Despite the apparent challenges posed by COVID19, financial technology, particularly the payment space, remains attractive for investors. According to Fintech Futures, M&A activity in the FinTech space in 2019 was characterized by continued and accelerating consolidation, particularly in the payments space, and FinTech valuations were pushed higher by the growing levels of competition on the buy-side of M&A. Will the situation be different in 2020 and beyond? We approached Maria Popova from the FI & Fintech corporate finance practice of Kempen & Co., a specialized investment bank based in Amsterdam, to hear her post-COVID experiences and estimations.
[Maria is an experienced strategy and M&A professional based in Amsterdam. Having spent around ten years focusing on the payments sector, she advises various players across the payments value chain and investors interested in the space. Maria is Vice President at FI & Fintech corporate finance practice of Kempen & Co, a specialized investment bank that works closely with various types of financial technology players.]
- Maria, how does the technology-driven finance mentality shape corporate finance practice?
[Maria:] At Kempen & Co the entrepreneurial mentality is in the heart of everything that we do. At the FI & Fintech practice we work closely with founders and entrepreneurs, helping their businesses grow from early stage to potential exit or IPO. The business leaders that we work with are truly passionate about financial technology, solving the pain points of the industry, are oriented towards growth, and, by nature, are strong individuals. As an advisor, we fully share the mentality of entrepreneurs and this ultimately shapes our culture at Kempen & Co Corporate Finance.
- Recent reports show that the COVID-19 crisis has significantly hit the M&A market. How did the pandemic shape the M&A and investment strategies of your European clients and valuations? Did the remote work aspect of deals impact the negotiation and due diligence processes?
[Maria:] The pandemic impacted directly or indirectly probably every business around the globe, and it is likely that some of this impact is permanent. The effects on the financial technology companies have been mixed and largely dependent on the sector. Some sectors, such as non-travel e-commerce, have actually benefited from the pandemic-related restrictions, as consumer purchases have increasingly moved online. Investors remain active in the payment space and there is strong buy-side demand for prime assets, which has been translating into strong valuations in 2020. While many investors still prefer to do business with the management teams who they have met personally before, full digitalization of the processes does not prevent deals from happening. On the other hand, we have witnessed a few fundraises being postponed, especially in the cases where companies are directly and significantly impacted by Covid. Bridge financing and convertible bonds have recently been the go-to solutions for companies that are difficult to value due to the impact of the pandemic.
At Kempen & Co, 2020 has been a strong year so far with the execution of 41 transactions by the Corporate Finance and Equity Capital Markets team across 13 different countries, representing a total deal value of c. €23bn. The team continues to successfully close a wide variety of transactions, including public offers, sell-side mandates, fully virtual IPOs, bridge financings, hard underwritten rights issues and numerous follow-on ECM transactions.
- What are your predictions for 2021 regarding both regular and distressed M&A deals?
I see 2021 as the year of the survival of the fittest in the new normal. I think that overall the pandemic has put a multiplier effect on the velocity of the trends that we have observed in the financial technology space for the past couple of years. On the one hand, businesses that have initially been well positioned in the digital space as well as those able to adjust fast in terms of product and go-to-market strategy seeing opportunity in the situation, will be the winners. On the other hand, the pandemic has already squeezed out a few travel- and events-related businesses, and the distress will inevitably continue into the next year, as the restrictions remain. The dualism of the situation will be reflected in the M&A activity. Next year, we can expect strong deal flow and impressive valuations in the sectors that have benefited from the pandemic, such as non-travel e-commerce, online marketplaces, recurring billing, and risk and fraud management. A few financial technology assets that make part of larger groups may be unlocked, as the companies try to rationalize their product strategies and focus on core activities. For the sectors that have been hit by the pandemic the most, it will be harder to stay afloat next year relying on the interim financing, and as the result we may see a set of distressed assets coming to market.
- Every crisis also an opportunity. What opportunities startups and SMEs can use to boost their strategy and visibility during this unique period?
The beauty of the smaller businesses is their fragility and the ability to change fast. Entrepreneurs are forced to change fast in order to stay afloat in crisis situations. Change of course also requires resources, but luckily the financial technology ecosystem offers access to a variety of partners that can help move the ideas forward and reduce time-to-market. In both B2B and B2C models, value added services (such as analytics tools, loyalty solutions, pay-later options, passive forms of authentication and highly-automated KYC) that help companies strengthen the relationships with their clients have become even more important. Think of yourself as a consumer and how much more demanding you have become to your online shopping, digital banking or investing experiences in the past months. Technology and service providers that enable our daily financial interactions strive to make them as seamless, passive, and secure as possible. With the increased activity of fraudsters, security is essential, so are the risk and fraud management solutions. Giving your clients piece of mind and at the same time optimizing your own bottom line is the only way forward in the digital world.
- As a payment expert, we'd also like to pick your brains about the local payment practices. How does the Dutch ecosystem perceive PSD2? The demand for PSD2 compliant licenses seems to be lower in Holland than other European countries - is it simply because the implementation was delayed or because retail banks are already digital and progressive, making third-party provider services redundant?
In the Netherlands, privacy concerns, specifically in the payments industry have historically been central. The Dutch regulator and the accompanying supervision authorities, as well as the Dutch banks, have been careful about giving access to third parties. Especially when the Dutch banks already offer a wide range of payment and value-added services to the consumers in the Netherlands. The Netherlands is one of the markets where the Account-to-Account payments exist and are widely used for over a decade. iDeal, the online payment method, based on online banking, accounts for around of 60% online transactions (e-commerce and non-e-commerce, such as billing). The user experience is convenient and is fully harmonized between desktop and mobile purchases, with possibility of mobile-based in-app authentication. The Dutch banks have been further expanding the range of payment services, for example enabling payment request via an app to consumers and small merchants and lately instant payments. The Dutch payment system is sophisticated, as the Dutch banks continue to innovate, while being kept on their toes by the Dutch fintechs, a few of which have proven successful not only in their home market, but also cross-border. We can expect the Dutch payments financial technology ecosystem to further evolve next year fostered by pandemic tailwinds.