the investors’ first rodeo in the SPAC world. Most recently, Hirsch served as an advisor to a SPAC sponsored by Trinity Real Estate Investments, which successfully completed its initial business combination in 2019 with Broadmark Realty Capital. Broadmark is a hard money lender that specializes in construction loans to real estate investors.
Jay Levine serves as chairman of OneMain Financial, a business acquired by Fortress in 2010 for approximately $125 million and is currently valued at over $4 billion. With Levine having served as CEO of OneMain from 2011 to 2018, it’s fair to say that Levine knows a thing or two about growing a financial services business. And now that he no longer holds day-to-day operating responsibility at OneMain, his evolution to SPAC investor is logical.
The S-1 details that Levine “architected the reinvention of OneMain” and was responsible for eliminating numerous points of inertia including a culture of bureaucracy, lack of strategic planning, constrained liquidity, an unprofitable business structure and a lack of technology / data analytics.
After reading dozens of SPAC S-1s, it’s notable that the Cascade filing puts significant emphasis on its executives’ operational prowess and accomplishments.
Cascade will focus its acquisition efforts around a thesis that is near and dear to our hearts at FinLedger and the broader HW Media business. The S-1 filing states:
‘We believe the financial services ecosystem is at an inflection point, as the way consumers and small businesses spend, invest, borrow, and insure themselves continues to evolve. We believe that there are numerous legacy-infrastructure, asset-heavy businesses that may benefit from a balance sheet-light, customer-oriented approach. Conversely, the fragmented financial technology and business process outsourcing ecosystems may be able to supplement their modern, robust technology stacks with underwriting and capital markets expertise to create beneficial outcomes for core operating businesses.’
Reading between the lines, Levine and Hirsch are pointing at the challenge that both incumbent and challenger financial institutions face – building technology infrastructure and distribution simultaneously is hard, expensive and time-consuming. This opens the door for growth for players that focus on their core competencies, and leverage technology and BPO solutions to find operating leverage.
The S-1 continues: ‘…recent COVID-19 related market dislocations and illiquidity have led to inefficiencies in the valuation for these companies in the private sector….a SPAC transaction that brings management expertise and enhanced liquidity may present an attractive alternative to companies looking to go public.’
Acquisition strategy
As all this translates to likely acquisition candidates for Cascade – the thesis leaves the door open to acquiring the right “balance sheet-light” financial institution or one of the technology or solutions providers that is enabling growth and efficiency for incumbent or challenger FIs.
Going deeper on the acquisition strategy, the filing outlines some potential focus areas within the target sub-sectors. Within the broader fintech sub-sector, Cascade highlights interest in “businesses providing critical workflow to financial institutions.” This includes data aggregation and analytics, risk management and compliance businesses.
Cascade will also evaluate opportunities related to insurance and mortgage/housing. Within the insurance sector, Cascade highlights an interest in “business models with unique products and/or customer acquisition strategies.”
This may include insurtech plays with a regulatory advantage and rollup opportunities among niche brokerage and agencies. If the rollup play gains traction, I anticipate that Cascade will seek to start with a sizable insurtech platform, and begin rolling up traditional brokerages leveraging public equity to arbitrage high customer acquisition costs that plague many fintechs.
In the mortgage industry, where Hirsch has notable experience through Broadmark Realty Capital, the Cascade filing indicates that the SPAC will evaluate opportunities “with disruptive and scalable mortgage platforms” that have competitive advantages stemming from customer acquisition capabilities and/or origination and servicing cost advantages. Cascade will also look at businesses providing housing-related lead generation services or iBuyer investment models. The S-1 has a heavy focus on evaluation of the mortgage sub-sector as a promising investment area. The filing details that:
‘The enormous potential of these technologies to improve operational efficiency, cut redundant costs and enhance the growth profile manifests itself in mortgage technology, where digitization is still in its earliest innings. For example, the current mortgage process is highly document-intensive, with wider populations of prospective borrowers often ignored due to lack of credit history data, and with the existing customer base often underserved from origination through closing.’
Cascade is not the only investor betting on these dynamics. The acquisitions of Optimal Blue by Black Knight, and Ellie Mae by Intercontinental Exchange are betting on the same market forces.
Further solidifying Cascade’s advantages in the mortgage sector is Director Nominee Roy Guthrie. Guthrie worked with Levine as a director and member of the audit committee of OneMain and also serves as a director and chairman of the audit and risk committee of Mr. Cooper Group, a residential mortgage loan originator and servicer.
Director Nominee Gene Weil, who formerly led the financial institutions group at Houlihan Lokey, also brings the mortgage industry firepower. Weil is also an investor in Strong Home Mortgage, a direct to consumer mortgage originator.
With capital in hand and strong investor support to go deal hunting, Hirsch and Levine are now faced with the challenge of identifying and negotiating the right transaction. And with advantageous equity and transaction incentives, Hirsch and Levine have the right motivation to bring forward a transaction that will perform and thrive in the public markets. In the broader SPAC landscape what remains to be seen is if these newly public entities can and will effectively allocate capital to achieve aggressive growth and positive outcomes for all stakeholders.
This isn’t the first SPAC unveiled this week that is focused on financial services companies. On Monday, FinLedger reported on how Lefteris Acquisition Corp. is seeking to raise $225 million by offering 22.5 million units at $10 apiece. Its goal is to identify businesses in the financial services industry with enterprise values in the $600 million to $1.3 billion range.
And today, moments before publishing this article, another fintech-focused SPAC, Altimar Acquisition Corporation filed it’s paperwork with the SEC. Altimar is broader in its approach than Cascade, and will consider acquisitions across four key industries its executives and sponsors have expertise: TMT, Healthcare, Financial Services/ Financial Technology and Consumer. Altimar is managed by Tom Wasserman and Wendy Lai.