The fintech bubble may have burst, but these investment bankers are bullish

Cut valuations, mass layoffs, a funding drought and closed IPO market. For most, 2022 will not be remembered as a fantastic year for the fintech sector.

But all was not doom and gloom, according to new analysis from investment bank Peel Hunt. A new note from the firm today says the spectacular bursting of the fintech bubble in 2022 has helped “weed out the weak business models” in the sector and moved the market towards an ultimately more sustainable emphasis on profitable growth.

Analysts at the firm have now urged investors not to take a “myopic” view of the market and have doubled down on the “compelling long-term investment case” for the fintech sector.

“We compare the evolution of the fintech sector to the evolution of the internet sector, with 2022 reactions mimicking the Dot-Com crash of 2000,” fintech analysts Gautham Pillai and Advika Jalan said in a new report.

“However, as we saw with the internet sector over the next two decades, we believe 2022 has helped to weed out the weaker business models in the fintech space and shown the resilience of the rest of the providers, who are focused on profitable growth.”

Fintech venture downturn

The analysis comes despite a sharp decline in valuations last year as venture capital funding dried up after a decade-long funding frenzy.

Prices fell across nearly every stage of the 2022 rally as investors latched onto loss-making, high-growth business models that had tempted big rounds over the past decade.

Series D and later funding rounds saw value decline by 27 percent in the third quarter of the year, bringing them down to nearly 2020 valuation levels, a recent report from data firm CBInsights found.

Fintech funding in the UK fell eight per cent to $12.5 billion last year, but remained stronger than rival markets, with global funding down by around a third.

In its report today, Peel advised Hunt to shrug off the downturn and back largely unlisted London-listed venture car Augmentum.

The firm also reiterated its buy rating on a number of listed fintechs, including Alfa Financial Software, Eckoh, Equals and Network International.

“The current market volatility masks the opportunity presented by the vibrant UK fintech sector,” the analysts said.

Talks exclusively with By AM last week, Augmentum CEO Tim Levene said investment was likely to start flowing back into the market in the second half of the year as investors put dry powder to use.

“I think the general consensus view is that the first half of the year will be quieter than the second half as people start to see how the economic impact plays out in the UK and beyond in Europe,” he said.

“There’s a lot of capital that needs to be put in,” he added.