Venture capital investment in FinTech reaches record $27.4 billion high

17 April 2018 Consultancy.uk

Global investment in FinTechs by venture capital grew to a record $27.4 billion in 2017, spurred on by high deal value in the US, UK and India. Digital payments and lending services attracted the most investment capital.

FinTech (financial technology) startups continue to draw the interest of venture capital around the world. Venture capital firms and funds continue to see great potential in the disruptive FinTech firms which are providing user-friendly financial services and products through modern and innovative technology: digital payments services and online lending platforms being the foremost among them.

Confidence in FinTech has accelerated venture capital financing in the industry to a record level of $27.4 billion in 2017 – a growth of 18% from 2016. According to a recent report from consulting firm Accenture, the growth in FinTech investment has been driven by a surge in deal value in the US, UK and India.

In the US, the value of venture capital investment deals jumped 31% to $11.3 billion in 2017. Meanwhile, in the UK, deal values almost quadrupled to $3.4 billion, while India saw a near quintupling of investment to $2.4 billion in 2017. The volume of global FinTech deals also rose greatly, from about 1,800 in 2016 to almost 2,700 in 2017.

Julian Skan, Senior Managing Director in Accenture’s Financial Services practice, commented, “Much of the growth, particularly in the U.S. and UK, has been driven by big new investment flows from China, Russia, the Middle East and other emerging economies.”

Nearly US 100 billion has flowed into fintech ventures since 2010

The notable decline in investment share in the Asia-Pacific (APAC) region in 2017 is attributed to a sizable drop in FinTech financing in China, where investment declined to $2.8 billion from a record high of $10 billion in 2016. After a 2016 which boasted the multi-billion dollar financing of FinTech Ant Financial and Lufax, investors in China pulled back in terms of deal value, which declined to $19 million on average in 2017 from $186 million the year prior. The number of deals, however, nearly tripled to 146 in 2017 from 54 in 2016. And while there was a higher volume of smaller deals, there were still some fairly large FinTech deals in China, with real estate broker Homelink raising $440 million and online finance firm Tuandei raising $290 million.

Meanwhile, the growth of venture capital FinTech investment last year in the US, UK, and India included some rather sizable deals. In the US, Kabbage Inc – an online lender for small business – raised $900 million, while online lender Social Finance Inc raised $500 million. In September 2016, US-based LendingPoint managed to raise half-a-billion dollars from a credit transaction. The US continues to be an important center for FinTech development, accounting for over half of the $97.7 billion global venture capital investment since 2010.

In the UK, BGL Group – a digital insurance distributor – raised $900 million. The large deal helped push the overall value of FinTech investments in the UK to a record $3.4 billion in 2017. Digital payments company TransferWise raised $280 million in another sizable transaction.

Most fintech investments went to lending, payments and insurance technologies in 2017

In India, mobile-first financial services company Paytm raised $1.4 billion in venture capital, pushing FinTech investment levels to almost five times that of 2016. The number of deals also increased, seeing a year-over-year rise of 65%. Accenture reports that the increase in deal activity derived largely from a central bank “demonetisation” policy aiming to fight corruption. The policy banned high-value bank notes, shifting a large volume of transaction to digital payments and cashless services, including Paytm.

Accenture notes that FinTechs specialising in lending and payments services and products accounted for the bulk of US investments in 2017, swallowing up 60% of $11.3 billion. As can be seen in the above chart, the global makeup of deal value by FinTech specialisation mirrors the US situation: payments and lending firms took the bulk of the money last year, with 30% going to each; insurance-providing FinTechs took 12%.

The analysis also shows that the global volume of FinTech deals grew from about 1800 in 2016 to almost 2700 in 2017. From 2010 - 2017, the volume of deals grew at a compound annual growth rate (CAGR) of 35%.

“This volume of investment reflects the soaring demand within financial services for new digital innovations, as these technologies prove their value and applicability in the market,” said Richard Lumb, Group Chief Executive of Financial Services at Accenture. “That will continue to position FinTechs for a vital role in helping reshape the financial services landscape.”

Related: European FinTech market investment increases as market matures.

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Private equity firms ramp up sustainability focus

19 April 2019 Consultancy.uk

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.