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The UK has established a significant investment vehicle aimed at supporting growth-stage financial technology companies until they can go public, with the goal of enhancing the nation’s reputation as a fintech investment hub on a global scale.
Backed by industry giants like Mastercard, Barclays, and the London Stock Exchange Group, the Fintech Growth Fund plans to inject between £10 million and £100 million into various fintech firms. These firms encompass consumer-focused challenger banks, payments technology groups, financial infrastructure companies, and regulatory technology innovators.
The fund, advised by UK investment bank Peel Hunt, is designed to assist companies in the growth stage of their funding journey, particularly those seeking Series C rounds and beyond.
This initiative is a direct response to a 2021 government-commissioned review led by former Worldpay Vice Chairman Ron Kalifa. The review examined whether the UK’s listings environment was discouraging for tech firms.
“It’s definitely a start,” noted Gautam Pillai, an equity analyst at Peel Hunt specializing in fintech, during an interview with CNBC.
This move represents a rare commitment to a specialized fund exclusively focused on fintech, with backing from major industry players. While there are existing fintech-focused funds like Augmentum Fintech and Anthemis Group, the UK has yet to see a fintech-oriented fund initiated as part of a government-led strategy.
The UK has faced criticism for perceived barriers to fintech entrepreneurs, which sometimes force them to explore listings overseas. This became more pronounced after the UK’s exit from the European Union, which raised doubts about the nation’s status as a global financial center.
The London Stock Exchange has pledged to implement several reforms to encourage fintech firms to go public in the UK instead of opting for the US. This step is particularly crucial following the decision of British chip design firm Arm to choose New York over London for its listing.
“It’s about finding the next Stripe, the next Worldpay, the next Adyen,” Pillai emphasized.
The Fintech Growth Fund also boasts former UK finance minister Philip Hammond as an advisor.
Additionally, this initiative presents an opportunity for major financial institutions to tap into expertise in the development of new technologies. Established banks and financial firms are eager to advance their digital ambitions as they face competition from younger tech startups.
The Fintech Growth Fund aims to make its first investment by the end of the year, according to Pillai.
While £1 billion may not match the colossal sums being invested in fintech and tech more broadly, Pillai believes it’s a promising start.
He added that the UK is a hotbed of fintech innovation, ranking only behind the US in terms of the scale of its fintech industry. The UK is home to 16 of the world’s top 200 fintech companies, according to Statista, an independent research firm that conducted the analysis for CNBC.
The fintech industry is currently navigating a period of uncertainty due to rising inflation and macroeconomic challenges that have softened consumer spending. This has led to significant valuation drops for companies such as Checkout.com, Revolut, and Freetrade in recent months.
In 2022, the internal valuation of Checkout.com plummeted by 73% to $11 billion in a stock options transfer deal.
Revolut, a major British foreign exchange services company, saw a 46% valuation reduction (equivalent to a $15 billion markdown) by shareholder Schroders Capital, according to a filing. Atom Bank, a UK challenger bank, also faced a 31% valuation markdown by Schroders.
KPMG reports that UK fintech investment plummeted by 57% in the first half of 2023.
Pillai believes that now is an opportune time to launch a new fintech fund, as the entry level for investors to acquire positions in privately-held mature companies has significantly lowered.
“From a pure investment standpoint, you couldn’t find a better time in fintech history to start a fintech fund.”
While 2020 and 2021 saw a “bubble” characterized by sky-high tech valuations, Pillai believes that this correction has “eliminated some weak business models, but the stronger ones will survive and thrive.”
He also stressed, “There is still an active investment market in the UK. We still have one of the world’s leading financial centers, no matter what assumptions were made in the last decade or so.”
Phil Vidler, Managing Director at Fintech Growth Fund, echoed this sentiment, stating, “As a center for business—time, location, and law, etc.—those fundamentals are still here. Similarly, we’re now getting to a point where second-time founders are starting companies, and large, global venture firms touted as the best in the world are setting up here in the UK.”
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