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Public fintech companies' woes have hit a trough
The AltFi Fintech Index's 2023 performance so far suggests we’ve reached a crossroads with some strong performers and dozens of private companies beginning to mull their future IPOs, writes Daniel Lanyon
We have hit the trough for public fintech company woes.
That is the most optimistic thing you can say nearly two years on from a predicted fintech ‘bloodbath’. But is it too optimistic?
There have been some fintech casualties this year and it would be silly not to expect a few more in the next six months or so. The ‘bloodbath’, as the Economist labelled the coming reckoning for fintech one year ago, hasn’t quite happened, at least in the severity of that metaphor though.
Encouraging performance in the AltFi Fintech Index might even suggest better times are ahead.
What is clear is that the past two years certainly contrast starkly with the pandemic-induced mega boom that fitted neatly from 1 January 2021 to 31 December of the same year.
The next two years will be pivotal in the long-term maturation of the sector.
The best of fintech times…and the worst
In the history books of the fintech boom of the past decade (whenever they get around to being written) 2021 will be the year noted as the period when everything changed.
Mass hiring of tens of thousands of new employees including salary packages for developers up to $1m and insane valuation multiples were all underpinned by an annual $120bn global venture capital injection into fintech startups that went into reverse.
In 2022, layoffs and perk cuts as well as down rounds and a renewed focus on profitability became the dominant trends as VC volumes dropped to $79bn.
The AltFi Fintech Index declined considerably over the course of 2022, ending the year with a 58.6 per cent drawdown. Public market fintechs were (mostly) having their first torrid market experience, with some AltFi Fintech Index constituents down up to 90 per cent.
A (fintech) market crash would be an accurate description, perhaps even putting it mildly. However, the performance of the AltFi Fintech Index in 2023 shows the trend might be reversing.
This year there has certainly been a big pullback in venture funding, more layoffs to add to the tens of thousands of last year and a more or less big freeze in fintech initial public offerings (IPOs).
However, something of a bounceback is underway in the public markets. This will likely lead to more stability and perhaps even a recovery in private markets which will further support a push for more companies to become public companies.
This year the AltFi Fintech Index is up 17 per cent and has been up as high as 47 per cent, outperforming the major indices by a comfortable margin.
This begs the question: Are public fintech valuations currently at a temporary dip in a longer-term growth trajectory? Or could there be worse to come?
Of course, nobody knows has a definitive answer. Fintech is a dynamic industry, and valuations can be influenced by a multitude of factors.
While the industry's potential remains undeniable, given the vast and growing global market for financial services, concerns about frothy valuations, the sustainability of companies' business models and their balance sheets and a few regulatory challenges have weighed on investor sentiment and you can’t dismiss these entirely.
Perhaps more important than anything has been the hit to the macroeconomy, whereby a complex multitude of factors prompted the worst uncertainty for a generation and soaring interest rates as a response to seemingly out-of-control inflation.
However, this merely changes how investors are pricing risk and makes the cost of money more expensive. It doesn’t affect the business model of fintechs if you buy a long-term secular story of digital disruption.
While current concerns about regulation and profitability may be contributing to lower valuations, it's important to remember that innovation often faces hurdles before achieving widespread adoption.
More important though, is the performance of companies themselves.
According to AltFi’s research ten public market fintech companies have more than doubled investors' money this year, with a more than 100 per cent share price gain. This is often driven by fundamentals more than a return to a risk on market environment.
Nubank and Remitly, for example, are two such companies where strong performance is driving up their share prices.
Investors should approach fintech valuations with caution, conducting thorough research and considering both short-term challenges and long-term potential.
The future of fintech is undoubtedly promising, but the path to success may involve navigating through new periods of uncertainty and volatility.
Rather than seeing current valuations as a trough, it might be more accurate to view them as a reflection of the industry's maturation and the need for sustainable growth.
In the long run, the fintech sector's ability to address these challenges will determine whether valuations are at a trough or a temporary dip on the path to greater heights.
