While private equity buyout dealmaking shows new signs of life, certain subsectors of fintech have been especially fertile territory for PE buyers.
According to a recent PitchBook analyst note, there were 16 US and Canadian fintech buyout deals in Q1—compared to 11 deals in the same period last year—with 38% of the deals falling under the enterprise payments sector.
The fintech companies within this segment have reported strong operating performance amid high inflation.
“We believe that payments companies are likely fetching premium multiples because payments businesses have a natural embedded inflation hedge,” said James Ulan, PitchBook’s emerging technology lead analyst.
“Their revenue automatically increases as payments volume increases, given that they take a percentage of payments volume. Contrast this with traditional SaaS revenue models, where service providers have to renegotiate a larger contract with their customers.”
Notably, Parthenon Capital Partners, a middle-market firm, completed two Q1 add-on deals through platform company Payroc WorldAccess, a payment processor. The PE firm acquired Banquest Payment Systems on Feb. 1 and also expanded its market presence in Canada with its Feb. 6 purchase of SterlingCard Payment Solutions.
Ulan explains that payment businesses are able to generate an attractive EBITDA margin because processing additional payments volume requires minimal added headcount and software-based workflow tools increase their cut of the transaction.
The valuation disconnect is waning as buyers and sellers come to agree on prices, according to the analyst note, while robust customer and business spending buoys the operations of the target companies.
Featured image by JulPo/Getty Images
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