How the UK’s fintech companies can attract private equity investment
6 min read
03 March 2015
The UK has proved to be a unique environment for fintech firms, with its robust financial services infrastructure and technologically advanced customer base.
Now estimated to be worth £20bn in annual revenues and employing nearly 135,000 people across the country, the UK fintech sector is booming with 24 of the most successful companies in the FinTech 50 Europe watch list based in London, now coined the financial technology capital of Europe.
In terms of funding the UK and Ireland has also become the fastest growing region for fintech investment since 2008, with deal volumes up 74 per cent annually, compared with the average 27 per cent growth that has been seen globally.
It’s a sector which LDC has always retained strong appetite for, not least given that its status as the private equity arm of a major financial services organisation provides plenty of angles including sector diligence, independently testing the potential and driving cross sell revenue initiatives for the prospect – examples of proven successes include Comdirect and more recently ULS which LDC successfully floated last year.
However, despite record levels of investment, securing private equity funding is never an easy task. Here, I’ll be sharing my views on how the UK’s growing number of fintech companies can best present themselves to attract private equity investment.
Understand where you are in your growth story
Establishing whether your company is mature enough to attract development capital is the starting point, as typically private equity firms don’t invest in startup companies. This early-stage funding is normally left to venture capital or angel investors, which specialise in providing investment for early stage firms that lack a strong track record.
Once you’ve established that private equity is the right route, be clear on what your objectives are for the funding. For instance if you’re looking to expand your business then an injection of growth capital can help provide the necessary resources to scale up new production facilities, improve critical infrastructure, increase your overseas presence or boost product development capabilities. Alternatively if you’re part of a management team looking to buy the business from existing shareholders then private equity can also help support a management buy-out and provide the necessary capital and expertise.
Professionalise your management team
Fintech companies, similar to many other growth businesses, excel as a result of the creativity and passion of their founders who have harnessed their skills and ambitions to drive the business forward. Often, particularly in the early stages, pursuing growth strategies, developing products or services can become priorities over and above maintaining sound financial records.
However, private equity firms when seeking companies in which to invest, will undertake extensive due diligence checks, accessing in detail both operational and financial performance. Therefore, strengthening your financial team to ensure they can readily provide the financial and business information private equity houses require is vital to securing their investment.
Read more about the fintech sector:
- Boris Johnson lauds fintech sector as he heads trade delegation to Asia
- British Business Bank chief: UK can steal a march with fintech
- Richard Branson invests in London fintech company TransferWise
Know your position: Traditional vs. emergent
The fintech sector encompasses varying sub-sectors, from payments to financial data and analytics, financial software to fintech platforms, but the two broadest and most commonly divided areas are traditional and emergent fintech ventures. Traditional fintech firms typically facilitate existing financial services sectors to enable them to better deliver their services while emergent firms characteristically provide new technology solutions that can often disrupt existing markets. Therefore ensure you target the private equity firm that’s right for your business model.
Assess your international scalability
Many private equity firms look to invest in quickly scalable technology businesses, which have significant growth potential and given that financial services is such a vast global market expanding internationally is a viable option for many fintech companies.
Factors to consider are whether you have a technology platform that will seamlessly work across markets and regions, whether you have completed all the significant investment to make the platform scalable, do you have strong franchising and licensing potential, which could help you scale up quickly and can the management team deliver on your expansion plan.
Plan for the exit of your private equity partner
As a captive private equity arm with no fixed fund close date we have flexibility on the duration of our investment hold but more typically private equity firms only invest for three to five years and therefore it’s important to plan for your private equity partner to exit as early as possible. This could include reviewing other peer group development capital firms or considering alternative finance, either equity or debt, and maintaining a dialogue with your corporate finance adviser to help guide you in finding a solution is paramount.
Jonathan Caswell is investment director at LDC.