Tracing the numbers: Is global fintech investment on the mend?
The fintech sector evolved from a fledgling niche just a decade ago to one of the hottest investment spaces in 2021, buoyed further by the spike in demand for remote and digital experiences as a result of the global pandemic. However, global economic challenges have meant that 2022 was a much tougher year for all in the sector as levels of investment contracted.
Ballooning inflation globally brought on large interest rate hikes; the UK was particularly badly affected. This all led to a sapping of consumer and business confidence and spending patterns, softening demand for B2B and B2C Fintech products and ultimately leading to a dramatic 60% fall in VC funding for Fintech companies. Publicly traded Fintech businesses (and broader technology businesses) had already been seeing a dramatic contraction in valuations from Q4 2021 onwards - this took only a short period of time to work its way into the private markets, reflected in dwindling VC investment demand.
That said, current investment is stronger than the numbers might indicate at first glance. Deals are very much still happening, investors and acquirers are just being more tactical in their dealmaking. Whilst we are seeing a lot more due diligence taking place and overall longer cycles for deals getting done, the Fintech sector remains active.
With the first quarter of 2023 well under way, Royal Park Partners recently released a report delving into how the sector is faring. So, what do the figures tell us about what’s in store for Fintech investors this year?
Green shoots replace stagnation
Ongoing global macroeconomic uncertainty persists with most Western economies expected to experience very low growth in GDP in 2023. Although the United States appears to be avoiding a recession, inflation remains elevated and particularly so in the Eurozone and UK.
Despite this, January 2023 is already showing promise for Q1 overall, looking like it will be significantly better than 2022’s final quarter. Private fundraising activity tends to closely follow the public markets sentiment and consequently slowed down significantly last year. However, in January we saw signs of stabilisation, with 66 deals (more than a third of Q4’22 deal count) for a total value of $2.3bn. These deals spread across verticals, mostly at late-stage with half of the capital deployed in North America.
VCs focussed on later stage investment accounted for the lion’s share of funding for the deals, which is remarkable as investors continue to exercise caution. This is likely because later stage Fintech companies have had to call capital rapidly to plug funding gaps and build a warchest to get to profitability rapidly. 39 of the 66 deals completed in January were later stage funding rounds, with 82% of the total funding for the month going to later stage VC.
There are also certain sectors within Fintech that are ready for consolidation, such as capital markets technology, BNPL, crypto and share trading applications; a natural consequence of the mushrooming of the number of companies we saw in these sectors over the past couple of years.
Positively, investors are positioning themselves to deploy capital extensively in 2023, into high-quality companies as the ‘flight to quality’ continues. Buyers and investors must tread with caution, but not fear; if companies can cut back on spending and keep heads above water for the next 18 months, the funding environment could look a lot different in the medium term – as January has already demonstrated.
Separating the trading trends within the public FinTech verticals
On the back of the broader crypto market meltdown in the latter half of 2022, the crypto and blockchain index has been the biggest loser, down 83% LTM over the past 12 months. Credit outlook concerns have also caused some ripples in the LendTech space, particularly across consumer and BNPL products. That said, LendTech partially recovered in January 2023 (+4% LTM) and looks set to bounce back as macroeconomic forecasts stabilise and actual data on loss ratios are not as bad as some had feared.
While verticals such as Wealth and Cap Markets Tech have been performing relatively better, the growth is still below FTSE level performance. Valuation multiples across the board have compressed. However, in the first month of the year, most of the verticals have recovered and are trading close to 6-month highs – and may well continue this trend throughout this first half of the year.
The bigger picture
FinTech is on a gradual road to recovery, with promising signs inspiring confidence for the rest of the year. The tides have changed in a matter of months; last November it felt like FinTech was staring down the barrel of a gun, with an impending global recession, combined with massive uncertainty in the interest rate environment and around funding and valuations, posing a cause for concern.
There has certainly been a more positive turn of macro sentiment over the past weeks, which will naturally take time to filter through into the private funding markets. As companies adapt to new conditions and reorient to focus on profitability over growth, investors are meanwhile more focussed on playing the field as it evolves in front of them versus having a fixed game plan as before. Combined, this ability to react to change will see promising Fintech companies continue to get funded, and the industry emerge steadily from the dip, strong and stable. It is often held as a critique of the Fintech sector that none of these businesses have been proven through an economic cycle - now is the moment of truth.