Fintech firms may struggle to find investor love in the new US IPO market

March 8 (Reuters) – The once high-flying fintech startups looking to go public will have a hard time attracting investors’ attention, even as a freeze that has gripped the market for new listings begins to thaw.

Initial public offering (IPO) activity in the US ground to a halt for more than a year as the US Federal Reserve’s aggressive monetary tightening policy drained easy money from the system.

The cautious mood in the market has meant that mostly those startups backed by solid fundamentals and steady revenue streams have ventured public, with about 24 companies listing their shares this year and about 140 filing for IPOs.

As investor confidence improves, more companies are expected to revive their IPO plans this year, but fintech firms may opt out of the race as they face a number of concerns, including rising cash-burn rates, mounting losses and poor stock performance for some of its listed peers.

“We’re still at the beginning of the IPO market upswing. And when IPO activity resumes, we expect fintechs will likely be among the last to rejoin the party,” said Matthew Kennedy, senior strategist at IPO research firm Renaissance Capital.

“I don’t think it would surprise anyone if they were all sitting out the IPO market in 2023,” Kennedy added.

Digital banking pioneers Chime and Stripe are currently seen as the industry’s top IPO candidates, along with investment app Acorns and buy-now-pay-later firm Klarna.

BOOM AND BUST

Fintech apps surged in popularity during the COVID-19 pandemic, as a near-zero interest rate environment helped them offer easy credit to lure consumers stuck at home.

Digital payments giants such as PayPal Holdings Inc ( PYPL.O ) and Block Inc ( SQ.N ) also expanded their buy now, pay later ( BNPL ) services to appeal to millennials and Gen Z customers.

But with interest rates at their highest levels since the global financial crisis, apps with heavy exposure to subprime borrowers have attracted investor scrutiny, making it difficult for such startups to justify higher valuations.

“On the fintech side, it’s not one-size-fits-all. Fintech companies that have maintained their growth and market share focus may not play well in today’s market focus on profitability,” said Rachel Gerring, EY Americas IPO leader, and Mark Schwartz, Head of IPO and SPAC Capital Markets Advisory.

However, they said there were companies in the sector with the scale and cash flow for whom individual circumstances would determine whether to go ahead with their IPO plans or opt for a wait-and-see approach.

In the 2021 IPO boom, 20 fintech companies raised a combined $10.93 billion, largely eclipsing the $144 million raised by a lone offering the following year, according to data from Dealogic.

“The IPO market is not closed, but it is certainly more focused on valuation and profitability,” said David Ethridge, US co-IPO leader at global consulting giant PwC.

Companies looking to go public will need to bolster investor confidence in their cost-cutting plans and be transparent about their efforts to reduce cash spending, he added.

MONK LISTS

Publicly traded fintech companies have largely failed to live up to shareholder expectations as they have steadily posted losses, leading to a series of exits in their shares.

Coinbase, which was valued at $86 billion in its Nasdaq debut in April 2021, now has a market capitalization of about $15 billion.

Robinhood and BNPL lender Affirm Holdings ( AFRM.O ) have shed $20 billion each in valuations since going public.

High-growth fintechs were previously valued like technology companies, where valuation was determined as a multiple of sales. But with the tech boom slowing, they are being evaluated using the playbook investors use for financial firms, where earnings play a critical role, Renaissance’s Kennedy said.

Reporting by Manya Saini in Bengaluru; Editing by Anil D’Silva

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