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As M&A plummets, VC fintech investment in the Americas on record pace

Fintech investment in the Americas dropped sharply in H1’20, driven primarily by a lack of large M&A deals. The largest M&A deals in H1’20 included a US$1.3 billion reverse merger by Open Lending and the US$700 million acquisition of AML/KYC due diligence company RDC by Moody’s.

At mid-year, M&A investment was less than US$3 billion, while Q1’20 saw the lowest quarter of M&A investment since Q1’13. The pandemic likely had M&A investors holding back, rethinking valuations.

A great growth vehicle despite COVID-19

Fintech VC investment in the Americas remained strong (US$12.9 billion), on pace to exceed the 2019 record. The US accounted for most of this investment (US$8.6 billion) as US investors see fintech as a significant growth vehicle. The payments space was the hottest sector for VC investment, with Stripe raising US$850 million, Chime raising US$700 million and B2B payments company AvidXchange raising US$388 million.

Other late-stage companies across fintech verticals also raised large funding rounds, including wealthtech Robinhood (US$430 million) and cryptocurrency company Bakkt (US$300 million).

Bar graph - Total Americas investment activity

Maturing fintechs recognize that size matters — especially now

Given the growing fintech market in the US, it’s becoming readily apparent that size matters when it comes to long-term success. In the current environment, the strongest fintechs will continue to get stronger while others struggle and run out of cash. Scale will be particularly important for fintechs in the digital banking and lending spaces as competition heats up.

In Q2’20, European challenger banks Revolut and N26 both entered the US market. Digital bank Chime’s US$700 million raise is expected to help it better compete and grow. Lending company SoFi meanwhile made a big play to expand its capabilities, announcing its acquisition of white-label payments company Galileo for US$1.2 billion.

Lemonade’s proceeds with strong IPO and reap the rewards

During H1’20, IPO exits in the fintech space, similar to IPO exits more broadly, were put on pause due to the impact of COVID-19 and its related uncertainty.  Unicorn insurtech Lemonade, however, bucked expectations with its IPO in July.  After several years of dramatic growth, Lemonade had a very strong debut on the New York Stock Exchange, rising well above its initial offering price before pulling back somewhat in the month that followed. The successful IPO may well spur other fintechs to consider possible IPOs heading into H2’20. 

Trends to watch for in the Americas

The biggest concern for many fintech investors in the Americas, particularly in the US, is the length of time it will take for the economy to recover from the impact of COVID-19. If the economy continues to stabilize, the second half of 2020 could see even stronger fintech investment. The economy, in conjunction with credit quality, could be a significant driver of fintech activity in the lending space.

Banks, many better capitalized than they were during the 2008–2009 financial crisis, will be important to watch as they could make some big investments in an effort to accelerate their digital agendas. PE money will likely also rise as investors look for opportunistic deals. 

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