The year-end stock rally is reviving IPO talks in the fintech sector after the market has been dormant for two years.
The increasing odds of rate cuts in 2024 triggered a stock rally toward the end of 2023, including in the fintech sector. As of Jan. 2, S&P Kensho Democratized Banking Index generated a one-year total return of 52.10%. Signs of stronger investor sentiment in the public market are now bringing the idea of an IPO back to the table.
"The recent rebound suggests that perhaps there will be a more favorable environment for IPOs globally," said Ifeoluwa Orioke, chief revenue officer of Nigerian payment infrastructure provider Flutterwave Inc. The company, backed by Tiger Global Management LLC, views an IPO in the US or Nigeria "a desirable outcome," although it has not determined the timing, the executive said.
Still, many companies are waiting for a leader to set the stage in the IPO market.
"People are cautiously optimistic, but that optimism is fragile," said Heather Bellini, president and CFO of asset management software provider InvestCloud Inc. "I still very much feel like we need to see IPOs from some other really big leaders that are out there ... because we want to see the strength and the momentum and the resiliency of the IPO market."
InvestCloud, backed by Motive Partners and Clearlake Capital Group LP, contemplated an IPO in the last market boom but the board decided to shelve the plan around mid-2022, Bellini said. It still intends to go public but the timetable is undecided, she added.
Activities picking up
Several fintech companies have reportedly engaged with investment banks to join the 2024 IPO class, including stablecoin issuer Circle Internet Financial Ltd. and blockchain technology company Figure Technologies Inc., which could float its lending unit.
On Dec. 12, 2023, digital brokerage Apex Fintech Solutions LLC announced that it has filed confidentially with the Securities and Exchange Commission to propose an IPO of its common stock. Apex, backed by Chicago-based PEAK6 Investments LP, made its first attempt to go public via a special purpose acquisition company merger in 2021, but later terminated the SPAC deal in part because its crypto business complicated deal closing due to regulatory uncertainties on digital assets. Apex sold its crypto trading platform to Bakkt Holdings Inc. in 2023.
Companies that file registration statements confidentially do not have to determine the date or the pricing for an IPO immediately. They have more flexibility to gauge investors' appetite, often in so-called testing-the-waters meetings.
"We have seen, especially over the course of the past quarter, a meaningful pickup in IPO activity behind the scenes. Confidential IPO filings are positioning companies to hit 2024 windows," said Ryan Dzierniejko, a partner at Skadden Arps Slate Meagher & Flom LLP in the capital markets practice. "Historically, we saw one round of testing-the-waters meetings before a company went public. We are regularly now seeing two rounds or more being built into timelines."
The ticking clock
As in many other sectors, most fintech companies have stepped back from going public in the last two years, due to dropping valuations amid interest rate hikes. M&A and capital raises in the fintech sector have also been sluggish, leaving investors few options to liquidate their positions.
Few fintech companies began trading in the US in 2023 and 2022, including XBP Europe Holdings Inc., Better Home & Finance Holding Co. and Dave Inc., compared to at least 25 in 2021. Although shares of Better.com started trading in August 2023, that was a result of several extensions of the company's deal signed in 2021 to combine with SPAC Aurora Acquisition Corp.
The majority of fintech companies that went public since 2019 generated positive year-to-date total returns as of Dec. 18, 2023, although few were traded above the price at the initial offering.
"It's a really big issue that we continue to wrestle with," said Tarun Gupta, a partner at venture capital firm Jump Capital. "If companies aren't going public, then your only option for exiting is M&A, and if that's not happening, then it's just a really, really tough ecosystem."
Industry experts have attributed the clogged deal pipeline to a gap of valuation expectations between buyers and sellers. While investors facing economic uncertainties and persistently high costs of financing became more conservative, many private companies hesitated to accept lower valuations coming out of a record stock rally in 2021 and seeing skyrocketing valuations in capital raises before the pandemic. They hope to wait out the downturn, but the clock is ticking and investors' patience for an extended holding period of private companies' shares will only reduce over time.
"If you're a PE-backed company, your valuation expectations just may need to change because that's where the market is, and you've got to return capital at some point," said Chris Sugden, managing partner at growth equity firm Edison Partners who focuses on fintech. "We're at that part of the cycle where it's going to start to matter in 2024 and 2025."
Going public through a SPAC merger used to be a popular exit option among fintechs around 2021, but interest in SPAC deals has dissipated almost completely among fintech companies, Gupta said. In the last SPAC mania, fintech companies were able to raise capital at frothy valuations based on their growth outlook, but investors have now raised the bar to focus on companies' near-term profitability.
Getting IPO-ready
Although many fintechs have not determined whether the fog will clear for going public, late-stage companies are still doing preparation work to be IPO-ready.
"What we're seeing is a number of companies really focusing internally on hygiene checks and cleaning things up," said Jeffrey Brill, co-head of Skadden's global fintech practice.
Some companies are forming required committees to strengthen corporate governance and improving diversity at the board level, or hiring CFOs with prior experience at public companies, Brill noted. Such check-ups also include improving network security and acquiring or updating necessary licenses for lending or money transmission purposes, he added.
Small business lender Bluevine Inc. also sets its sights on an IPO potentially in 18 to 24 months, CEO Eyal Lifshitz said. Bluevine believes its scale makes it an IPO-bound company, although its current focus is on continuing to invest in growth and add new products, Lifshitz said. Bluevine generated roughly $200 million in 2023 revenue and has raised $242.5 million in venture capital funding.
"There is still so much headroom in terms of growing here, and still so much to do for small businesses. We feel like we're at a point where there's so much value to be created," Lifshitz said.
In December 2023, Flutterwave hired its first chief risk officer, Amaresh Mohan, to oversee compliance, trust and safety matters. It has also obtained money transfer licenses in 13 US states for remittance between US and Africa, according to a news release in December.
InvestCloud also made a new appointment in January, hiring James Young as chief information officer. Young will be responsible for InvestCloud's technology strategy, product development and operations. He will help make the company run as efficiently as possible, Bellini said.
"We are putting the pieces together so that when we do make the decision to IPO, we're ready," Bellini said.
