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Private Equity Firms Target Middle Market Fintech and Payments Companies – Fintech Schweiz Digital Finance News
Of Fintechnews Switzerland
June 7, 2024
Middle-market fintech and payments companies are gaining prominence in the broader fintech mergers and acquisitions (M&A) landscape, attracting the attention of private equity (PE) firms for their strong growth potential, stable profit margins and strong customer bases, a new analyst note from private market data provider PitchBook.
Middle-market fintech companies fall between small, early-stage startups and large, established companies in terms of size and maturity. These companies cater to mid-sized businesses or consumers and often specialize in specific products or services tailored to their target audience. They typically generate moderate revenues and maintain a moderate market presence compared to larger fintech players, but still represent a significant part of the overall fintech ecosystem.
Second According to the PitchBook note, middle-market fintech companies are increasingly attractive to larger companies, especially given the relative ease of financing and executing deals in this space. These companies have also shown strong performance in an environment of high inflation, making them attractive targets for investment.
Quarterly corporate fintech PE buyout activity, Source: Q1 2024 Fintech M&A Review, PitchBook, May 2024
According to PitchBook, payments companies are particularly attractive targets due to their ability to withstand inflation and maintain stable revenue streams. These companies provide a service that nearly everyone needs and benefit from robust consumer and business spending. Unlike software-as-a-service (SaaS) companies, payment companies charge customers a percentage of each transaction rather than a fixed annual contract price. This model protects them from the negative impacts of inflation and could also offer some benefits in such economic conditions, the statement said.
Additionally, PitchBook points out that industry-specific payment tools, combined with workflow software, can generate the kind of revenue and margin growth that creates attractive buyout returns. One such example is the acquisition by Jobox.ai from Talus Pay, a payment processing solutions provider for small and medium-sized merchants owned by Alvarez and Marsal Capital. Jobox.ai specializes in payments for home services and workflow software. This acquisition complements Talus Pay’s existing focus areas, including healthcare, retail, restaurants, manufacturing and government.
Another example is the acquisition of MuniciPAY by Autoagent Data Solutions in January. MuniciPAY operates as a city payment gateway for municipalities. Autoagent Data Solutions, known for tax escrow and government payment processing services, has acquired MuniciPay to expand its payment gateway for citizens, allowing local governments to consolidate incoming revenue in one place.
According to the note, these companies, which combine payments and software, have a competitive advantage that is difficult for others to penetrate, along with a loyal customer base, which makes them attractive targets.
M&A activity in the fintech sector is picking up
Analyzing corporate acquisition patterns, the PitchBook note highlights a pickup in activity this year. In the first quarter of 2024, corporate acquisitions reached 18 deals, compared to a four-year low of 14 in the fourth quarter of 2023.
During the quarter, the increase in corporate mergers and acquisitions was largely driven by a more positive outlook among executive leadership teams. Until recently, business leaders faced challenges related to slowing revenue growth due to declining stimulus. They also expected a recession due to rate increases and an inverted yield curve. However, according to the report, the ecosystem exceeded expectations.
The quarter also saw large financial firms actively acquiring fintech companies to add new products and improve existing offerings. JP Morgan, for example, purchased LayerOne Financial will improve its offering for hedge funds in March. With the agreement, clients of Neovest, a 100% subsidiary of JP Morgan, will be able to monitor their portfolios, conduct risk assessments, send orders to their brokers and perform compliance checks, all from a single platform, the companies said in a statement.
In the first quarter of 2024, corporate acquisitions in North America were concentrated in New York, San Francisco and other large cities, the note said. Many of these deals involved small businesses with between 5 and 20 employees, indicating that companies continue to acquire talent and technology. The top segments by number of deals were capital markets (23%), CFO software (18%) and financial services infrastructure (18%).
Globally, the total value of fintech M&A deals announced in the first quarter of 2024 reached the highest level since the fourth quarter of 2021, totaling $75.7 billion across 282 transactions, according to data from Financial Technology Partners, an investment banking firm focused on fintech. show. Although the number of trades decreased by 11% compared to the first quarter of 2023, the overall volume increased by 7.5 times.
The increase in M&A volume was driven by a resurgence in $1 billion-plus M&A deals, which numbered 11 in the first quarter of 2024 compared to just two announced in the same period last year. These big deals included that of Capital One proposed a $35 billion takeover of Discover Financial Services, KKR’s purchase of a 50% stake in Cotiviti a Valuation of $11 billionexchange platform Webull’s $7.3 billion merger deal with special purpose acquisition company (SPAC) SK Growth Opportunities and Nationwide Building Society’s $3.7 billion acquisition of Virgin Money.
Global fintech M&A volume – quarterly, Source: Q1 2024 Quarterly Fintech Insights, Financial Technology Partners Research, April 2024
This article first appeared on fintechnews.am
Featured image credit: Edited by freepik
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