Fed Rate Hikes Double Crypto Firm Circle’s Valuation

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Circle had previously struck a deal last July to merge with the same SPAC, Concord Acquisition Corp., at a valuation that is 50% lower than what it attained in February. In the intervening seven months, Circle more than doubled its expected revenue for 2022 and 2023, creating a new windfall for the crypto firm—and its bankers.

At the higher valuation, the boutique investment bank that advised Circle, ​Financial Technology Partners LP, now stands to earn a record payday of more than $800 million, according to a fee breakdown Circle detailed in prior securities filings. Circle disputes that it owes that much.

When Circle issues new USD Coins, customers send it a corresponding amount in dollars. Circle then invests those dollars in a portfolio of cash and short-term government securities to ensure USDC’s convertibility. With about $53 billion in USDC outstanding, the reserve portfolio that Circle manages is as big as a midsize US bank.

Like a bank, Circle earns a yield on its book of assets, and that yield tends to rise when interest rates go up. In Circle’s case, it anticipates earning an extra $2.3 billion in interest income in the next two years, based on where interest-rate futures traded in mid-January and increased estimates of how much USDC will be in circulation by the end of 2023.

The Federal Reserve’s interest-rate outlook helped crypto firm Circle boost the valuation of its pending merger to a special-purpose acquisition company to $9 billion. Photo: Saul Loeb/Agence France-Presse/Getty Images

Unlike a bank, Circle doesn’t pay any interest on customer funds and doesn’t have the expense of maintaining a network of branches, tellers or ATMs, meaning more of that income lands on its bottom line. Circle does share a portion of the interest income on USDC reserves with Coinbase Global Inc., an exchange that helps distribute USDC.

Circle’s improved financial outlook is a reversal of fortune from just over two years ago. In 2019, Circle reported a net loss of $179 million, mostly due to the sale of Poloniex, a troubled crypto exchange it had acquired a year earlier that faced fines for violating investor-protection laws and opening accounts for people in Iran, North Korea and other sanctioned countries. Circle then shifted its strategy that year to focus on developing USDC, though circulation at year-end amounted to only $520 million.

Not long afterward, Circle hired FT Partners to help it raise money, according to people familiar with the matter. FT Partners regularly secures guarantees that clients will hire the firm for any deal they might do in the future and that they would pay the bank fees that ratchet up as a percentage of the sale prices and fundraisings it fetches, The Wall Street Journal reported in December .

Circle agreed to both of those conditions when it engaged FT Partners, according to securities filings and the people familiar with the matter. The investment bank advised Circle on its original merger with Concord at a $4.5 billion valuation. FT Partners said its engagement letter with Circle entitled it to about 9% of the transaction value, according to Circle’s securities filings, which would amount to more than $400 million.

Circle disputes that reading of the engagement letter and said in an August filing that it believes the fee should take into account “the custom and practice among investment bankers in similar size and type of transactions.” Still, it set aside shares valued at about $350 million to cover a potential settlement or litigation with FT Partners. Circle didn’t list FT Partners as an adviser in the press release announcing either deal.

At Circle’s $9 billion valuation, the estimated cut for FT Partners doubled to more than $800 million. That is more than five times the highest advisory fee on record, according to Dealogic, and nearly three times the amount Concord held as of the end of 2021.

Write to Peter Rudegeair at [email protected]

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