Introduction

The digital ecosystem has transformed the global financial landscape in 2022. As part of the trend of collaboration and partnerships that has emerged during this transformation, mergers and acquisitions have risen considerably in the Financial Technology industry.

Over the last few years, private equity firms have been priced out of deals from strategic buyers that were willing to hand over significant multiples. In 2023, we predict it is likely that private equity firms will make a return and re-establish their presence amongst M&A activity, as valuations have come down.

When it comes to specific sectors, Blockchain, Payments and ESG software are predicted to remain the most active subsectors this year.

As seen in our latest Financial Technology report, in 2022, the ‘Payments’ subsector accounted for the majority of the deals overall (18%), closely followed by ‘Banking Software’ (16%). Strategic buyers remained the remained the largest category of acquirer representing 87% (2021: 89%) of transactions. The geographic mix was like the prior year with roughly 45% of all buyers headquartered in North America and 41% of transactions being cross-border.

In 2023, we predict that strategic buyers will continue to drive most transactions, as they look to expand their capabilities and offerings through M&A.

Algorithmic Trading Partnerships are on the Horizon

The penetration of modern technologies and the proliferation of developing economies has led to the increasing use of automated algorithmic trading platforms, thus changing the way of traditional investment models or trading methods.

Algorithmic trading solutions are not differentiated by their investment in switches and routers infrastructure, but rather by their ability to leapfrog the competition and deliver innovative techniques designed to deliver performance alpha for their clients. Differentiation can come from several elements, such as employing the latest innovative techniques or intellectual property, leveraging a firm’s own proprietary internal data, or harnessing and accessing a firm’s own unique natural liquidity.

Algorithmic platforms that embrace change through financial technology partnerships will be better able to stay ahead of the technology curve compared to those that remain shackled to the legacy infrastructures of past generations. Banks and brokers must form more partnerships with FinTech specialists to leapfrog the intensifying competition in innovation and deliver improved execution performance outcomes and alpha for clients.

Acquisitions in this vertical include that of Algomerchant, a developer of an algorithmic trading platform designed to provide fully AI-driven services for stock traders and portfolio managers by Two Alpha.

A Continued Interaction between EHS and ESG

Verdantix’s Green Quadrant: EHS Software 2023 survey shows that the EHS software market had more than 50 transactions in the past two years and predicts that it’ll grow from $1.6 billion in 2022 to around $2.7 billion by 2027.

Most measurable metrics in ESG are reported by EHS professionals and put EHS professionals at the forefront of the company. Hence, it can be expected that as ESG gains more value for both internal and external stakeholders in the future, causing businesses to make long-term commitments to ESG targets, EHS issues will become more material to business leadership. More capital spending will be put into solutions and technologies used by EHS managers to monitor and report complete, accurate, and timely ESG/EHS metrics such as greenhouse gas emissions and possible hazards. More investment will also be put into training EHS managers and hiring seasoned EHS professionals to stay current.

Acquisitions in this vertical include that of Canada based Frostbyte Consulting, a provider of consulting services focused on environmental, health and safety (EHS) and quality business information by J.S. Held. Similarly, ProcessMAP, a software platform for environment, health, safety, sustainability and compliance information management was acquired by Ideagen.

57% of EHS decision-makers strongly agree that they will be driving ESG initiatives during the next two years.

Public Markets Overview – Review of 2022

The aggregate market cap for our selected public companies in the sector saw their aggregate market capitalisation decline by $130bn. Publicly traded Financial Technology companies and indices underperformed against both broader financial services and technology in 2022.

A vulnerability to higher interest rates, the disappearance of many pandemic-era catalysts and a more general reckoning for companies that followed ‘growth at all costs’ playbooks contributed to the fall from growth of many Financial Technology valuations.

A myriad of stakeholders including public companies with large balance sheets, private equity with dry powder and traditional financial services companies will be on the lookout for FinTech assets at a discount in 2023.

M&A as a Growth Strategy

Overall, 2023 looks to be another active year for M&A and we are here to help you navigate through the process. To find out more about Financial Technology M&A, view our latest reports here.

If you are considering M&A as a growth strategy for your business, get in touch with one of our specialist M&A Advisors for a complimentary discussion.