Fintech: the opportunity is vast (and early)
The recent investment in GoCardless presents an opportunity to take stock of Permira’s fintech journey so far, write Andrew Young and Alberto Riva.
In the world of private equity and growth investing, you’d probably find it difficult to come across a portfolio that isn’t at least partly weighted towards digital businesses. For Permira, though, having over three decades’ experience in technology and software investing gives us a deeper perspective.
This, combined with our cross-sector expertise and global network has, over the years, opened doors to new verticals within technology – be that marketing tech, sales tech or indeed financial tech.
It has been near a decade since Permira began actively assessing opportunities in fintech - before ‘open banking’ emerged and when PayPal was a rare alternative payment method (APM) - and, for us, that opportunity only gets more exciting.
In January, Permira Growth Opportunities led a landmark funding round for opening banking payments innovator GoCardless, a London-headquartered tech business that is leveraging open banking to drive the industry forward, something the company’s co-founder and CEO, Hiroki Takeuchi, calls ‘a once in a generation shift’.
For more info on the investment, check out the press release here.
GoCardless processes $25bn of transactions a year for 70,000+ customers and has doubled its valuation in a little over 12 months. The company joins Permira’s growing portfolio of fintech businesses that are leaders in a trend that is reshaping the way people and companies transact and manage money.
We feel privileged to be supporting such category-defining businesses and management teams as they work to reshape the financial services sector.
How did we get here
This has also been quite a journey for us. Ten years ago, we were seeing a host of bank carve-out opportunities of payment companies. But rather than help the old financial services industry to wind down, we wanted to support the companies that had found a better way of doing things – the true tech disruptors.
In 2018, the Permira funds backed payments company Klarna, now a fully regulated digital bank that is on its way to being a ‘super app’ as shopping continues to surge. It has more than 100 million active users and it’s not an exaggeration to say the company is leading a cultural change in the way younger generations manage their money and expenditure. Earlier this month, the company’s CEO, Sebastian Siemiatkowski, tweeted that US app downloads of Klarna have now surpassed PayPal’s, while the number of transactions continues to shift in Klarna’s favour.
This was followed in 2020 and 2021 by investments in Clearwater Analytics and Carta respectively – fintechs that are disrupting their markets with the best cloud-based applications we have seen.
These investments are good examples of what we look for. In typical Permira fashion, when it comes to fintech we are seeking long-term growth compounders with strong unit economics, all through the lens of a product and growth-focused investment strategy – and the two go hand-in-hand. These platforms grow not because they have rights or real estate, but because they delight their customers and fulfil a need. Financial services, as a sector, is famously a poor Net Promoter Score (NPS) segment, but the best fintechs are resetting that relationship in a tremendously positive way.
There is vast opportunity, but we are very focused on particular themes of great potential.
Firstly, people have been talking about ‘the cloud’ for a long time, but only recently are we seeing cloud native platforms like Clearwater and Carta accelerate their traction to replace in-house legacy technologies that the vast majority of enterprises continue to rely on for their financial and regulatory functions. In the case of Clearwater in particular, the ‘cloudification’ of enterprise financial software is still very early.
Another theme is ‘software meeting payments’- where technology automates the payment workflow in vertical markets. This typically results in software-like metrics such as high retention combined with underlying volume growth (we call this “Saas+”). GoCardless is a great example of this. It has all the ‘stickiness’ of a SaaS model, plus a growth kicker provided by its focus on payments.
A third theme is APMs, which Klarna and GoCardless play into. Klarna‘s consumer focus highlights a growing sub-theme of the ‘great rebundling’ of financial services – starting with the wedge of BNPL, Klarna has successfully expanded into cards, savings products and shopping tools with more to come. GoCardless is redefining subscription payments by combining direct debit with open banking, resulting in higher conversion rates and lower costs for merchants.
Another important theme is the ‘democratisation’ of financial products. Carta is a good example of this – by increasing transparency and ease of use in illiquid assets, the business is on the journey to create a public marketplace for assets which were previously ‘private’.
It is difficult not to be enthused by companies that offer excellent customer experience while increasing transparency, accessibility and choice. That’s why we are committed to applying Permira’s global network and sector experience to helping these companies make finance work better, for everyone.
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