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UPDATE: SoFi going public via SPAC deal with profitability expected in '21


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According to Market Intelligence, April 2023

UPDATE: SoFi going public via SPAC deal with profitability expected in '21

Unicorn digital lender SoFi expects to become profitable this year, and if it succeeds in launching a national bank, its outlook gets even rosier, executives said.

Social Finance is going public through a merger with Social Capital Hedosophia Holdings Corp. V in the latest high-profile special purpose acquisition company deal. The company agreed to a transaction with the Chamath Palihapitiya-backed SPAC that values SoFi at $8.65 billion, post money, according to a Jan. 7 press release. Reuters reported deal talks between the two companies earlier in the day.

SoFi's long-awaited public market debut in 2021 will come in what is projected to be its first year of profitability. The company expects to record adjusted EBITDA of $27 million in 2021, according to an investor presentation released Jan. 7. SoFi projects that it will be able to grow its adjusted EBITDA to as much as $1.18 billion by 2025.

A bank charter could expand SoFi's profitability even further, CFO Chris Lapointe said on a conference call to discuss the deal. The charter would effectively allow SoFi to use deposits, rather than third-party warehouse providers, to fund originations, Lapointe said. It would also allow SoFi to hold the loans for longer, leading to higher net interest income, he said. In the investor presentation, SoFi estimated that with a bank charter in hand, its adjusted EBITDA could grow from $42 million in 2021 to as much as $1.48 billion in 2025.

The mix of SoFi's revenues is expected to shift over that time period as well. In 2020, SoFi generated more than 75% of its adjusted net revenues from lending, with its technology platform and financial services offerings accounting for the rest. By 2025, lending will still represent 43% of SoFi's revenue stream, the company said. But its financial services products are expected to grow to 32% of adjusted net revenues, while the technology platform will come to be about 25%, according to the presentation.

Led by Anthony Noto, the former COO of Twitter Inc., SoFi has been gradually building out its suite of offerings in recent years to stretch beyond student loan refinancing, its best-known product.

It now deals in everything from mortgages to credit cards to allowing clients to trade fractional shares and cryptocurrencies on its platform. In October 2020, SoFi secured conditional approval from the Office of the Comptroller of the Currency to establish a full-service national bank. And earlier in 2020, it branched out to buy payment processing platform company Galileo Financial Technologies for $1.20 billion. On a Jan. 7 call to discuss the deal, Palihapitiya, a venture capitalist who was an early executive at Facebook Inc., called the business "the AWS of fintech," referring to Inc.'s highly lucrative web services business.

"Together, what it creates is a very diversified revenue stream that we think looks really similar to the Amazon growth characteristics: the ability to grow from both consumer adoption as well as enterprise adoption," Palihapitiya said.

With SoFi, Palihapitiya adds another successful SPAC merger to his record. Prior blank-check companies Palihapitiya has led have struck deals with Virgin Galactic Holdings Inc. and Opendoor Technologies Inc., for example.

Under the merger's terms, the combined company will receive up to $2.4 billion of gross proceeds that come from a $1.2 billion private investment in public equity, or PIPE, plus as much as $805 million of cash that is currently held in Social Capital Hedosophia's trust account from its October 2020 initial public offering. The PIPE was led by Palihapitiya and the investment company Hedosophia, which together contributed $275 million. The remaining $950 million of the PIPE was raised from several institutional investors, including BlackRock Inc., Altimeter Capital Management LP and Baron Capital Group Inc.

SoFi's existing shareholders will be able to roll 100% of their equity into the company post merger, according to the release. Once the deal closes, SoFi plans to use $150 million of the deal's proceeds for "strategic secondary transactions" that it says will help restructure its capitalization table "in a way that is more conducive to obtaining an OCC national bank charter."

The deal has been unanimously approved by Social Capital Hedosophia's board and the independent directors on SoFi's board. It is expected to close in the first quarter, pending the approval of the SPAC's shareholders and other closing conditions.

Connaught and Credit Suisse were both financial advisers to Social Capital Hedosophia on the deal. Credit Suisse also was the SPAC's capital markets adviser and placement agent, while Skadden Arps Slate Meagher and Flom LLP acted as the legal adviser. Citi and Goldman Sachs were both the financial advisers and placement agents to SoFi on the deal. Wachtell Lipton Rosen & Katz and Goodwin Procter LLP were its legal advisers.