link group’s 2019 · 2020-03-28 · 4 • link corporate markets london’s role as hub of global...

Link Group’s 2019 FinTech Funding Report December 2019

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London’s role as hub of global investment is vital to FinTechs. Link Group’s 2019 Fintech Funding Report explores the state of play of the UK’s FinTech landscape, various funding options and the benefits of listing on London’s prestigious stock exchanges.

Political uncertainty and a weaker economic outlook in 2019 have undoubtedly had an impact on market conditions. This report assesses the level of 2019 FinTech listings, with notable recent examples, and key areas of consideration for funding growth in this unprecedented economic climate.

Introduction

A framework for FinTech growth

The UK sits at the heart of global financial markets. And boasting an enviable pool of talent, supportive regulation and infrastructure, it has proven to be a breeding ground for disruptive UK FinTech businesses, as well as a magnet for overseas FinTech companies seeking international investment to grow.

The ongoing success of this sector on the global stage is also down to the eco-system designed to support the growth of early stage companies; the UK possesses a series of networks and programmes designed to help FinTechs thrive. Whether providing mentoring, legal advice, office space or access to professional contacts, incubators and accelerators provide vital support for early-stage FinTech companies. There are now estimated to be 186 separate accelerators in the UK, and 205 incubators, all supporting fledgling tech companies’ growth and prospects of securing additional funding. As a result, there are now an estimated 1,600 FinTech companies within the UK1.

These high-growth companies are typically cash-hungry, rather than cash-generative, in their early stages, requiring ongoing funding to support their development. London’s role as hub of global investment is therefore vital. In fact, according to analysis by London & Partners and Innovate Finance, London is now the top location for the number of FinTech investment deals globally, with 114 in the first eight months of 2019. These secured a total of more than $2bn in funding in 2019 for London-based FinTech firms. A notable example includes the $800m funding from SoftBank for supply chain finance lender Greensill, the largest FinTech funding round in the world so far in 2019. Such a supportive framework has underpinned the number of FinTechs undertaking an IPO in London since the financial crisis.

1 Department for International Trade, UK FinTech State of the Nation report, 2019

1600+FinTech companies in UK

114FinTech fundraises in 2019

More than $2bninvested

Nearly £6bn

raised by FinTech IPOs in last decade


As this rapidly growing sector has matured, a number of FinTech companies have turned to London’s stock market to secure additional funding, broaden their investor-base, or provide an exit for founders or early-stage investors. This hit a recent peak last year, with seven FinTech initial public offerings (IPOs), the most on record, raising a total of £1bn.

02011 2013 2014 2015 2016 2017 2018 2019

Volume of FinTech IPOs

1

2

3

4

5

6

7

8

£-2011 2013 2014 2015 2016 2017 2018 2019

Total money raised in FinTech IPOs (£m)

£500

£1,000

£1,500

£2,000

£2,500

£3,000

In the last decade, 25 FinTech companies have undertaken an IPO, whether on the Main Market, or the Alternative Investment Market (AIM). Collectively, these companies have raised £5.9bn through their listing.

AIM vs Main Market

AIM is the more favoured market, accounting for nearly two thirds of FinTech IPOs. As one might expect, those companies admitting to trading on AIM are typically smaller, and raise smaller sums. With its less onerous regulatory requirements, as a market it is often more suited towards smaller companies at the earlier stages of their lifecycle than those admitted to the Main Market. On average, £31m has been raised by FinTechs per AIM IPO, with companies valued at an average of £133m.

The state of play for FinTech listings in the UK

Dividend misconception

There is a misconception that because FinTechs are typically high growth companies, they are not inclined to pay dividends. This is not the case across the board. In fact, 40% of FinTechs that have listed on the Main Market in the last decade have paid dividends to investors, contributing a total of £249m. Those that pay dividends commenced doing so within a year of listing. The proportion of dividend payers is naturally much lower on AIM, as these companies tend to require more funding, rather than being in a position to return capital to shareholders.

Paying a dividend allows these companies to appeal to a wider investor base, whether institutional or high net worth investors. It also helps investors understand a company’s value. As listed FinTechs mature and grow, becoming more cash generative, and a greater number list, we can expect them to become a growing component of the UK dividend market.

Proportion of FinTech listings on each market in last decade

AIM60%

Main Market

40%

MainMarket

AIM

0 100 200 300 400 500 600

Average amount raised via FinTech IPO (£m)

On the Main Market, the typical amount raised stands at £544m, with World Pay and Network International the largest examples of recent years. These two collectively raised £3.7bn, and comfortably achieved ‘unicorn’ valuation status. The average company valuation is much larger too, standing at £1.4bn at IPO, reflecting the larger-scale and later-stage companies that would opt for the Main Market, rather than AIM.


IPO activity has notably slowed in 20192. Just two IPOs have taken place in the FinTech space – those of Network International and Finablr. These international payments companies collectively raised £1.5bn through their IPOs. This compares to the seven undertaken in 2018, featuring peer-to-peer lender Funding Circle, and online stockbroker AJ Bell.

The slowdown in activity matches wider IPO activity in the UK, as political uncertainty and a weaker economic outlook has weighed on the UK stock market, dampening demand for IPOs. On top of this, notable issues with the potential IPO of WeWork, and the performance of recently-listed companies such as Uber have weighed heavily on IPO activity at a global level. As a result, in the UK there have only been seven new listings on AIM in 2019 to date, and a further 21 on the Main Market, with several companies delaying or cancelling planned listings, such as Swiss Re pulling the flotation of ReAssure, its life insurance business. This compares to 42 and 40 respectively in 2018 as a whole.

Given the dampened investor sentiment at present, and following several well publicised post-IPO performance issues including Funding Circle and Aston Martin, it’s understandable that IPO activity among FinTechs has paused for breath. Kazakh FinTech group Kaspi.kz is a notable example, recently postponing an IPO that would have valued the company $5bn, citing “uncertain market conditions”. Some companies also elect to stay private for longer to hold out for a higher valuation on IPO. For instance, in June, Revolut stated it would not undertake an IPO until it was valued at $20-40bn. Other companies may wait to improve their profitability, so as to demonstrate a more compelling case to investors when they do list.

Assessing alternatives

Rather than undertaking an IPO, FinTechs that want to stay private will often target late-stage funding instead from venture capital trusts or private equity firms. TranserWise is a good example. In May, it issued $292m worth of private shares to the likes of BlackRock, Lead Edge Capital, Lone Pine Capital and Vitruvian Partners, allowing early-stage investors to exit or reduce their holdings. Indeed, private equity remains very active in this space. In Europe, private equity firms invested $1.2bn in FinTech companies in the first half of 2019 alone.3

2 Please see methodology for more detail on definition of FinTech. 3 KPMG, The Pulse of Fintech 20194 ONS, Ownership of UK quoted shares 2016 (latest data available)

Other options include acquisition or investment by established financial services players. For instance, Santander recently bought a £350m stake in Ebury, the London-based FinTech that specialises in FX and trade finance for SMEs. For the larger-scale company, this approach allows it to benefit from the innovation and disruption the FinTech brings, rather than be challenged by it. For the FinTech these deals can bring fresh capital, as well as allowing them to leverage the reach and customer base of the larger party in the transaction. Nonetheless, neither of these options preclude an IPO at a later date.

The benefits of listing: building out an investor base

London has long been a hub for international investment, and its stock market reflects this. International investors hold 54% of the value of the UK stocks.4 That is one of the key reasons FinTechs choose to list in the UK. Both domestic and overseas companies are able to appeal to a broader range of investors, frequently reflecting the international nature of their businesses and growth strategies.

Conclusion and outlook

While prevailing market conditions have dampened enthusiasm in the short-term, the pipeline of high-quality FinTechs being developed in and moving to the UK remains strong. London remains a global leader. Given the fundamentals that support both the UK as a global financial hub, and its FinTech sector’s growth, this pipeline will only strengthen in the future.

This will inevitably lead to a resurgence in IPO activity, especially when we see greater political clarity, and stability in financial markets. It is a case of when companies list, rather than if. A return to the average of the previous 5 years would see the number of FinTechs choosing to issue double in 2020.

FinTech IPOs pause for breath as wider market struggles


Case studies: IPOs in practice

Finablr is a global platform for payments and foreign exchange solutions with capabilities spanning the full spectrum of the payments value chain, from origination and processing to distribution, all attuned to market nuances and regulatory requirements. Through its portfolio of category renowned brands, which includes Travelex, Xpress Money, and UAE Exchange, Finablr serves more than 23 million consumers and over 1,500 corporate and institutional partners.

In its successful IPO in May 2019, it raised more than £300m, despite challenging market conditions, valuing the company at £1.2bn.

Investment platform AJ Bell was co-founded by Andy Bell in 1995. It administers over £46 billion on behalf of almost 200,000 customers. It operates in both the advised and direct-to-consumer parts of the of the investment market through two distinct platform: AJ Bell Investcentre and AJ Bell Youinvest.

Its successful IPO in 2018 valued the company at £651m at the start of trading. It has subsequently seen its value rise to £1.6bn, marking it as one of the most successful IPOs of recent years.

AJ Bell included a retail share offer to existing customers, allowing them to invest in the business, as well as a share offer to employees.

The move was designed to improve AJ Bell’s profile, and allowed founder Andy Bell to cut his stake in the business, as well as several key financial backers, such as Invesco, to extract capital.

Following its successful IPO, positive share price performance led AJ Bell to join the FTSE 250 in March. Its share price is currently 38% above its price at IPO1.

1 As at 18th October 2019.

Founded in 2008, Boku provides online mobile payment services. It develops an accessible platform for consumers, merchants, and carriers for payment transactions through mobile phones.

Despite being founded and incorporated in the US, Boku elected to float in the UK, admitting to trading on AIM in November 2017. The company believed AIM to be the most appropriate market for its size, ensuring it generated stronger attention from investors and analysts than it might do on US exchanges.

CEO Jon Prideaux noted that Boku had “been through several rounds of venture-backed funding - up to series D-2 and a convertible note”, creating “a pretty complex capitalisation structure”. Floating gave Boku “the chance to simplify things and gain access to a new tranche of investors, right at the time when the company was becoming profitable… and its growth more predictable.”

It raised £45m from the IPO, a third of which was used to strengthen the company’s working capital position and invest in product development. Despite volatility at the turn of the year, Boku’s share price is still 67% higher than at IPO1.

6 As at 18th October 2019.

Finablr

AJ Bell

Boku


IPO considerations

For those FinTech companies considering an IPO, it can be bewildering to know where to start. However, there are several key questions ahead of the journey towards becoming and operating as a publicly listed company that can help shape a successful market debut.

Have you appointed the right advisers?

Is your corporate governance up to scratch?

The IPO process is a complex legal, financial and organisational undertaking, requiring expertise of specialists who have undertaken similar transactions in the past. So selecting the right support is vital. The right advisers will not only be sources of expertise and experience, they will make the process easier for you.

Professional advisers required include legal advisers, sponsors or NOMADs (typically an investment bank or broker), underwriters, reporting accountants, financial PR, and brokers. For listing, a company will also need a share registrar to support your shareholders, maintain your register oversee AGMs, and manage dividends. [Advisor rankings guide provides comprehensive list of top advisors]

Pre-IPO planning

Those companies seeking to achieve a successful IPO are required to confirm the suitability of their governance structures. But good corporate governance is more than a box-ticking exercise. It is of paramount importance to investors’ decision-making, and a core part of a company’s risk management.

Demonstrating best practice ahead of an IPO is vital, and time should be dedicated to this early on. For instance, has the company appointed an appropriate board of directors, recruiting suitably qualified non-executive directors well ahead of IPO? Does your company have a compelling CSR strategy for investors? Are there clear processes in place for monitoring directors’ conflicts of interests? What steps have you taken to ensure Board and committee meetings run smoothly? All of these considerations help investors determine how risky it is to invest in your company.


Are you planning to list on the right market?

Choosing which listing regime you will adhere to or which market your shares will be traded on will be one of the most important choices you make on your IPO journey. There are several options available ranging from a Premium Listing with admission to trading on the Main Market, to admission to AIM, and each option entails differing governance and transparency requirements.

There are two segments of the Official List within which a company can choose to list: Premium, or Standard and there is the LSE’s growth market, AIM, which does not require entry into the Official List. Premium Listed companies are required to meet the UK’s super-equivalent rules which are higher than the EU minimum requirements and some of the most respected governance standards in the world. A Standard Listing requires that companies comply with the EU minimum standards, while AIM requirements are designed to accommodate younger and smaller growth businesses.

It should not be forgotten that investors take comfort from corporate governance and high disclosure standard, for this reason a Premium listing, while more onerous, may drive greater institutional interest and higher valuations.

Do you have a compelling case for investors?

Investors will want to understand your equity story, where you plan to take the business, how it will grow and how it will deliver profits in the future. You will have to produce an approved prospectus or admission document, which is mandatory for admission to the stock market. This features company financials, reasons for the IPO, risks associated with investment in your company and details of the offer itself and it will be presented to potential investors. Your prospectus or admission document should be considered a regulatory requirement but you should not lose sight of its use as a powerful marketing tool, allowing the company to make a detailed and compelling case for investment.

Ahead of an imminent IPO, investor road shows are a common means of stimulating demand among institutional investors. The roadshow provides an opportunity for senior management to deliver their ‘elevator pitch’ to stand out in a competitive market. A convincing narrative can bolster investor sentiment, lower perceived risk of investing at IPO, and therefore, increase the final valuation. While these road shows will often be an intense 1-2 week period, requiring the attendance of senior management, the preparation that goes into the content and targeting appropriate investors is a longer process still.

Have you thought about investor engagement?


Life after IPO

Are you ready for life as a public company?

How will you manage dividend payments?

Should you go digital?

How will you manage investor relations communications post IPO?

Have you considered how you will manage your shareholders?

Once a company is publicly listed, it must fulfil all the regulatory and reporting obligations of a listed company. That means keeping shareholders, regulators and the stock market informed of corporate developments. Disclosures can include annual and quarterly reports, shareholder meeting results and ad-hoc disclosures such as managers’ transactions or significant shareholder disclosures.

The IPO can frequently be seen as the key event in an investor relations campaign; it is only the start. This means an aftermarket investor relations campaign is crucial, ensuring continued engagement. This will include a strategy for proxy solicitation for key shareholder votes and corporate actions, share register analysis to inform overall strategy, as well as an engagement strategy with sell-side analysts to ensure your company receives ongoing coverage, and analysts understand your strategy and narrative.

Operating as a public company is not without administrative requirements that are far different from those as a private business. For instance, a publicly listed FinTech will need to manage its register of shareholders using a registrar, allow shareholders to access and monitor their shareholding, and issue share certificates.

Those companies electing to pay a dividend will also need to manage the process, ensuring the correct shareholders receive the appropriate funds. This includes those shareholders who have opted for a dividend reinvestment plan – an offering that can boost shareholder loyalty and reduce the need for additional spend on printing and mailing dividend cheques. In 2018, Link distributed and calculated more than seven million dividend payments to shareholders on behalf of listed companies.

When considering dividend payments, listed companies also face the option of delivering their dividend payouts electronically, rather than by cheque. For a FinTech, this is likely to prove popular - embracing technology to provide a sustainable, secure, and efficient method of payment.

Digital disruption is not limited to dividend payouts. A newly listed company will need to host AGMs, an event that can be augmented by technology. Hybrid AGMs marry physical events with web-based technology. For FinTechs with an increasingly global reach and shareholder base, this can encourage greater shareholder attendance and engagement.


Accelerator

A scheme or programme designed to aid the rapid growth of selected new small businesses. These are typically more suited for companies that are more developed than those appropriate for incubators.

AGM

Annual general meetings are mandatory events for a listed company’s shareholders, in which the directors present the annual report regarding a company’s performance and strategy.

AIM

The Alternative Investment Market (AIM) is the London Stock Exchange’s international market for smaller growing companies. A wide range of businesses including early stage, venture capital backed as well as more established companies join AIM seeking access to growth capital.

Main Market

The Main Market is London’s flagship market for larger, more established companies. It is home to some of the world’s largest and most well-known listed companies.

Incubator

Incubators assist companies at a very early stage. They are collaborative programmes to support start-ups by providing a space to work, seed funding, mentoring, training and other benefits.

Initial Public Offering

The offering of shares of a private company to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors, and allows existing shareholders to sell their shares.

Private Equity

Private equity consists of capital that is not listed on a public exchange. It includes funds and investors that directly invest in private companies, or that engage in buyouts of public companies.

Venture Capital

A form of private equity and a type of funding typically provided to start-ups and early-stage companies with high growth potential.

Glossary of terms

Methodology:

Link’s research team has analysed listings across the London Stock Exchange, identifying companies that refer to themselves or are commonly referred to as FinTechs, and those companies that typically use technology to improve or automate financial services.

Statistics regarding the amount raised by IPO by fintech companies is based on LSE data and includes money raised through primary and secondary share sales. Dividend data is taken from Link Group’s quarterly UK Dividend Monitor.


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link group’s 2019 · 2020-03-28 · 4 • link corporate markets london’s role as hub of global...

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