With private markets continuing to show strong interest in fintech and many firms reaching maturity, Pawel Szaja, partner at Shearman and Sterling, predicts 2020 will deliver a surge of fintech IPOs.
Operating in the firm’s Capital Markets practice group, Szaja founded and has helped build Shearman & Sterling’s Fintech Foundry, a program dedicated to supporting fintech related activities of their clients and the wider fintech ecosystem.
Szaja observes: “In my mind, fintech is becoming a separate asset class for investors. This is positive as it creates specialised investors, many of whom are in the US, but also across Europe, Asia and the Middle East. These investors are valuable as they follow the fintech sphere closely and know how to invest.”
In keeping with the forecast, Credit Karma’s long rumoured IPO is expected to emerge following its acquisition by Intuit, the accounting, tax filing and financial planning software firm this week.
A recent report by Linklaters observed that during 2019 “fundraising by fintechs fuelled acquisition and international expansion with Europe maintaining the lead over Asia in fintech funding.”
Linklaters predicts that in 2020 “investors are also being increasingly selective when investing in fintechs at the later stage funding rounds with greater scrutiny on financial valuations, governance and a continued focus on the route to exit.
“2020 may continue to see increased consolidation in the sector as the bigger players continue to make acquisitions to achieve scale or broaden their offering into adjacent services.”
Brushing off the assertion that investor confidence was bruised following 2019’s series of high-profile IPO flops including Uber, Lyft, Peloton and the beleaguered WeWork, Szaja adds that if anything, the troubled IPOs served only to motivate investors to be shrewd in directing their funding away from speculative options to more secure opportunities.
Rather than simply working to keep these fintechs private for longer, Szaja adds that while private investment has certainly helped to fatten and expand these firms, the rumour that this investment functions only to keep the firms private for longer is just that.
“At some point the firms are going to hit a threshold which in the case of these fintechs, means going public. The investment creates an extension to the private stage in the lifetime of a company - purely a delay in journey to going public.”
The investor base, Szaja contends, is working to shape the fintech sector as investors are, by definition, involved in the price discovery process as “they effectively complete the valuation of the business.”
As has been the typical approach, M&A consolidation continues in the sector helping the startups grow and expand. For instance, marketplace lender Lending Club’s recent purchase of Radius Bank demonstrates the strategic positioning that fintechs are able to take given the healthy pipeline of investment flow.
It is this consolidation in conjunction with a more sophisticated, attentive investor base which has provided fintechs with the targeted investment they need to position themselves for an effective IPO.
KPMG this week predicted that “frothy, speculative deals will be increasingly replaced by high-conviction deals focused on companies with proven business models and paths to profitability or access to capabilities in adjacent areas of interest.” 2019 was a significant year for global fintech investment the report found, with $135.7 billion invested in fintech across 2,693 deals.
Timing is just as important as preparedness, Szaja argues, noting that there is a sweet spot for a fintech IPO, however “hitting the right window” in his mind effectively means getting the best valuation possible. At this point in time, given the ongoing and increasing interest in fintech by a motivated investor base, the market conditions are favourable for fintech IPOs.
“It would be an oversimplification to say that all companies in the fintech industry are strong and growing - fintech is subject to the rules of open market economy. Many companies will fail, many will die. That’s the nature of the disruptive process.
“What I think is different about fintech is the number of companies that are created compared with other industries, the direction of travel is the process. We remain confident and optimistic that there is going to be quite a lot of work in the IPO space,” Szaja concludes.