After the success of European financial technology investments in areas such as payments, private equity and venture capital firms are now shifting their focus to a new set of subsectors that aim to either disrupt or improve the function of banks and financial institutions.
GP Bullhound partner Claudio Alvarez
Source: GP Bullhound
Technology-driven challenger banks, which have disrupted the model traditionally offered by high street banks through innovation and digitalization across services such as online lending and deposit-taking, are attracting interest from sponsors. Fund managers are also looking to invest in companies working to improve the function of incumbent banks and financial institutions. Examples include fintechs focused on big data analytics, regulatory technology and cloud infrastructure, market participants said.
A number of sponsor-backed companies in the payments businesses have attracted high valuations in Europe. Worldpay Inc., which Royal Bank of Scotland Group PLC sold to Advent International Corp. and Bain Capital LP in 2010, was listed on the London Stock Exchange in 2015 in an initial public offering that valued the company at £4.8 billion. It was later acquired by U.S.-based Vantiv in a roughly $13.34 billion deal. That combined company merged with Fidelity National Information Services Inc. earlier this year in a roughly $49.77 billion deal.
Denmark's Nets A/S, another payment services company, was taken private by an investor group led by Hellman & Friedman LLC and included Advent and Bain in 2018 for $5.5 billion. Nets completed a merger with Advent and Bain portfolio company Concardis GmbH in 2019, creating a company with approximately €500 million of EBITDA and €1.3 billion of net revenue.
Amsterdam-headquartered Adyen NV, backed by investors such as General Atlantic Service Company LP and Index Ventures, also listed in 2018 in an IPO that valued the company at €7.1 billion.
"In the first epoch of fintech, payments was where it was at," said Patrick Sarch, co-head of global financial institutions for law firm White & Case LLP. He added that sponsor investment in the European fintech space has now moved into its second phase as firms have expanded their focus.
Challenger banks, which have digitalization at the heart of their strategy, have seen strong uptake from consumers, as well as increased funding support from sponsors.
Three years ago, many sponsors thought having an app and a strategy to engage users through either better experience or better front-end design would not be enough to beat the high street banks, Claudio Alvarez, partner at technology advisory and investment firm GP Bullhound, said.
Over time, however, it has become clear to managers that the banks continue to struggle with innovation. Many challenger banks now have meaningful scale, with investors taking a longer-term approach to these investments, Alvarez said.
A handful of European-headquartered challenger banks — including OakNorth Bank PLC, Monzo Bank Ltd., Revolut Ltd. and N26 Bank GmbH — received significant rounds of fundraising. N26 has a post-money valuation of more than €3 billion following its latest fundraising round, OakNorth and Monzo have both seen valuations around £2 billion following fundraising rounds this year, and Revolut saw a post-money valuation of over £1 billion following a fundraising round last year, its latest for which transaction values are available.
Fintech companies targeting legacy issues and regulation that affect financial institutions are also attractive to private equity and venture capital investors, with these businesses having a ready potential client base.
White & Case partner Hyder Jumabhoy (left)
White & Case co-head of global financial institutions group Patrick Sarch
Source: White & Case LLP
Sponsors are exploring investment opportunities in fintech firms focused on big data analytics, the processing of large and complex data sets. Financial institutions can use big data analysis for a range of initiatives including improving customers' experience by tracking their behavior and monitoring risk and compliance.
Private equity firms are also considering investments into regtech businesses, which offer a technology-based solution to help firms deal with regulatory requirements. The introduction of European regulations such as the Markets in Financial Instruments Directive II and the General Data Protection Regulation, as well as the introduction of international regulations such as Basel III, to name just a few, adds additional complexity for financial institutions.
"Where there is complexity there is opportunity," Jessica Hardy, assistant director at U.K. private equity firm Dunedin LLP, said. She added that regtech is an interesting space "particularly for technology-led innovation where they've got real solutions to real problems as opposed to solutions for solutions' sake."
White & Case corporate partner Hyder Jumabhoy, who focuses on financial institutions, said advanced data analytics and regtech make for clear investment opportunities as they are "easy to sell." Banks and other financial institutions that are actively seeking customer monitoring and reporting present a ready market for those services and may look to acquire these businesses once they have gained scale, creating an exit opportunity for sponsors, he added.
As they work to continue to innovate, traditional banks are starting to shift to the cloud, rather than upgrade and innovate their legacy platforms, GP Bullhound's Alvarez said, and European fintech players like Temenos AG, Mambu GmbH, 10x Future Technologies Ltd. and Thought Machine Group Ltd. all offer cloud-based solutions for the industry. These business-to-business software players are easier investments for private equity players who have experience with software enterprise businesses to grasp.
"It's about how robust is your platform and making sure you've got the right skill sets around enterprise salespeople," Alvarez said.
With entrepreneurs finding new pockets where they can disrupt, or make systems more efficient, market participants do not expect activity to slow down soon.
"It's been a strong sector for so long that I expected fintech investments to decrease, and instead it's just kept increasing," pan-European private equity firm Idinvest Partners SA head of venture and growth capital, Matthieu Baret, said. "Even though we think everything has been addressed in fintech, there are still a lot of things to do in this space."