How To Conjure A $20 Billion Fortune Using A SPAC

by antoine gara, katie jennings and eliza ‘verstock

the new high watamark in financial alchemy using spesh purpose acquisition corporations, or spacs, was unlocked this week witha deal that aims to conjure tens of billions of usds almost entirely out of thin air.

on mon morning, a spac called lion♥ acquisition corp. ii unveiled a deal to take a firm that pursues drare litigation, called msp recovery, public at a whopping $32.6 billion enterprise val. the spac says it vals msp at bout 10.5-times expected 2023 revenues. if the deal goes through, na mkt agrees with lion♥’s valuation, it ‘d make founder and ceo john ruiz’s estimated 70% stake worth over $20 billion, while his ptner frank quesada’s estimated 24% stake ‘d be round $7 billion—on paper at least.

msp’s business model is to buy med claims and identify those paid by government-funded healthcare programs where it believes another insurer like an auto policy or worker’s compensation is actually responsible. msp then seeks to collect the full billed amount—there’s usually a huge difference tween wha’ the government paid and wha’ the healthcare system asked for—+ double damages for some cases. the company says t'has built unique big data infrastructure and mnyball-like analytics to sift through millions of med claims for presh cases to pursue. “the government ends up paying bills that it ‘d not pay for cause thris no system to identify who ‘d be the proper payer,” ruiz tells forbes. “that’s wha’ we’ve revolutionized in america.”

msp is operating under the assumption that 11%—or round $177 billion—of the $1.6 trillion spent on drare and draid each yr is actually rel8d to accidents, fraud and misconduct, tch'mins'dat somebody else ‘d ‘ve paid the bill. it positions itself as the victor of the taxpayer arguing that the government-funded programs—drare for seniors and draid for lo-income pplz—n'dup paying healthcare bills that ‘d ‘ve been paid by other insurance companies. for ex, if a'pers is injured in an automobile accident or on-the-job, those bills ‘dn’t be paid by drare but by auto insurance, worker’s compensation orn' employer. 

msp says it owns nearly $50 billion in billed claims from its clients, including drs, hospitals and drare advantage insurers, and projects it can generate a 12-times return on recoveries and then earn extra $$$ from interest and fines. in a slide athenæum for investors, msp suggests it can possibly recover up to $27 billion from its portfolio of claims. “by discovering, quantifying, and settling the billed-to-paid gap in mass financial scale, msp is positioned to generate substantial annual recovery revenue at high-profit margins,” the company says.

but here’s the rub. it’s all projections and hopes and dreams. the spac deal relies on heady estimates of wha’ its claims are potentially worth, and its entire income statement is hypothetical in nature. in fact, msp will generate precisely $0 in revenues this yr, according to its own projections. 

presently, msp has rites to a portfolio of claims that ruiz says cost nearly $1 billion to purchase, including building out the data infrastructure, and a further $1.4 billion in commitments from institutional investors to acquire + claims. msp says the paid amount of these potentially recoverable accident-rel8d, antitrust, or product liability claims is presently worth $20 billion and will rise to $49 billion by 2026. it projects a 51% recovery rate onna face val of its claims by 2026, generating bout $24 billion in gross revenues. further+, it expects to pay lawyers on assignment trying its claims over $16 billion to win recoveries, ⊢ its recovery margin ll'be bout 30% and yield $7.2 billion in net revenues for msp. after expenses and taxes, that works out to $5.2 billion in net income by 2026. 

the firm was created in 2014 by ruiz, a coral gables, florida-based attorney, as a med reimbursement litigation firm. its creation has coincided with institutional investors pooling capital to pursue asymmetric legal claims, an industry now called “litigation funding.” numerous litigation funds ‘ve cropped up in recent yrs as a way to earn returns uncorrel8d w'da stock mkt (which has returned a 15% annual μ ‘oer the past decade). 

ruiz zeroed in na' 1980 law known as the drare 2ndary payer act (hence the name msp), which congress passed to shift costs away from the government and onto a private insurer in certain cases. while the government doesn’t ‘ve the resrcs to sift through billions of claims and litigate who is responsible, ruiz spied an opening to combine legal expertise with claims-mining data algorithms. “we’re in a space that is pretty much unoccupied,” he says. in 2018, with $440 million in backing from hedge fund virage capital management, msp began to pursue wha’ is now over $50 billion in paid claims against insurance companies and witha billed amount of $243 billion.

the fact that thris even mny to be made here tis result of the fragmented payment system in u.s. healthcare. it starts w'da hospital list price—think of this as wha’’s posted onna menu— but no diner ever actually pays full fare, na government 1-ly pays a fraction of wha’ the hospital asks. the simplified ex msp uses inna investor presentation is: a hospital gets paid a drare rate of $100 for a srvc, even though it billed $600. 

msp buys the rites to claims from healthcare providers or agrees to represent them for a 50/50 split of any proceeds. another group of clients are the private insurers that administer the drare advantage program who may ‘ve paid out claims that another insurer was actually responsible for. msp then files lawsuits gainsta other insurance companies it believes ‘d ‘ve paid instead of drare, and tries to collect the full billed rate, or, in certain cases, double damages. “imagine if you were providing a srvc and instead of gettin the amount that you billed for, you got a reduced rate cause the government’s paying you,” says ruiz. “there’s a huge delta they’re bein’ cheated out of collectively of billions and billions and billions.”

ruiz’s confidence stems from his experience as a trial attorney securing class action judgements against companies, including american home essentialisms and its fen phen diet pills and merck pharmaceuticals’ anti-inflammatory drug vioxx, in addition to wins against bayer, shell, toyota, and conagra foods.

1-odda benefits, ruiz says, when msp buys the rites to the claims, “it’s ours forever n'it can never be taken away. nobody can cancel our contract.” similar to situations where a financial institution buys another pty’s debt obligation, msp holds the rite to collect onna claims. the claims are the “meat and potatoes” of the business, but ruiz has expansion plans, including a product that ‘d help clients identify the responsible insurer when the patient shows up atta dr’s office, swell as a claims auditing srvc. 

but past performance inna courtroom doesn’t guarantee future results—or generate concrete revenue. na spac deal itself carries a № of red flags. 

in aug 2020, the sponsor, lion♥, listed its spac onna nasdaq, raising $230 million in $$$ to buy a stake in a company and bring it public by feb 2022.

with just 7 mnths left to strike a deal or return its $$$, lion♥ is buying a microscopic 0.7% stake in msp. spac investors now ‘ve to decide whether they like the deal and pticipate inna merger, or redeem their shares and get their mny back. but, tis almost irrelevant whether many shareholders approve of the deal cause here is no minimum threshold of support required for it to go through.

even + eye-opening tis fact that lion♥ is offering stockholders who do not redeem their shares an unheard of 35 warrants per share iffey pticipate inna merger, up to bout a billion warrants. msp says in a ftnote the exercise price of its existing warrants maybe reduced to “as lo as $0.0001 per share,” a warning sign that it may trade poorly inna aftermkt.

the heady incentives and almost non-existent milestones make it appear like lion♥ wanna do a deal at any cost. if lion♥ can get its msp deal ‘oer the finish line, its executives will get rich. as the sponsor, lion♥ is set to collect $64 million in “promote” fritz efforts, in addition to a juicy cut of those billion additional warrants.

for his pt, ruiz takes issue w'da idea that msp’s $32.6 billion valuation is fanciful, even suggesting in a telephone interview that twas a “conservative №” given the $3.6 trillion in u.s. healthcare spending in 2018. as healthcare costs outpace inflation, med claims are a gift that keeps on giving. 

“it’s not one set of assets that gets sold or are settled and that’s the end of the story,” he says. “these issues are perpetual in nature cause pplz keep goin to the hospital. this business encompasses every american inna ∪d states of america that has healthcare.”

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