I recently came across a report from
TowerGroup entitled "Private Equity and Financial Technology Vendors: Finding Each Other at Last" published by Stephen Bruel last July.
In his report, Mr. Bruel estimates that 2.8% of all private equity transactions between 2005 and Q107 were in the financial technology companies, representing $33 billion of deal value, as private equity firms are starting to see beauty in the financial
services sector (reflected in the value of its products, its revenues and its client base).
He warns the clients of these companies to be aware of the type of private equity owner and boxes them into 3 categories:
- Matchmakers: private equity firms that make an investment in a company with a view to combine it with a complementary company. Examples of such firms include
Warburg Pincus (Trema, Wall Street Systems) and
TA Associates (ION Trading).
- Technology experts: firms that only focus on the technology industry such as
Silverlake and what they've done with
- Opportunists: people who focus on multiple industries and will invest in a fintech company if the deal has merit. Examples include
KKR (First Data).
Overall, he has mixed feelings about the impact of private equity in these businesses.
A few comments for Mr. Bruel:
- It's not because Silverlake/SunGard and KKR/First Data happened in the past few years that private equity has finally embraced fintech. In fact, TA Associates has been actively investing in the sector with a dedicated practice since the late 90s in addition
to firms such as
General Atlantic and Warburg Pincus. You use too few datapoints to derive your broad conclusions.
- Whilst I think it is very important for clients to consider the ownership structure of the vendor that supplies (or will potentially supply) them, I doubt that private equity ownership affects vendor relationships in such a dramatic fashion as presented.
Opportunists would be more likely to divest or consolidate operations.
- Based on the experience we've had investing in the sector, I would argue that if you took all the private equity deals in the sector and chart the value creation under PE ownership, you'd find that in most cases PE ownership has been beneficial.
If anyone has read this report or has some thoughts, let's hear them!