That’s not to say the FinTech market hasn’t been hit hard by the broader collapse M&A players have seen in 2023. Pitchbook data reveals a 45.8% decrease in M&A value year-over-year for the sector, with a 2023 forecast for a transaction value of $28.3 billion. , up from $52.2 billion in 2022. Some of the pent-up consolidation potential could prove to be a boon for the industry this year and beyond.

But Rudy Yang, senior emerging technologies analyst at PitchBook, shares an optimistic outlook for FinTech deals this year. “It’s been a quiet few months for FinTech mergers and acquisitions,” he says, “but there were some bright spots in the first quarter.”

These bright spots, he and other sources tell Middle Market Growth, are indicative of a more active year ahead, as PE investors take advantage of long-term growth potential and as companies prepare to increase their service offerings through strategic agreements.

Getting to a (delayed) head.

Part of FinTech’s appeal to dealmakers is its diversity. “There are many different subsegments within the FinTech space,” notes Mike Andrusko, partner at Centri Business Consulting and leader of its Digital Asset Practice. “There’s RegTech, asset tech, InsurTech which is starting to get bigger and I would say digital assets will fall into the FinTech space as well.”

In addition to these new FinTech niches, areas such as payments, banking and CFO technologies such as treasury and liquidity management solutions contribute to a prolific market that has matured since its early startup days 10-15 years ago, when many of the companies in the segment were simply “financial services companies using technology” rather than true FinTechs, according to Ganesh Rao, leader of the technology and financial services investment group at private equity firm THL.

Rao says certain FinTech niches are key to the firm’s investment strategy. InsurTech, banking technology and funds and wealth technology are some of the focuses of THL, which also seeks FinTech with the opportunity to embed additional financial services, such as payment functionality, within existing platforms.

Despite the industry’s diversity, dealmakers say FinTech has not yet reached the level of dealmaking activity that experts had predicted.

“Many analysts, myself included, came into last year expecting there to be a wave of consolidation within the industry,” says Yang, who cites FinTech startups taking advantage of low interest rates and inflated financing in venture capital in recent years (2021, a banner year for both FinTech and private equity funding, saw $121.6 billion funneled into FinTech startups). “We and many industry stakeholders expected many startups to have a greater need for liquidity and many more failures. What we’ve seen so far is that it hasn’t really materialized.

Closing the valuation gap

According to Yang, much of the stalling of mergers and acquisitions in the FinTech sector can be traced back to the dreaded buyer-seller valuation gap that has plagued so many sectors over the past year, especially tech. Fortunately, he says, the situation should ease as 2024 progresses.

And Max Heller, CEO of Centri and leader of its M&A advisory practice, says buyers are eager to jump when sellers compromise. “We see lower valuations as a plus for investors,” he notes. “Buyers are taking advantage of it and there is more of a meeting of the minds.”

Overall, industry experts are confident that 2024 and beyond will finally be the time when the long-awaited consolidation will occur.

Rao expects the second quarter to be a particularly significant period, especially when it comes to sellers’ willingness to go to market with moderate value expectations. LPs pressuring PE firms to return capital should also be a driver of deal-making activity this year, he adds.

While dealmakers don’t expect a wave of FinTech consolidation until at least the end of the year, some deals are closing. Last October, Celero Commerce, a non-bank payments processor and portfolio company of lower middle market PE firm LLR Partners, announced its acquisition of electronic payments company Finical. A month later, PE investor Advent International revealed that it had acquired British payments company myPOS, valuing the company at $500 million. And in January, technology-focused PE firm Welsh, Carson, Anderson & Stowe announced the acquisition of EquiLend, which provides technology to the global securities market processing industry.

“We are starting to see some encouraging signs,” says Sam Ryder, director of LLR, which is targeting stabilization of interest rates and expected cuts later in the year. Several LLR portfolio companies have completed additional acquisitions in 2023.

LLR targets growth-stage FinTechs with revenues between $10 million and approximately $100 million. Ryder says companies with high recurring revenue profiles and high retention rates are the most attractive, as are companies that can replace legacy systems in areas such as wealth management, banking and payments.

THL, says Rao, also looks for non-cyclical companies, ideally in end markets where software and technology penetration is in the early stages of long-term penetration. The most important thing, he observes, is the health of the end customer. FinTechs serving auto insurance or small community banking spaces, for example, have had a precarious time in recent months and deserve a little more caution right now.

The strategic advantage

But it’s not just PE sponsors who are strategizing their FinTech investments for the years to come. Strategies have historically played a particularly important role in industry consolidation, with some large transactions continuing to make headlines.

According to a recent report from Pitchbook, five of the ten largest FinTech M&A transactions from 2020 occurred in 2023 or 2024, including Intercontinental Exchange’s $11.7 billion acquisition of financial services data provider Black Knight in September, as well as Nasdaq’s acquisition of Adenza in November. a financial services risk management and regulatory reporting company, for $10.5 billion (Adenza was acquired by its previous owner, software private equity firm Thoma Bravo).

While strategic deals in the middle market are more modest, there are opportunities for synergies and partnerships, experts say.

According to Centri’s Andrusko, much of the inertia behind FinTech M&A this year and beyond will lie in identifying strategic growth potential, both from strategic and PE-backed platforms. “There are some companies that may not necessarily have a license, so instead of going through the application process, they may go through an acquisition to get into a company that already has that infrastructure in place to help them save time, effort and money “, he says.

“I bet you’ll see more strategic partnerships and identification of potential targets,” Heller predicts. “Probably a trend for 24 is where there are more strategies in play, but there may also be private equity-backed platforms doing add-ons.”

Yang similarly highlights the value of strategic partnerships within the FinTech ecosystem, not only to consolidate a fragmented market and weed out the winners from the losers, but to enable companies to improve and augment their existing offerings. As enterprise and consumer end customers demand holistic and seamless products, industry collaborations can help banks, corporations and other industry pillars expand into new geographies and add features to products, thereby bringing significant revenue to the agency.

Such demand lends itself well to mergers and acquisitions, particularly as the FinTech ecosystem matures. “We’ve gotten to this point in FinTech where banking incumbents, large corporations and startups are more ready than ever to collaborate with each other,” Yang says.

Carolyn Vallejo is the digital editor of Middle Market Growth.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.

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