PE firms are pouring money into fintechs. Here's how top firms like Blackstone and Advent are investing in the space. (2023)

  • Private equity pumped $203 billion into fintech deals last year.
  • Deals in fintech are expected to continue to increase over the next four years.
  • Insider spoke with five private-equity firms about the types of companies they are focused on.

Financial technology is a fragmented industry with plenty of room for consolidation. And private equity is increasingly moving in to help businesses scale and get in on the next batch of market leaders.

PE firms pumped approximately $203 billion into fintech across 167 transactions last year, according to the investment bank Financial Technology Partners' annual report.

Further accelerating the deal environment are startups rethinking their plans to go public. Valuations in the public markets fell in the fourth quarter of 2021 and continued to stay low into 2022, spooking some fintechs.

That's created a perfect storm for PE investors to make deals, experts previously told Insider.

Insider spoke with managing directors at five top private-equity firms about how their fintech deal teams are structured, their outlooks on the market for 2022, and what investment themes ranked high on their lists.

Here's how 5 top PE executives are investing in fintech

Advent International

PE firms are pouring money into fintechs. Here's how top firms like Blackstone and Advent are investing in the space. (1)

Advent International

Key investments in 2021: Xplor Technologies, the merger of two of Advent's payment-processing companies, Clearent and Transaction Services Group

Team leader: Bo Huang, managing director of the business and financial-services team, and Chris Egan, managing partner

Advent's first foray into fintech came during the 2008 financial crisis. Along with other PE players, Advent came to the rescue of banks by buying their noncore business units, providing much-needed capital and developing the businesses as a joint venture.

It started by acquiring Experian's electronic-payment-processing unit, Monext, in France in 2008. The experience from that acquisition led Advent to take a 51% stake in Fifth Third Bank's payment-processing unit, Fifth Third Processing Solutions, which rebranded to Vantiv the following year.

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After selling Monext to the French bank Crédit Mutuel Arkéa in 2010, Advent joined Bain Capital in taking a 39% stake in the British payment giant Worldpay from the Royal Bank of Scotland, acquiring RBS's remaining 20% stake in 2013.

Advent exited Vantiv in 2014 and Worldpay in 2017, reaping billions of dollars from their public listings in 2012 and 2015, respectively.

Advent, which has $86 billion in assets, stuck with that investment theme, in the US, for about five years. In 2017, it moved on to embedded finance, which is the integration of financial products like payment processing or lending within a company's website or app. It's a theme the PE firm continues to pursue.

Huang thinks of embedded finance as a "huge tailwind within fintech" because of how omnipresent it is in areas such as business, consumer lending, and buy now, pay later.

"It's kind of in the early-to-mid innings, and it's just becoming more prevalent across different pockets of financial services," Huang told Insider.

Advent has invested $6.5 billion in 17 fintechs since 2008. And its 12-member North American team consists of one managing partner, Huang as the managing director, two principals, two vice presidents, and six associates.

Blackstone

PE firms are pouring money into fintechs. Here's how top firms like Blackstone and Advent are investing in the space. (2)

Blackstone

Key investments in 2021: CampusLogic, a financial-aid-software company; Bright Health, a health-insurance startup; iCapital, a wealth-management-technology-platform provider; Dynamo Software, an alternative-investment-management tech platform; Beacon Platform, a risk-management tech platform for financial-services institutions

Team leader: Vincent Letteri, senior managing director in the growth-equity business

Blackstone's technology-investing team includes 12 people, from partners to analysts fresh out of college, according to Letteri. The team is spread across New York, San Francisco, and London, targeting tech deals mainly in North America and Europe.

Letteri's team is focused on four fintech trends this year: the digitization of payments, be it the move away from cash or the replacement of paper checks; software and services that support investments in alternative assets; digital substitutes for bank branches; and embedded-finance businesses that enable nonfinancial companies to offer payment options to its customers.

The $881 billion PE firm is most excited about the payments space.

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"It's a massive market in the trillions of dollars. And so you have the opportunity for many multibillion-dollar companies to sit within the payment space. Second, you have a number of large legacy players that are built on old technology, which are ripe for disruption," Letteri told Insider.

"We think there's still significant runway, and the financial models are quite attractive in those spaces. You get to profitability faster than other sectors because of the nature of the payments landscape," he added.

Blackstone started paying more attention to fintech around 2019, when it launched its growth-investments business led by Jon Korngold, which targets financial services, among other sectors.

To be sure, the firm invested in fintech before 2019, including deals for the tech and analytics provider Ipreo in 2014, the online-payments company Paysafe in 2017, and the market-data provider Refinitiv in 2018.

Its latest investments have come out of Blackstone Growth, a fund that closed at $4.5 billion last year and is not exclusive to the fintech space. Notable nonfintech investments from the fund include the dating app Bumble and the Swedish oat-milk company Oatly.

An emerging theme that Blackstone has its eye on is companies delaying going public because of lowered valuations this year. Letteri said there were a number of businesses the firm was looking at, though he declined to specify which ones.

Blackstone also has its sights set on public companies looking to go private.

"Our approach is to build long-term relationships with these businesses. So these companies aren't going to be new to Blackstone," he added.

TA Associates

PE firms are pouring money into fintechs. Here's how top firms like Blackstone and Advent are investing in the space. (3)

TA Associates

Key investments in 2021: WorkWave, a software company that offers integrated payment processing for pest control, landscaping, house cleaning, and other field services; Insurity, a software and analytics provider to insurance companies

Team leader: Roy Burns, managing director and cohead of TA's North America financial services

Fintech has been one-quarter of TA's investment activity over the past five years, Burns told Insider. The investments have stretched across healthcare, insurance, payments, wealth management, and childcare.

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Healthcare and childcare are not traditionally viewed as fintech, but TA takes notice of fast-growing companies that enable financial technology in those industries. Examples of investments include Rectangle Health, which streamlines how healthcare providers handle payments, and Procare Solutions, which serves as a payment processor for more than 30,000 preschools, day cares, and other childcare facilities.

TA, which has been around since 1968 and manages $47.5 billion, has teams in Boston and Menlo Park, California, that focus on five sectors: financial services, technology, healthcare, consumer, and business services.

"We're spending our time getting to know companies in advance of them deciding to raise capital or bring on a partner like TA," he said.

The ownership-agnostic firm is interested in controlling and minority investments.

Burns said he expected to see continued acceleration of non-financial-services companies incorporating payment options and partnering with tech companies to build software that can desegregate different business systems.

Thomas H. Lee Partners

PE firms are pouring money into fintechs. Here's how top firms like Blackstone and Advent are investing in the space. (4)

Thomas H. Lee Partners

Key investments in 2021: Odessa, a software company for lease and loan origination and portfolio management; Abacus Data Systems, also known as AbacusNext, a cloud-based platform for accounting and legal firms

Team leader: Ganesh Rao, managing director and head of financial technology and services vertical

Boston's THL, which manages $16.9 billion, has been around the investing block for 48 years but became a fintech investor in the 1990s with a stake in the consumer-credit-reporting company Experian.

The 19-member fintech-focused team has recognized five investment themes within the industry: insurance technology, wealth-management tech, business-management software with integrated payments, software for chief financial officers, and banking software.

For 2022, the firm sees the most growth opportunities in insurance tech, integrated payments, and software for chief financial officers, Rao told Insider.

"We built up a really good pipeline," he said of THL's fintech deals.

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Despite not having funds particularly focused on fintech, THL has been investing out of its vintage Automation Fund that closed at $900 million in 2020 and its ninth flagship fund, Fund IX, that closed its fundraising at $5.6 billion in October. Within fintech, THL has invested $3.5 billion in nine companies over the past six years.

Like Blackstone, THL is also interested in firms reconsidering going public this year.

"Some companies that were not investable from our perspective from a valuation standpoint are potentially getting to a place where we could find it more interesting, and it could create opportunities," Rao said.

Warburg Pincus

PE firms are pouring money into fintechs. Here's how top firms like Blackstone and Advent are investing in the space. (5)

Warburg Pincus

Key investments in 2021: Beacon Platform; Clearwater Analytics, business-management software for financial institutions

Team leader: Cary Davis, managing director of technology investments

This New York firm manages more than $73 billion in assets and has eight technology professionals, including four partners, tracking fintech opportunities across capital markets, consumer banking, lending, and insurance technology.

Within each track, Warburg Pincus found its calling with nonfinancial companies that have embedded finance and cloud-based software and represent the next generation of consumer finance.

"The SaaS-ification of capital-market solutions is something that we continue to look at. There might be some buyouts in that space of some chunky things that are legacy," Davis told Insider, referring to software as a service.

To be clear, Warburg Pincus is more focused on making growth investments in new companies in that space.

Davis also said his team was looking at a number of names in the retirement space, as an increasing number of Americans are set to hang their hats up in the coming years.

But Warburg Pincus isn't interested in the consumer-facing companies that grab headlines. It wants the business-to-business companies because they are more profitable and have longevity.

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Warburg Pincus has invested nearly $6 billion in fintech globally from various funds.

FAQs

How does a private equity fund work? ›

Similar to a mutual fund or hedge fund, a private equity fund is a pooled investment vehicle where the adviser pools together the money invested in the fund by all the investors and uses that money to make investments on behalf of the fund.

How much is PE dry powder? ›

How much private equity dry powder is there? Dry powder in private equity sits around $1.2 trillion as of Q3 2022, according to Pitchbook. Its current rate is down slightly from its previous record, $1.8 billion, at the beginning of 2022.

How are private equity funds structured? ›

Private equity firms are structured as partnerships with one GP making the investments and several LPs investing capital. All institutional partners of the fund will agree on set terms laid out in a Limited Partnership Agreement (LPA). Some LPs may also ask for special terms outlined in a side letter.

How do you value early FinTech? ›

Quantitative data such as financial and operating metrics have significant weight in estimating a FinTech company's enterprise value. Key performance indicators such as revenue, expenses, profitability, growth, customer acquisition costs, and customer lifetime value have a key role in the company's value estimation.

How do PE funds make money? ›

Private equity firms buy companies and overhaul them to earn a profit when the business is sold again. Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by debt.

What is the difference between a hedge fund and private equity? ›

Hedge funds are alternative investments that use pooled money and a variety of tactics to earn returns for their investors. Private equity funds invest directly in companies, by either purchasing private firms or buying a controlling interest in publicly traded companies.

What is dry powder in PE? ›

What is Dry Powder? Dry Powder is a term referring to capital committed to private investment firms that still remains unallocated. Under the specific context of the private equity industry, dry powder is a PE firm's capital commitments from its limited partners (LPs) not yet deployed into active investments.

Does PwC do private equity? ›

Through one team, PwC provides private equity clients with a single point of access for wide-ranging solutions to challenges at every level of their private equity business.

What is a dry close in private equity? ›

Dry-closing, or a "dry close" is when a fund closes on the investor commitments to the fund, so the LPs are contractually bound to provide their capital commitments, but the GP does not make an initial capital call for a period of time.

Who is the founder of FinTech? ›

KP Atluri - Founder CEO - FinTech Group | LinkedIn.

What is FinTech business model? ›

A FinTech business model is a business plan for a financial technology company that comprises an operational strategy, income sources, and target client base. FinTech firms often take an inclusive approach to finance, allowing customers convenient access to a diverse variety of financial services and products.

How much does it cost to start a FinTech company? ›

The minimum share capital of a Payment Terminal Services Provider company is N100 Million. An application must be made to the CBN with all accompanying documents. The application fee is N100,000 while the licensing fee is N1 Million.

How much money do you need to start a private equity firm? ›

Another important factor to consider is a firm's minimum investment requirement. Historically, the standard minimum investment amount for private equity has been $25 million.

What happens when private equity buys your company? ›

When a private-equity firm (PE) acquires a company, they work together with management to significantly increase EBITDA during its investment horizon. A good portfolio company can typically increase its EBITDA both organically and by acquisitions.

Where do private equity firms get their money? ›

Private equity firms raise money from institutional investors (e.g. pension funds, insurance companies, sovereign wealth funds and family offices) for the purpose of investing in private businesses, growing them and selling them years later, generating better returns for investors than they can reliably get from public ...

Why does private equity make so much money? ›

By contrast, private equity firms make money by exiting their investments. They try to sell the companies at a much higher price than what they paid for them. The profits are then divided up based on a distribution waterfall.

Can you make a lot of money in private equity? ›

Private equity is a very lucrative career. As an asset class, private equity has enjoyed tremendous success over the past decade. Investors around the globe continue to pile their money into private equity firms.

Do private equity firms invest in startups? ›

Private equity firms tend to buy well-established companies, while venture capitalists usually invest in startups and companies in the early stages of growth. Typically, private equity firms will seek out companies that are already mature but on the downturn due to some inefficient management.

Who makes more money PE or hedge fund? ›

Hedge fund compensation is more variable than private equity salaries + bonuses, but at the junior levels, you'll most likely earn a bit more in private equity. At the top levels, a star hedge fund PM who has a great year could easily earn more than an MD in private equity – depending on the fund size and structure.

What is the biggest hedge fund in the world? ›

1. BlackRock Advisors. BlackRock (BLK) is a New York-based investment manager that manages trillions in assets. The largest BlackRock entity, BlackRock Fund Advisors, has been in operation since 1984 and oversees $1.9 trillion in assets.

Is hedge fund better than investment banking? ›

A hedge fund offers the product that high-net-worth investors purchase. An investment bank offers the services for how they can invest. A hedge fund offers people the chance to invest in a portfolio, with returns based on how well the portfolio's underlying investments do.

How much do you need to invest in private equity? ›

The minimum investment in private equity funds is relatively high—typically $25 million, although some are as low as $250,000. Investors should plan to hold their private equity investment for at least 10 years.

What is private equity for dummies? ›

Private equity, in a nutshell, is the investment of equity capital in private companies. In a typical private equity deal, an investor buys a stake in a private company with the hope of ultimately realising an increase in the value of that stake.

How do private investors get paid? ›

Part of the returns for investors in private equity is through receiving dividends, much like shareholders of a public company do. This process is known as dividend recapitalization and involves the process of raising debt to pay private equity shareholders a dividend.

Why do people go into private equity? ›

Investors seek out private equity (PE) funds to earn returns that are better than what can be achieved in public equity markets. But there may be a few things you don't understand about the industry. Read on to find out more about private equity (PE), including how it creates value and some of its key strategies.

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