The rise of private equity in FinTech

A surplus of private equity capital and less outperforming opportunities are raising valuations according to LLR Partners vice president Ryan Goldenberg in a research interview with FinTech Global.

The FinTech sector has been dominated by early-stage investors and venture firms; however, over the past four years there has been a rise in the size of deals, according to data by FinTech Global. Since 2014, there has been a decline in the number of deals valued under $1m, and a rise in deals valued from $5m and up. FinTech deals valued over $25m has seen a risen by over 5 per cent since 2014, with 14 per cent of the total deals in the sector having investments in this range. This bracket includes over 60 FinTech companies to raise $100m or above.

While this trend is just a natural part of the cycle, Goldenberg sees the surplus of private equity capital in the overall funding environment and there being fewer quality opportunities is driving up valuations.

LLR Partners vice president Ryan Goldenberg said, “Digitisation of financial services as a whole is still early in its adoption curve, but the segment is large. Investors are always going to chase big markets where technology can have a meaningful impact. Whether the impact is to increase revenue or save costs, there is a lot of opportunity right now. But with a surplus of private equity capital in the market and fewer companies that outperform, we’re seeing valuations being driven up.”

With the increased size of deals and FinTech unicorns, more private equity firms are being drawn into the space for investing. Technology adoption across the financial services has still been relatively low, and yet the opportunity is massive. Much more can be done to make financial services available to broader populations, and building simpler processes. The deals completed by venture firms over the past several years are beginning to mature and are forming a rising opportunity for private equity firms, according to Goldenberg.

Private equity giants KKR and Warburg Pincus are two of the late-stage investment firms that are beginning to take a bigger interest in the FinTech space. Last year, both these firms took part in five FinTech deals each, which puts them among the most active investors in the area. One of the deals closed by KKR in 2017 was the $70m investment into spend management platform Ivalua, which was made through its $711m fund dedicated to opportunities in the technology space. Fellow private equity firm Blackrock, also had a fairly active year in the sector, completing four transactions.

With high levels of capital and fewer quality opportunities, Goldenberg said that LLR Partners is sticking with what it knows to succeed in the environment.

He added, “FinTech is complicated on the whole, and even more so in each sub-sector. PE investors that have a dedicated focus on and experience in financial services, including all its nuances, will likely be best positioned for success. We approach FinTech thematically, focused on payments, wealth management and lending technology, and will stay focused on those sub-sectors as we try to differentiate ourselves in the market.”

Last year, the payments and remittances sector received the highest proportion of funding within the FinTech sector, accounting for 31 per cent of the total $38bn invested in FinTechs. North America saw the lion share of the deals in the space, with there being 35 per cent of deals completed there. The three biggest deals in FinTech last year were private equity investments into the payments space. India-based e-commerce platform Flipkart received two colossal equity injections in 2017, picking up $1.5bn from Softbank and $1.4bn via Tencent, eBay and MicrosoftThe third biggest deal was the $1.4bn private equity investment from SoftBank into India-based payment and financial services group One97 Communications.

Earlier in the year, LLR Partners closed its fifth flagship fund on $945m to invest across the FinTech, security and software, education and healthcare industries. LLR’s investments range between $25m and $75m. The firm recently closed a FinTech deal, having acquired a minority stake in Midigator for a $30m growth investment. The company offers an automated software platform to prevent, analyse, and manage payment card chargebacks.

“Regulatory environments and legislation vary by market, and lots of rules and regulations govern insurance, banks and payments. We’re also in a market where valuations are difficult. Investors that are familiar with the specific risks in the financial services market will likely be best set up for success.”

While there has been a rise in the deal value and number of opportunities for a high amount of cash, it differs across the FinTech space. Goldenberg said that while an area like payments is very mature and has a lot of opportunities for masses of capital, an area like lending is still relatively young and so less offerings. With the close of the new investment vehicle, the company is looking to stick which what it knows, to ensure it succeeds.

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