PE-focused Fintech unlocks a multitasking opportunity for acquirers

The financial technology (fintech) market continues to mature from an ecosystem of early-stage disruptors competing for venture capital support to an ecosystem of more established operators, ripe for growth and consolidation. Private equity investors are paying attention, and fintech has become an attractive M&A target in a tepid dealmaking environment.

Recently, a niche has emerged in fintech that targets private equity not just as a potential investor, but as a customer. Innovators explore how technology can address finance-related challenges experienced by private equity firms and their portfolio companies.

Some industry participants and retailers say this gives PE firms an opportunity to use the solutions they acquire. Such a strategy could drive the modernization of PE firms’ own financial back-office operations, increase visibility into the financial health of their portfolio companies, and support customer acquisition for the fintech business—if private equity can overcome resistance to digitization.

An attractive investment target

Current market volatility could generate an increase in M&A activity within the fintech space, according to analysts.

A recent S&P Global Market Intelligence report notes that declining share prices of publicly traded fintech companies have spilled over into the private markets, creating favorable pricing for acquisitions and the possibility of take-private deals. A separate Katten survey found financial services and technology to be the year’s biggest investment opportunities identified by middle-market private equity executives, similarly citing declining valuations.

“When valuations start to fall, you’re likely to see more consolidation,” says Miguel Tejeda, principal at Motive Partners, a B2B fintech-focused private equity firm. “You will see more action on assets that are very good but may not be able to raise growth rounds as they have historically. We are probably entering a five-year period where the exit opportunities for these extremely exciting growth companies, which normally would have continued to fund hypergrowth until a massive IPO is now going to bring their goals down to a more reasonable level.”

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In addition to favorable purchase prices, Tejeda says that the fintech area is attractive for the size of the growth opportunities. B2B fintech companies are in a particularly advantageous position, having embraced subscription and recurring revenue models aimed at high-spending corporate customers with long-term contracts.

We are probably entering a five-year period where the exit opportunities for these extremely exciting growth companies, which would normally have continued to fund hyper-growth until a massive IPO, are now going to bring their targets down to a more reasonable level.

Miguel Tejeda

Motive partners

Also, he adds, companies tend to view financial solutions as business-critical, rarely on the chopping block amid market downturns and budget constraints. “You start thinking about these long-term growth drivers and a market that’s a $1.5 trillion revenue opportunity, and you realize this is an industry you can invest in,” notes Tejeda, citing recent data from the Boston Consulting Group.

Specializing in Private Equity

As private equity buyers explore the investment opportunities in fintech, they are also discovering that fintech companies are increasingly designing solutions developed specifically for private equity-specific challenges.

Motive Partners has seen this trend firsthand. The firm joined middle-market private equity firm Charlesbank Capital Partners last September to invest in Accordion, a financial technology and consulting services company designed to help private equity firms and their portfolio companies modernize their finance function.

Will Stuis, director of Accordion’s CFO Practice, says private equity firms have many of the same financial pain points as any business: siled systems, poor data quality and a lack of real-time visibility.

But the fast-paced demands of the PE ecosystem, as well as tightened audit and regulatory requirements, make fintech adoption a particularly impactful strategy. “Long and complicated processes, especially around reporting, just don’t cut it,” says Stuis. The COVID-19 pandemic and the current market downturn have also increased the pressure on PE firms to remain agile. “Technology allows you to be more proactive when it comes to market volatility,” adds Stuis.

John Signa, founder and CEO of E78 Partners, a middle market PE-focused professional services firm with fintech offerings, says his previous experience in private equity has exposed him to the industry’s biggest hurdles around financial reporting and visibility.

“I experienced how challenging it was to manage a portfolio of assets across a range of funds,” he says. “There was really no standardized way for the 30+ portfolio companies that we owned at the firm I was with before I founded E78, across seven different fund vehicles, to do portfolio monitoring and valuation effectively.”

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E78 has responded to this need by launching its Adaptive Workday product, designed to help investment firms gain broad visibility into their portfolios, and track and report across the various business areas. “I’ve always said that private equity is another form of holding company,” says Signa. “They own controlling interests in privately held companies. These companies have CFOs, they are obligated to report results up to the private equity firm, and the private equity firm’s CFO has a fiduciary responsibility to take that information and report it to LPs. »

As the fintech space continues to mature, more solutions targeting the PE ecosystem will emerge. Tejeda says products designed to accelerate reporting and improve transparency across the portfolio, which were once limited to financial reporting, are now expanding into other areas, such as ESG assessments.

Investment and adoption

PE-backed E78 and Accordion sit at the intersection of the private equity companies’ opportunity both to invest in fintech and to use the solutions they acquire.

However, that is easier said than done.

“PE firms tend to be more conservative when it comes to adopting technologies,” notes Accordion’s Stuis, who adds that this hesitancy can extend to a firm’s own portfolio. “Introducing something new is tough for many finance and accounting teams. …to take a new initiative, such as adopting technology – it is not easy to fit into the daily job.”

E78’s Signa agrees, noting that fintech adoption today is most common among the largest investment firms with the resources available to develop proprietary solutions. “Then you get to the middle and lower end, where I would say adoption is incredibly low,” he says.

That’s “ironic”, notes Signa, as PE firms will often first identify digital transformation as a value creation opportunity in their own portfolio companies – but struggle to embrace this development themselves. Signa says that while the private equity sponsor has not adopted E78’s solutions, the firm has been instrumental in connecting the company to the wider PE ecosystem and driving customer acquisition.

Motives Tejeda is not surprised by some PE firms’ reluctance to adopt fintech solutions, even those they acquire. But he expects the space to play a very different tune five years from now as market pressures prompt investors to embrace differentiated strategies to boost returns and add value. PE firms can become “pseudo-strategies,” he says, promoting the development of a fintech ecosystem with overlapping clients and opportunities for joint ventures.

Tejeda notes that his firm has not only implemented accordion solutions, but such adoption should be a priority among PE acquirers.

“As a FinTech investor, we have to practice what we preach,” he says. “And there is no better care than being a customer.”