- Late-stage venture in fintech is booming
- A handful of investment trusts provide access to the market
UK fintech-focused venture capital investment hit $6.2bn (£4.5bn) in the first half of 2020, according to consultancy KPMG’s latest “pulse of fintech” report. This is a record high, both in terms of the amount raised and the number of deals in the first six months of the year. Data from Dealroom.co shows that UK fintech companies have now raised a total of $15.4bn over the past five years.
Globally, M&A activity in the fintech sector is comparable with the same period last year, while venture activity has boomed with over $52bn worth of deals in the first half. That compares with a total for the year of $44bn in 2020 and $41bn in 2019, according to KPMG.
Venture players are looking for more established companies to invest in, however. The report shows that the median valuation of a company attracting later-stage venture money is now four times higher than it was just two years ago.
The UK's advantage in the fintech sector is its talent, according to the managers of Chrysalis Investments (CHRY), which has seen its share price almost double in the last year and has a heavy weighting in fintech.
“We think the background to the current fintech opportunity really lies in the UK’s stature as a global financial leader,” say Chrysalis managers Nick Williamson and Richard Watts. “This has meant there’s been an extensive talent pool from which fintechs can recruit with knowledge of the financial sector and expertise to grow strong businesses."
The success of established fintech companies show the investor appetite for more. UK challenger bank Revolut achieved a valuation of $33bn (£24bn) in its latest funding round to become the country's most valuable fintech company. That’s a similar market capitalisation to Natwest (NWG), which had revenues of over £10bn last year, compared with £222m for the startup bank.
However, Howard Womesley-Smith, partner at law firm Reed Smith said investment in UK fintech had been too low in recent years and a splurge would lead to more success stories. Banks in particular have been too slow and are insufficiently agile to build their own fintech, which has buoyed corporate-affiliated venture investing.
But not all fintech firms have left investors flush. Last summer Revolut rival Monzo completed a funding round at a 40 per cent discount to its previous valuation of £2bn in June 2019, after the pandemic hit its growth plans.
Outside of the branch-less banks, one of the fastest-growing areas of fintech is ‘buy now pay later’, which is overhauling the traditional credit card model. Sweden’s Klarna, Europe’s biggest provider, increased its valuation from $11bn last September to $45.6bn in June, raising $1.2bn in the first half of the year. Closer to home, Zilch achieved a valuation of over $500m earlier this year following investment of $80m led by Goldman Sachs (US:GS) and Daily Mail & General Trust (DMGT).
How to access
While few of the most exciting fintech companies are listed, investors can access some of these companies via a handful of listed investment trusts. Some focus specifically on private companies, and some are so-called crossover investors, where they aim to buy late-stage private companies and own them through the listing process.
The most pure-play option is Augmentum Fintech (AUGM), which owns 22 private fintech companies across the UK and Europe. Its largest holding is interactive investor, the UK’s second-largest investment platform. The trust has a market capitalisation of £280m and its share price has climbed by a third in the past year.
Chrysalis, meanwhile, has seen faster growth by targeting later-stage ventures and aiming to own holdings through flotation. The trust, which launched in November 2018, has key holdings in Klarna, Starling Bank and Wise (WISE). While it trades on a large premium to its net assets, this is partly owing to a valuation lag as the trust's net asset value is calculated quarterly.
There are also some venture capital trusts with a high exposure to fintech. Alex Davies, founder and chief executive at the Wealth Club says one of his favourite VCTs, Octopus Titan VCT (OTV2), has 27 per cent of its assets invested in fintech. Its largest holding is Bought By Many, the pet insurance disrupter, and one of the UK’s newly minted unicorns (businesses valued at over $1bn).
Another VCT with significant fintech exposure is Draper Esprit VCT (DECC). The fund has 30 holdings, with cloud-based retail banking software developer Thought Machine, trading platform Freetrade and payment technology platform Back Office Technology among its largest holdings. It also owns PrimaryBid, which is trying to help individual investors access company fundraising and crowdfunding platform Crowdcube.
Both of these trusts are currently closed to new investors but Davies says they are likely to raise new funds before the end of the year.