The fintech market is picking up as public markets recover, private investment increases

Global fintech investment fell significantly through 2022, with funding falling 46% from 2021’s record levels, deals falling 8% year-over-year (YoY) and unicorn births falling to a low of five new unicorns in the fourth quarter of 2022, which representing an 87% drop compared to Q4 2021, data from CB Insights’ State of Fintech 2022 shows.

Supply chain disruptions, rising geopolitical tensions and a looming recession are among the main reasons behind the decline, prompting investors to slow investment and halt the start-up funding frenzy.

Following the steady decline in investment activity in 2022, global fintech funding and deal activity rebounded significantly in Q1 2023, driven by late rounds and a public market recovery.

A new report from London-based corporate finance advisor Royal Park Partners looks at the state of the fintech market in Q1 2023, delving into public markets, private investment activity and fintech exit trends observed over the past quarter.

Public markets are picking up again

After a turbulent Q4 2022, public markets recovered some of their losses in Q1 2023, helping fintech segments regain strength, data from the report shows.

The cryptocurrency and blockchain vertical recorded the strongest gains as it continued to recover from the downturn caused by the FTX bankruptcy and other scandals. A cohort of 10 listed companies in the sector, including Bakkt, Coinbase and Galaxy, witnessed a 55% increase in share prices quarter-on-quarter (QoQ), the largest growth observed across all fintech verticals studied .

Besides crypto and blockchain, the capital markets and wealth management, payments and insurance cohorts witnessed an increase of approximately 10% QoQ. The banking and lending cohort fell behind the rest of the group, picking up 2% QoQ.

Distribution of fintech verticals by share price development, Source: Q1 2023 Quarterly Fintech Market Update, Royal Park Partners

Looking at key stock valuation metrics, data shows that payments recorded the lowest enterprise value-to-revenue (EV/R) and enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiples, at 2.7x and 9.8x, respectively. This makes payments the most affordable and healthiest group of verticals studied for Q1 2023.

EV/R and EV/EBITDA are two popular valuation tools that help determine whether a stock is adequately priced. EV/R considers only the top line, focusing on the company’s revenue-generating ability. EV/EBITDA, on the other hand, takes into account operating expenses and taxes, thus helping to determine a company’s ability to generate cash flow from operations.

Fintech public markets results Q1 2023, Source: Q1 2023 Quarterly Fintech Market Update, Royal Park Partners

Private fundraising is picking up again

Private financing activity increased remarkably in Q1 2023, growing more than double QoQ to $14 billion, data from the report shows. The number of agreements also increased, from 176 in Q4 2022 to 215 in Q1 2023.

QoQ growth was driven by an increase in fundraising activity in the capital markets and wealth management verticals, insurance and the “other fintech” cohort, which includes companies in categories such as payroll, governance, risk and compliance, price comparison and credit data.

Payments, meanwhile, saw a decline in funding rounds, but deal value increased dramatically, growing more than seven times QoQ to US$8 billion, thanks to Stripe’s US$6.5 billion Series I.

Looking at geographic distribution, data shows that North America attracted the lion’s share, securing over 66% of all fintech funding in Q1 2023. Asia-Pacific (APAC) and Europe came in second, neck and neck with market share of 16% each. Most of the investment rounds in Q1 2023 (60% of all fintech deals) were made at a late stage as investors focused on backing more mature and established fintech companies rather than investing in new ones.

Notable private funding rounds recorded in Q1 2023 include mobile payments app PhonePe’s $643 million late round, consumer lending platform Abound’s $602 million debt and equity financing, and workforce management platform Rippling’s $500 million Series E.

Q1 2023 fintech deal number and deal value, Source: Q1 2023 Quarterly Fintech Market Update, Royal Park Partners

M&A activity remains strong

In Q1 2023, mergers and acquisitions (M&A) activity remained dynamic, with a total of USD 13.3 billion across 198 deals. North America secured the largest share of the total deal value (83%), but Europe closed the most rounds (43%).

Key deals included Thoma Bravo’s US$8 billion acquisition of consumer management company Coupa – a deal that accounted for 63% of total M&A value in the quarter –; the acquisition of Duck Creek Technologies by Vista Equity Partners for US$2.6 billion; and MAX’s acquisition of CLAL Insurance & Finance for $687 million.

Q1 2023 fintech mergers and acquisitions deal number and deal value, Source: Q1 2023 Quarterly Fintech Market Update, Royal Park Partners

Looking at other startup exit types, the report notes that six fintech companies went public by merging with a special purpose acquisition company (SPAC). These companies included REAL Messenger, a proptech networking platform from the US, Roadzen, an insurtech company from India, Cheche Technology, a Chinese auto insurance company, and DigiAsia Bios, an Indonesian business-to-business (B2B) fintech-as-a-service (FaaS) company.

Three other companies took the initial public offering (IPO) route: New POS Technology, a Chinese payments company; Worldpay, a UK-based payment processing company; and Adenasoft, a South Korean financial services software developer.

Featured Image Credit: Edited from Freepik