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Affirm gears up for IPO amid growing competition

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Back in 2002, a company co-founded by fintech entrepreneur Max Levchin warned of growing competition in online payments as it prepared to go public.

“The market for our product is emerging, intensely competitive and characterised by rapid technological change,” PayPal wrote in an initial public offering prospectus at the time.

Now, Mr Levchin’s second big fintech start-up, Affirm, is going up against his old company in another crowded space: the so-called “buy now, pay later” sector.

Affirm, founded in 2012, is preparing for an IPO that some insiders think could still happen by the end of the year. If Mr Levchin pulls it off, the listing would cement his reputation as one of the savviest — and wealthiest — start-up founders of his generation.

But the more difficult part could come later. While Affirm styles itself as an alternative to credit cards, it faces immediate threats from Australia’s Afterpay and Sweden’s Klarna, which have both been expanding into Affirm’s US home turf.

In a twist for Mr Levchin, PayPal has also become one of Affirm’s direct competitors, warranting a mention in the company’s IPO prospectus.

Affirm said that the new competition could “result in the need for us to alter the pricing we offer to merchants or consumers”.

Conor Witt, fintech research analyst at CB Insights, said the company could face a backlash from merchants who have grown wary about the fees they pay to process credit card transactions.

In its defence, Affirm touts a “dollar-based merchant retention rate” above 100 per cent, which effectively means that merchants stay on the platform and consistently generate more business for Affirm each successive year.

Most of Affirm’s revenue comes from fees that merchants pay the company to offer its instalment product at the point of sale. Affirm said it generally earns larger fees from merchants who provide zero-interest options to customers, and these arrangements represented 46 per cent of the total order volume through its platform in the third quarter.

However, like PayPal and many other fast-growing fintech companies before it, Affirm had yet to become profitable by the time it filed its IPO paperwork.

In another parallel to PayPal, Affirm’s IPO documents revealed that it is closely intertwined with an ecommerce company. For PayPal, it was eBay, which moved to purchase the payments group months after its IPO.

For Affirm, it is the Canadian group Shopify, which has partnered with Affirm to bring instalment loans to merchants using its software.

Shopify received equity warrants from the partnership that would give it a roughly 7 per cent stake in the company, raising the question: could Affirm, like Mr Levchin’s last fintech venture, be swallowed up shortly after it goes public?

This is the last #fintechFT of 2020. We will return in January. We wish all of our readers a merry Christmas and happy new year. 

Quick Fire Q&A

Company name: Perenna

When founded: 2018

Where based: London

CEO: Arjan Verbeek

What do you sell and who do you sell it to: Perenna plans to offer all homeowners fixed-for-life mortgages that carry a static rate for the entire term.

How did you get started: We realised fixed for life mortgages would greatly benefit mortgage borrowers. Existing lenders had not cracked this code.

Amount of money raised so far: £1.7m

Valuation at latest fundraising: £1.7m

Major shareholders: Arjan Verbeek, Hamish Peacocke, Gerardine Davies, Azuro Financial Services, Colin Bell and Carrick Nominees Limited.

There are lots of fintechs out there — what makes Perenna so special: We are the only start-up building an innovative capital markets platform that can fix how UK mortgages are financed.

Further fintech fascination

Wirecard fallout: In an interview with the Financial Times, Allianz chief executive Oliver Bäte called for stricter regulation of the areas where technology meets finance in the wake of the Wirecard scandal. And Anastassia Lauterbach has resigned from the board of airline easyJet following scrutiny over her role at Wirecard, where she was also on the board.

Trendwatch: Sifted has done a deep dive into the world of neobanks, finding that there are now nearly 300 of them around the world, triple the number there were in 2017. Europe has been a hotspot for these businesses, but South Korea, Brazil and the US are catching up. Brazil’s Nubank has the most customers, with 30m users.

Stumbling blocks: Trading app Robinhood will pay $65m to settle charges from securities regulators that it did not give customers the best prices, reported the Financial Times. The company is facing tougher scrutiny as it makes the transition from a start-up to a big player in the financial services industry.

Crypto chronicles: As bitcoin continued its stellar run, the FT reported that cryptocurrency platform Coinbase filed with the US Securities and Exchange Commission to list on the stock market. It would be the first major cryptocurrency exchange to go public. Coinbase has more than 35m users in over 100 countries. Not everything is going smoothly in crypto-land though. Bloomberg reported that Robert Farkas, a co-founder of the cryptocurrency firm Centra Tech, was sentenced to a year in prison over an investment scam.

AOB: Zilch, a UK-based “buy now pay later” specialist has raised $30m in a funding round, said Finextra; the same publication reported that American Express has taken a stake in crypto trading platform FalconX; Reuters wrote that Wahed Invest, an Islamic fintech, is to buy UK digital banking app Niya.



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Spac boom under threat as deal funding dries up

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A crucial source of funding for blank-cheque company deals is drying up, pointing to a slowdown for one of Wall Street’s hottest products after a record-breaking quarter. 

Advisers to special purpose acquisition companies, which float on the stock market and then go hunting for a company to buy, say they are struggling to find so-called Pipe financing to complete their planned acquisitions. Pipe is short for private investment in public equity.

Institutional investors such as Fidelity and Wellington Management have ploughed billions of dollars into Pipe deals since the Spac boom emerged last year, providing a route to the public markets for businesses ranging from established software and entertainment companies to speculative developers of flying taxis and electric vehicle technology. 

But people involved in arranging the deals say Pipe investors are overwhelmed by the sheer volume of transactions and put off by rising valuations. 

“There is a lot of indigestion,” said one senior bank executive. “The pendulum has swung to where if you’re in the market with a Pipe right now, it’s going to be really hard and painful. A Spac goes back into the ocean if you can’t get a Pipe done.”

Spacs raise money when they first list on the stock market but they typically require more capital to fund their acquisition. Large institutional investors also act as a form of validation of the target company’s business prospects and its valuation.

There have been 117 deals announced this year, but the growing backlog in Pipes could prove to be a big roadblock for the 497 blank-cheque companies that are still looking for a deal, according to Refinitiv data.

Only about 25 per cent of Spacs listed since 2019 have completed deals so far. Sponsors typically have two years to complete a merger, otherwise they have to return the capital they raised to investors.

Several market participants said the slowdown would lead to a “flight to quality” and put downward pressure on the valuations of acquisition targets, which have skyrocketed in recent months.

Almost all of the executives the Financial Times interviewed said they were seeing Spac deals recut to offer more favourable terms to Pipe investors. One said: “It’s called the buy side for a reason.” 

Because Pipe investments are considered illiquid — the money is tied up at least until the deal closes and there may be a lock-up period after that — investors can usually get favourable terms. They can see the deal before it has been announced to the public and are almost always able to buy in at the Spac listing price of $10.

But earlier this year, Pipe investors were clamouring to get in on Spac deals. The group of institutions that backed Churchill Capital IV’s acquisition of electric carmaker Lucid paid a 50 per cent premium to the Spac listing price to get a stake, almost unheard of at the time.

The recent reversal has Pipe investors negotiating lower valuations for businesses, giving them larger stakes for the same amount of money, and better pricing terms.

“There’s only so much illiquid exposure investors are going to want to take,” said another bank executive who has worked on numerous Spac deals.

The Pipe slowdown is bad news for banks, which are unable to collect on advisory fees if they cannot sell a deal to investors.

It is also starting to affect the pipeline of Spac launches, lawyers and bankers said. In the first seven days of this month, only four blank cheque companies have gone public. That compares with 41 during the first week of March and 28 in February, Refinitiv data shows. 

“Where we had been at a crazy, mad, rush pace in January and February, we’re kind of at a standstill right now on the IPO side,” said Ari Edelman, partner in Reed Smith’s corporate practice.

For those that already went public and are looking for a target, he added, “the hope is this is just a bump in the road. And then ultimately the deal gets done.”



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UK-backed vaccine maker warns of export restrictions in IPO filing

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Valneva, the French Covid-19 vaccine maker backed by the UK government, has filed for a US initial public offering seeking to take advantage of investor appetite for biotechnology during the pandemic. 

The Paris-listed company, with a market cap of more than €1bn, filed to raise $100m in American Depositary Shares, the day after Vaccitech, the Oxford spinout that owns the platform behind the AstraZeneca vaccine, published its filing

Valneva has a deal worth up to €1.4bn to supply Covid-19 vaccines to the UK, manufacturing the doses in a Scottish factory expanded with government funds. The UK has already agreed to buy 100m shots and has an option to purchase 90m more by 2025. Valneva has already received almost £100m from the government. 

But in its filing, Valneva warned that any restrictions on importing or exporting vaccines out of the EU could have a “substantial” risk to its operation. The vaccine is due to be manufactured in the UK but put into vials and packaged in the EU, it said. 

Shortfalls in supply of vaccines to the EU have led to tensions between the UK and the EU over importing shots and raw materials for the current approved jabs from Oxford/AstraZeneca and BioNTech/Pfizer.

Valneva’s filing comes after it announced positive early stage trial results for its Covid-19 earlier this week, planning to launch a later stage study this month and apply for a UK approval in the autumn.

The phase 1 and 2 study showed the shot elicited more antibodies in the participants receiving the highest dose than are usually seen in recovered Covid-19 patients, with over 90 per cent producing significant levels of antibodies. The jab also induced a response from another key part of the immune system, the T-cells. 

The vaccine, which uses a whole inactivated virus, a more traditional approach than the currently approved shots, could be used as a booster for the vaccinated or to tackle variants of the virus.

Valneva said even though it would be approved much later, it could have a competitive advantage against its rivals. 

“We believe that, if approved, our vaccine, as an inactivated virus vaccine, could offer benefits in terms of safety, cost, ease of manufacture and distribution compared to currently approved vaccines and could be adapted to offer protection against mutations of the virus,” it said in the filing. 

But it also said that it did not yet have the rights to use the strain of virus in the vaccine on the commercial market. It is in the process of negotiating a commercial agreement with the World Health Organisation and the Italian National Institute for Infectious Diseases. 

Valneva is also developing vaccines for Lyme Disease and chikungunya, a virus transmitted by mosquitoes. Total revenue was €110m in 2020, down from €126m in 2019, as sales of its travel vaccines were hit by restrictions on travel during the pandemic. 

It made a loss of €0.71 per share last year, after it had to make a €7.4m writedown, partly because of the limited shelf life of the products. Valneva also had to renegotiate a debt financing agreement last year as it was at risk of not meeting the minimum revenue covenant.



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Vaccitech warns of blood clot risk in IPO filing

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Vaccitech, the start-up that owns the technology behind the AstraZeneca vaccine, has warned that concerns about the rare blood clotting side-effect could hit royalties and affect the reputation of products in its pipeline. 

The Oxford university spinout on Friday published its prospectus for an initial public offering of at least $100m on Nasdaq, at the end of the week in which the UK and several EU countries recommended against giving the vaccine to younger people. 

The filing revealed how much the start-up stands to receive from vaccine sales. If and when AstraZeneca starts selling the shot for a profit after the pandemic — which according to their contract could be as early as July 2021 — Oxford will give about a quarter of the royalties it receives from the vaccine to Vaccitech, approximately 1.4 per cent of total net sales.

The company received a one-off payment of $2.5m when it transferred the technology behind the Oxford/AstraZeneca vaccine last year. 

Vaccitech is developing vaccines for other infectious diseases, including the virus behind shingles and Mers, another coronavirus, as well as using the same vector technology in treatments for cancer and chronic hepatitis. 

The pandemic has helped the company prove its technology works in millions of people, when many biotechs go public with little or no data from clinical studies. The rapid development and manufacturing of the AstraZeneca vaccine has also helped prove that Vaccitech’s technology can be scaled speedily. 

But while the Oxford/AstraZeneca vaccine, known as AZD1222, has been shown to be safe and effective, recent concerns about a very rare side-effect are now weighing on public perception of the shot. 

“There can be no assurance that the vaccine is not associated with an increase in the overall risk of thromboembolic events,” the company wrote in the filing. 

Vaccitech also warned that studies showing the AstraZeneca vaccine was less effective against the variant first identified in South Africa could impact sales.

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Follow FT’s live coverage and analysis of the global pandemic and the rapidly evolving economic crisis here.

“Any association of AZD1222 with adverse events, or the perception of such association, or any findings that AZD1222 is less effective against certain variants of Covid-19, may reduce sales of AZD1222 and therefore the potential payments that we may receive from net sales of the vaccine, and may otherwise adversely impact the development of, and our ability to commercialise, any of our product candidates,” it said. 

Vaccitech’s decision to list in New York is a disappointment for the UK, which is hoping to lure more investment in life sciences. The UK Treasury has a stake in the company, according to people close to the situation. 

The largest investor is Oxford Sciences Innovation, an early stage venture capital firm focused on commercialising intellectual property from the university, with a 29 per cent stake before the offering. Other large shareholders include insurer Prudential, with a 13 per cent stake, and entities affiliated with Google Ventures, which hold 6 per cent. 



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