The financial technology sector had fewer sizable deals year to date compared to 2021, as companies and investors navigate stock market turbulence and macroeconomic uncertainties, though the pace of transactions overall in the space remained steady.
Three deals announced in the first five months of 2022 made it onto the 20 largest fintech and payments deals since 2021 list: Intercontinental Exchange Inc.'s proposed $13.56 billion acquisition of Black Knight Inc.; UBS Group AG's announced acquisition of Wealthfront Advisers LLC; and the announced acquisition of the BETA Maxit and Digital Investor assets of London Stock Exchange Group PLC by Clearlake Capital Group LP and Motive Capital Management LLC.
In comparison, eight deals announced January through May of 2021 made the list, according to data compiled by S&P Global Market Intelligence.
The shrinking market capitalization of fintech stocks appears to be part of what has distracted publicly traded fintechs from pursuing large M&A at the moment, industry experts said. The lower value of the companies' shares could reduce their capabilities to use equity financing to execute deals, and many fintechs face scrutiny from investors with respect to the sustainability of their organic growth.
"Fintechs in the public market have come down in valuation recently. So that plays into how well they will or won't be able to do transactions," Matt West, chief strategy officer at MVB Financial Corp., said in an interview.
The sector is seeing a valuation drop in 2022 alongside a broader stock market correction.
The S&P Kensho Democratized Banking Index and S&P Kensho Alternative Finance Index, which track technology-enabled financial services companies, have both plummeted by one-third in market capitalization in 2022 as of May 23, with the S&P Kensho Future Payments Index dropping by 25.4%.
Overall M&A pace steady
Despite a slowdown in large M&A deals, the overall transaction pace by deal count has been steady compared to the second half of 2021, according to data compiled by Market Intelligence.
The market volatility does not diminish the long-term caliber of the fintech sector, Jamie Warder, executive vice president and head of digital banking at KeyCorp, said in an interview, arguing that technology will penetrate more deeply into the financial services industry, continuing to drive M&A, investments and partnerships.
"I do think that the recent volatility tends to favor those companies that have a diversified product and customer set," Warder said. "I do see some fintechs who are ... more open to different types of partnership opportunities, probably because they see the stability that can come from a larger, diversified, more mature company."
KeyBank acquired student loan platform GradFin LLC on May 9. It reflects KeyBank's approach to partner with fintechs, and when the timing is right, it has the appetite to acquire the fintech outright, Warder said. KeyBank also contracts with fintechs as business partners.
"All of us are at an interesting time in the economic cycle, but I continue to be very bullish on how fintechs can make financial services better, and how more traditional players can partner with or even acquire fintechs to create value and better offerings," Warder said.
Back to fundamentals
Investors are cautiously monitoring the resilience of their portfolio companies in light of rising inflation and interest rates, as well as higher geopolitical risks, leading more investors to underscore fintech companies' financial fundamentals as opposed to a tendency to grow at all costs, industry figures said.
"For the first time in a handful of years, there's going to be an emphasis on profitability and the ability to generate cash flows," Adam Waite, managing director on D.A. Davidson's technology investment banking team, said in an interview.
Affirm Holdings Inc., for instance, outlined its plan to achieve a sustained profitability run rate starting from July 1, 2023, CEO and Chairman Max Levchin told investors during a conference call May 13.
In addition, the emerging class of fintechs founded after the Great Recession grew in a bull market that lasted until the onset of the pandemic. Changing market dynamics revealed issues in some of the business models for the first time, giving investors more information to revisit the premises of their valuation models and better understand risks in different scenarios.
In one example, equity analysts substantially changed their valuation approach in May for Upstart Holdings Inc., after the loan marketplace said in an earnings call May 9 that it had difficulty passing loans originated on its platform to institutional investors and had to hold loans on its balance sheet due to rising interest rates and higher delinquency. The company's shares dropped by as much as 64% following the call, and Upstart has said it will no longer hold loans.
"It's a healthy correction for the industry overall," Federico Baradello, founder and CEO at broker/dealer platform Finalis Inc., said in an interview. "The cream always rises to the top. There's going to be really exciting companies to track after the dust settles from this latest volatility."