Investments in FinTech and InsurTech remain high
FinTech firms continue to attract investment from start-ups, as new entities look for ways to disrupt current financial markets, while venture capitalists remain interested in investing in companies, although they have taken a more cautious approach. Latest figures show investment in Q2 2017 running at around $8.4 billion, around double of Q1, though still lower than Q2 2016.
The financial technology (FinTech) sector, which leverages a range of new technologies, has resulted in a number of innovative – and potentially disruptive – companies developing propositions, thanks to the continued high demand for financial services. The value of the financial services industry, coupled with the potential for capital light newcomers to bypass incumbents’ dependence on legacy systems – has opened the door for substantial digital disruption.
The size of the industry, mixed with this low-hanging fruit has led to explosive growth in creative enterprises, thanks to a potent combination of entrepreneurial engagement and venture capital (VC) investment. The market has seen ups and downs in recent years, as investors became weary of inflated promises and ultimately lower outcomes, however the latest report from KPMG into the industry, titled ‘Pulse of FinTech Q2 2017’, suggests that investment is once again on the upward curve.
The investment into FinTech firms from venture Capital, Private Equity and Merger & Acquisition deals, saw its most recent peak in 2015, at around 380 deals per quarter. Investment activity saw decline in 2016, started off at relative high levels of activity, before falling steeply in the second half of the year as wider venture capitalist concerns around valuations, among others, stemmed the market. This year so far has been off to a slow start, with relatively low values invested – but a surge in Q2 2017 saw a return to robust deal activity at around 300.
In terms of investment from venture capitalists, strategic changes continued to see shifts in terms of investment stage. Like the wider VC space, focus has shifted to late stage funding to support scale, with investors continuing to be weary of funding a large number of Angel/Seed and early VC entities. Overall however, the number of deals in the sector was relatively robust, with just under 300 deals in the latest quarter, down slightly on around 325 in the previous quarter.
Investment value has meanwhile shifted to early stage and seed/angle stage companies, with the latter increasing from $1 million on average last year to $1.3 million on average so far this year, while late stage investment averages dropped from $18 million to $12 million. This is part of a wider trend in the market that has seen investors keen to targeting their investment more strategically towards companies that are likely to generate long-term value.
Exit and type
Exit activity has remained relatively weak in the most recent period, in line with earlier trends. With around 20 exits in Q2, although up slightly on Q1 when there were 16, the relative early stage of the wider market most likely means that a relative lack of maturity is inherent – resulting in relative variable outcomes.
In terms of exits, the year-to-date so far has for the most part been to strategic buyers, with the number of buyouts down on last year, while the number of IPOs in the sector has hit levels seen in 2016. The lower level of IPOs in the segment follows a similar trend in the wider VC landscape.
In terms of value raised, the study found a considerable drop off relative to 2016, when a combination of buyouts and strategic acquisitions created the highest level of value. However, 2017 so far, pales in comparison to the total results for 2015 and 2014, both years saw more than $3 billion raised.
Commenting on the current trend in the market for FinTech, both in terms of startups and corporate activity, Ian Pollari Global Co-Leader of Fintech, KPMG International and Partner at KPMG Australia, said, "In order to compete and win in the future, financial institutions will need to become far more aggressive around reducing their cost base. This will likely drive significant corporate interest in fintechs, helping them achieve cost efficiencies through the deployment of smarter technologies within their operational and product areas.”
