Transactions in the US FinTech sector were very active in 2021, accounting for over $100 billion in value.[1]
But that was then and this is now.
As of Q2 2022, FinTech M&A activity declined significantly, with global funding down 33% quarter-on-quarter to the lowest levels since 2020 and a significant decline in deal volume as well.[2] Like the rest of the M&A space, the FinTech sector has been affected by general economic and investment uncertainty, driven by rising inflation and interest rates, and growing anxiety over the US economic and political environment.
Room for possibilities?
Yet, in any challenging market, there are pockets of opportunity, and the FinTech space is no different.
Despite an uncertain macroeconomic and political environment, many key drivers of M&A activity in the FinTech sector still exist – a rapidly growing and developing industry, a large amount of deployable capital, especially private capital, and a return to reality for some of the remarkably high valuations for FinTech companies present in 2021. Taking each of these drivers in turn:
- FinTech has been one of the fastest growing industries, with rapid growth of industry participants and a large number of new entrants each year. To remain competitive, companies will look to M&A to increase scale, acquire new capabilities and talent, and execute on their strategic goals. As companies face a challenging market with little access to cheap capital, the need to make this pivot will be especially important.
- Founders or venture capital firms looking to exit or monetize part of their holdings need to turn to M&A in today’s environment given the stasis that exists in the equity capital markets.
- Despite recent market challenges, the amount of usable private capital has increased significantly in recent years, and a fast-growing industry such as FinTech is likely to remain a popular focus for much of this capital.
- The deployment of capital in the FinTech space will also be driven by a decline in valuations for FinTech companies from the sky-high, and often unrealistic, valuations that were common in 2021. As these valuations return to more reasonable levels, investors are likely to find FinTech -companies must be attractive investment targets.
- Given the large number of smaller valuation companies, M&A transactions can be completed without debt financing, which is largely unavailable in today’s market.
Furthermore, for those FinTech companies that are unable to keep up with their competitors, or are unable to raise enough capital to continue operations, the best option may be to sell the company (or go out of business).
Outlook for 2023
So, what does all this mean for FinTech M&A in 2023?
Much will depend on how the macroeconomic and political environment develops in the coming months. Sitting here today, it is hard to see the environment improving – inflation and interest rates remain at high levels, many see a significant risk of a global recession, and geopolitical tensions continue across the globe. Indeed, it seems safe to assume that much of the uncertainty present in today’s environment will continue, and perhaps even increase, as we enter 2023. This uncertainty will weigh on deal activity.
For FinTech M&A, however, it is not all doom and gloom – the key drivers of M&A activity discussed above are likely to continue to exist in the FinTech space. As a result, while 2023 is unlikely to be another record year like 2021, these key drivers should support a healthy FinTech M&A environment. As for what that M&A environment might look like, expect more robust activity in the middle market as economic uncertainty is likely to have a greater impact on larger deals, especially relative to the cost of financing a large purchase price. Also, expect the pace of deals to slow dramatically. Unlike last year, investors are no longer buying targets that are almost invisible. Instead, they take the time to perform due diligence and kick the tires on proposed valuations. Capital is available for deployment, but now more selectively for companies that can prove their value proposition.
