European fintech companies, particularly in the UK, are set for a wave of acquisition according to industry experts.
The first half of 2017 has seen a boost for global fintech after a stuttering 2016. According to a report from Hampleton Partners, deal volumes are up 8% on the second half of 2016. UK fintech is appearing particularly attractive to investors with total deal values reaching $1.7bn to date this year, up from $0.5bn in the second half of 2016. After a period of subdued activity urgency seems to be returning to fintech investment.
Despite initial concerns, the UK’s vote to leave the European Union has added unexpected impetus to the sector. As established banks reassess their business models in light of Brexit and the upcoming PSD2 deadline, the attraction of innovative technology solutions has bloomed. With the depreciation of sterling offering further value for global investors, there is a sense that a time of opportunity has come.
A survey of 200 banks and asset managers conducted by law firm Simmons & Simmons confirms a growing sense of opportunity among investors. Of those surveyed, 31 per cent expect to acquire a fintech company within the next 18 months. 48 per cent of those without plans to acquire are delaying acquisition to attain greater certainty regarding a target.
Source: Hampleton Partners
The slowdown in 2016 was the result of a shift in mentality among both buyers and fintech firms, according to Paddy MccGwire, Managing Partner at technology investment bank Silverpeak. “Companies have become more conservative with their approach. Whereas buyers now want companies with a proven strategy, technology and team, fintech firms are looking to mature and consolidate their product solutions,” he said.
But with a growing number of UK companies now entering profitability, London is responding to this new mind set. According to research from technology investment bank GP Bullhound, the capital boasts more billion-dollar fintech companies than the rest of Europe put together with Markit, Paysafe, Funding Circle and TransferWise offering a combined value of $18.5bn. With their strategies exhibiting maturation, they will be near the top of many a suitor’s shopping list.
David Sola, Managing Director at Houlihan Lokey, agrees that a period of significant fintech acquisition could be imminent. “The inertia in the market has been broken and we’re now witnessing a mounting number of fintech acquisitions.”
These deals include Babel Systems, the UK securities processing platform, purchased for $20m by Investcloud, Vocalink, the UK payment platform, purchased by Mastercard for $920m and Compte Nickel, the French challenger bank, acquired by BNB Paribas for $216m.
According to Sola, these acquisitions will compel other companies to respond.
“Once companies in a sector begin to consolidate, other firms are forced to act simply in order to match the economies of scale. Based on the deal volumes we are witnessing this year we would expect 2018 to exceed anything seen since 2010,” he said.
This trend is to be amplified due to growing interest from Asia, according to MccGwire. Asian investment in European fintech, particularly from China, has surged in recent months. “Since 2016, there have been 17 deals in European fintech that have involved an Asian investor of which 7 were Chinese. Of these, 12 occurred in the past 12 months and 6 were in the UK.”
A recent study by accountancy firm EY confirms the growing financial prowess of China in the fintech market. It is estimated £6.5bn was invested globally in 2016, backed by significant government investment through more than 750 funds. “The size of their population and economy is enabling them to deliver enormous returns” says MccGwire, “they want technological independence from the rest of the world and are turning to foreign acquisition to attain it.”
Having shrugged off uncertainties following Brexit, there is a growing sense of anticipation surrounding fintech acquisitions in the UK. Given investors’ prioritisation for those with a proven strategy however, expect them to be fussy.