Private equity’s fintech footprint

The factors that make fintechs attractive private equity targets remain unchanged against the drop in volume last year, write Robert Ohrenstein and Jeremy Welch of KPMG.

Following sustained growth in the number of fintech deals of well over 20 percent per annum from 2014, private equity investment of 80 deals in fintech (totalling $3.1 billion) in 2019 represents a reduction from the record level of 114 deals ($5.1 billion in value) seen in 2018.

The 2018 market benefited from the timing of individual mega-deals, particularly in the payments sector, such as Hellman & Friedman’s take-private of Nets and Francisco Partners’ acquisition of Verifone. Although these mega-deals were not as prominent in 2019, a large number of private equity houses are now seeing substantial returns from earlier rounds of fintech investment, and the underlying investment thesis of a shift to digital financial services has clearly been established.

Where next for private equity fintech investment? Towards the end of 2019 many began to exercise an element of caution regarding valuations in the sector. Covid-19 and its associated economic fall-out is likely to lead to some re-basing of pricing expectations in certain sectors, where investors wait to see the credit cycle play out. Other parts of the fintech universe, such as digital payments and digital identity solutions, are more likely to see resilient pricing as changes following covid-19 increase demand.

Shift to digital

After the immediate impact of covid-19, the medium term looks set for further fintech investment by private equity. The shift to digital financial services is expected to continue apace, and the factors that help to make fintech businesses attractive private equity targets – high growth, cash generation and global scalability – remain unchanged by the current environment.

In addition, a number of the most prominent global fintechs remain private equity portfolio companies and are likely to seek to continue to expand inorganically in the near term. Although 2019 was not, and 2020 (for different reasons) may not end up being record years for fintech investment, we are confident there will be continued strong private equity investment in fintech.

Robert Ohrenstein is global head of private equity at KPMG International, and Jeremy Welch is a partner, financial services deal advisory, at KPMG UK