Declining valuations across the fintech segment are spurring interest from potential buyers.
The pace of M&A slowed in the first half of 2022 in the U.S. fintech and payment sector, with 221 total deals compared to 258 in the first half of 2021, according to data compiled by S&P Global Market Intelligence.
Among the 20 largest fintech deals announced since the start of 2021, five deals, worth a total of $19.09 billion, were announced in 2022. The other 15 deals, worth a total of $65.91 billion, were announced in 2021.
Dealmakers now expect M&A to pick up in the coming months, however, driven by proactive buyers. Deal structures are more favorable to buyers, as investors put more weight on business fundamentals in valuation multiples instead of pursuing growth at all costs.
"We are in a market where there are a lot of opportunities at a discount," Sean Blitchok, CFO of consumer lending and mortgage software company MeridianLink Inc., said in an interview. "What keeps me up at night is the velocity at which these opportunities come and our ability to evaluate these opportunities and move on these opportunities in a timely fashion."
While the KBW Nasdaq financial technology index was down roughly 18% as of Aug. 15 on a 12-month basis, the valuation plunge that started in the public market in late 2021 has spread to private companies. In July, buy-now, pay-later company Klarna fetched $6.7 billion in valuation in a new funding round, down from $45.6 billion in the prior round in June 2021.
Private equity firms are also being attracted by the lower valuation of fintech companies that went public in the past two years amid the IPO surge and the frenzy of special purpose acquisition companies.
"I'm hearing a lot of chatter from the private equity community folks that are very interested in looking at some of the public companies out there that are now trading well below their IPO prices," Rob Freiman, managing director and head of payments investment banking at Jefferies Financial Group Inc., said in an interview.
Jefferies was the lead financial adviser to an investor group composed of payment company Rêv Worldwide Inc. and private equity firm Searchlight Capital Partners LP, on their $1 billion acquisition of the Netspend consumer business from Global Payments Inc. announced Aug. 1. On the same day, Global Payments also announced the $2.03 billion acquisition of payment processor EVO Payments Inc.
Despite the recent activity, deal flow may not rebound to the record level of 2021 due to rising interest rates, recession fears and stock market volatility.
"Overall, people are much more sensitive to burning cash with the uncertainty of what type of environment we might be going into," Freiman said.
Late-stage fintechs facing more valuation pressure
The downward pressure on valuations appears to have a heavier impact on fintechs at later stages, industry investors said. The stock market volatility weakened companies' interest in IPO and SPAC mergers, which are two of the major liquidity venues for venture capital-backed fintechs. Many of them are not profitable and rely on external capital to sustain growth.
"Earlier-stage companies that may not have raised at such high valuations earlier on are in much better positions to seek out additional dollars where they can still achieve a valuation expansion from round to round," said Sam Das, managing director at CMFG Ventures LLC, the corporate venture capital arm of CUNA Mutual Group.
Secondary market trading of private companies' stocks shows that some shareholders are willing to take deals at lower valuations, according to transactions facilitated by RainMaker Securities LLC. The broker/dealer matches sellers of private companies' shares, typically of those at a pre-IPO stage, with hedge funds, family offices or high-net-worth individuals.
On RainMaker Securities' platform, shares of neobank Chime Financial Inc. were valued at $45 in the latest transaction on June 30, down from their peak of $125 in March 2021. Shares of payment company Stripe Inc. dropped to $31 in August from the peak of $83 in November 2021. Cryptocurrency exchange Payward Inc., doing business as Kraken, was valued at $39.50 per share in June versus $163 in several transactions in 2020.
"Fintech is an area where we've seen prices come down quite a bit already, and we expect that trend to continue, until public markets stabilize at somewhere where people say this is the bottom," said Glen Anderson, president at RainMaker Securities.
Macroeconomic uncertainties alter investors' appetite
When interest rates were lower, investments were poured into equities for higher yields. Fintech companies' high growth attracted investors and pumped up valuations, even if they were losing money. That dynamic made irrational valuation multiples common in the fintech sector, Greg Martin, managing director at RainMaker Securities said in an interview.
Now that the cost of capital is rising, investors are inclined to value companies based on cash flow, sustainable unit economics and profitability, Martin said.
"Everyone's looking for companies that have a path to profitability and a plan for profitability across the board, particularly for late stage companies," said Ryan Gilbert, founding partner at Launchpad Capital. "There is a more rational environment than we've seen in a long, long time."
