Venture capital’s domination of the FinTech sector could be under threat as private equity heavyweights begin to sink their teeth into the steadily evolving market.
One of the buyout majors at the head of the pack is Lovell Minnick Partners, which is turning its attention to the rising sub-verticals of payments, cyber security, RegTech and soon InsurTech, according to firm president Steven Pierson.
He said “Over the next 10 to 20 years, every company in financial services should be tech-enabled if they want to survive for the long term. By then, many Fintech companies will have already been acquired by larger players with whom they’ve worked in the past. Others may form new partnerships with other Fintech businesses to provide a more complete set of services.”
Despite its cutting-edge nature FinTech is not a new industry, but rather an evolution of how businesses operate, connect with customers and deliver value, Pierson said. All companies within the financial services sector need to adapt to their customers’ desire for simplicity, transparency, personalisation, and real-time information – but the current business style of many won’t satisfy this need. Lovell sees the winners and losers differentiated by their incorporation of technology, Pierson said.
Since 2014 the FinTech sector has seen a steady increase in the size of the deals, according to data by FinTech Global. Last year saw a record 552 deals of over $5m, and a 33 per cent drop in the number of transactions under $1m. Over the past three years there has been a steady decrease in number of deals under $1m, with last year being the first time more transactions above $5m. During this period, there has also been an increase of deals over the size of $25m, a potential indicator FinTech is becoming more appealing to private equity firms.
Size matters
FinTech investment is not a one-size fits all operation, however. Lovell is looking towards the areas of the industry which are ready for private equity-sized investments. Its typical deal size is between $30m to $80m, and at the moment most of the companies are not ready for that kind of cash, Pierson said. But while the entirety of a single sector such as payments, for example, is not ready for investments, the firm does see companies working in the loyalty rewards, tablet point-of-sales solutions and cross border payments industry as appealing opportunities.
Lovell kicked off the year by invested in loyalty points platform Engage, which manages end-to-end loyalty rewards, employee recognition and sales channel incentive programs. Pierson said, “As a customer acquisition and retention tool, loyalty programs continue to see growth across companies of all sizes and across the world. At the same time, the loyalty industry needs to evolve. Companies have realised they need to deliver greater value to their customers in order to stay relevant and have the desired effect, but value is not just a matter of dollars and cents. Customers are seeking greater flexibility in how they utilise their points while also expecting greater ease of use. Technology plays a critical role in allowing loyalty programs to create brand value in a cost-efficient manner that doesn’t rack up funded liabilities on the balance sheet. These trends are creating interesting opportunities for new entrants to the market.”
With the sector continually evolving, Lovell sees loyalty rewards becoming more intuitive and flexible for customers. Pierson highlighted the use of technology, especially mobile phones, to allow customers to earn and redeem more personalised rewards, as well as help the company monitor campaign effectiveness. Ultimately, this will help companies engage with customers better, he said.
Steering clear
Despite the opportunities within the sector for a PE major like Lovell Minnick, growth areas such as Blockchain are still a little too nascent for the firm to get involved in, Pierson said. Areas like marketplace lending and Robo-advisors also have too low barriers of entry and a surfeit of companies to be a current option for the firm. But Pierson said InsurTech could soon be a sector to which Lovell turns its interest.
He said, “We’ve traditionally stayed away from consumer driven investment plays where there may be some consumer regulatory concerns. There are also low barriers to entry in building these types of businesses, and we typically avoid investing in businesses that have low barriers to entry. It’s really hard to see at this stage who the survivors and winners will be in the B2C space. Those businesses that have healthy balance sheets and strong underwriting will be fine, but this is an area where we have been very cautious when investing.”
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