Voice of the Industry

How private equity will drive payments consolidation in 2020

Wednesday 15 April 2020 12:30 CET | Editor: Raluca Constantinescu | Voice of the industry

Andrew Backen, Partner at Equistone Partners Europe, shares with us the key factors attracting private equity investors and elaborates on the inflow of investment from private equity firms

Note: This article was previously featured in our Who's Who in Payments 2020 – Complete Overview of Key Payment Providers published on the 16th of March 2020 and delivered by Equistone Partners Europe in February 2020. Some views might be altered in the light of the COVID-19 situation. 

2019 was a busy year of consolidation within the global payments industry, with a string of large-cap deals that included FIS’ record-breaking USD 35 billion acquisition of Worldpay. 2020 has offered no signs of a lull in M&A activity. Worldline’s USD 8.6 billion acquisition of France-based digital payments provider Ingenico, announced in February 2020, fired the starting gun on further, industrial-scale consolidation of European payments this year. 

Multiple strategic rationales have driven, and will continue to drive, the ongoing consolidation of the payments industry. Chief among these is the search for scale. Currently, the global payments market remains relatively fragmented. A clear opportunity exists to step-change the scale of businesses through M&A, perhaps to establish a leading market position. For example, Nets’ merger with Concardis Group, completed in January 2019, created a business with approximately EUR 1.3 billion of net revenue across Germany and the Nordics, making it one of Europe’s largest payments groups. 

Payments companies are also seeking assets that can diversify their customer base and customer offering, by expanding into complementary geographies and services respectively. PayPal announced two purchases in 2018 exemplifying this approach: the USD 2.2 billion acquisition of iZettle, which provided access to the company’s established POS capabilities in new markets including Sweden and Latin America, and the circa USD 400 million acquisition of the global payout platform Hyperwallet, enhancing PayPal’s suite of payment solutions for ecommerce platforms and marketplaces. 

Alternatively, payments companies might look to add entirely new, high-growth business areas through M&A, rather than developing these platforms from scratch. Visa’s acquisition of cross-border payments company Earthport in 2019 provided the US-based payments technology provider with a stronger foothold in the substantial account-to-account payments market. 

The inflow of investment from private equity firms 

These various types of strategic transactions fuelling consolidation within the global payments industry have not just been limited to large-cap acquisitions by public-market giants. The mid-market, which might be tentatively defined as comprising companies valued below USD 500 million, also continues to be very active. And a striking trend within the mid-market of the payments industry is the inflow of investment from private equity firms to drive this consolidation. 

Certain larger private equity firms do invest in large-cap transactions; for instance, the Nets–Concardis merger was backed by private equity investors Hellman & Friedman, Advent International, and Bain Capital. However, it is in the mid-market that private equity firms are perhaps most actively deploying capital to both acquire payments businesses and then support these companies with ‘add-on’ acquisitions. 

At Equistone, for example, having invested in Small World Financial Services, a leading UK-based money transfer company, in November 2018, we subsequently supported Small World with the add-on acquisition of France-based international payments company MoneyGlobe earlier in 2020. The transaction addresses two of the key strategic rationales, adding a complementary geography through MoneyGlobe’s coverage of its domestic French market and generating further scale for the business. 

In this respect, private equity is an excellent partner for mid-market payments companies seeking to grow acquisitively. Many private equity firms regularly support ‘buy-and-build’ strategies at their portfolio companies, contributing not only capital, but also their established networks for originating new deals, their financial and technical expertise, and their experience in executing M&A including post-deal integration. But if mid-market payments companies’ appetite for participating in the ongoing industry consolidation is set to continue, what factors are attracting private equity investors to help fund and drive these acquisitions? 

Key factors attracting private equity investors 

Alongside a highly amenable landscape for supporting a buy-and-build strategy, into which private equity investors can deploy their record ‘dry powder’ reserves of unspent capital that Preqin estimates at almost USD 2.5 trillion, we see three key drivers. 

Firstly, the payments industry offers the growth potential to support strong returns for private equity firms’ underlying investors. McKinsey has forecast that global payments revenues will reach USD 2.9 trillion by 2022, with cross-border payments driving this expansion and growing by 74% by 2026. 

Secondly, the industry is being transformed by ongoing digitalisation. Whilst in some sectors of payments – and countries – more traditional routes to market will endure for a long time, supporting a company through a successful digital transformation is a clear pathway to creating value. An example of this at work is Global Blue, a leading Switzerland-based international provider of traveller tax refunds. The company was acquired by Far Point for USD 2.6 billion in January 2020, having previously been jointly owned by private equity firms Silver Lake and Partners Group and, before that, by Equistone. Global Blue fuelled its growth, with EBITDA growing from circa EUR 35 million to circa EUR 97 million during the period of Equistone’s backing, in part by successfully digitising transactions such as VAT refunds. 

Thirdly, active industry consolidation and corporates’ interest in acquiring payments businesses presents private equity investors with an attractive exit environment when they seek to sell the companies in which they invest. Increasing competition on the buyside and the steadily diminishing number of high-quality assets available as consolidation rolls on both serve to support asset valuations. 

Accordingly, trade buyers from across the globe were aggressive in acquiring private-equity-backed payments companies in 2019. This ranged from US-based Mastercard buying the real-time payments arm of Nets, shortly after the company’s merger with Concardis, for USD 3.2 billion, to Ant Financial, the payments arm of Chinese internet giant Alibaba, moving into Europe through the USD 700 million acquisition of UK-based WorldFirst. 

Strategic acquisitions for a range of rationales, upward pressure on valuations, and continued investment from private equity have emerged as some of the key dynamics within the global payments industry in recent years. All indicators point to M&A continuing at pace in the coming year, as payment providers seek to raise private equity investment, drive further consolidation, and attract interest from strategic buyers. 

This editorial is also featured in our Who's Who in Payments 2020 – Complete Overview of Key Payment Providers, a report presenting a comprehensive overview of the key solution providers in the payments space, as well as educational insights into the size of the market and the development of the payments ecosystem.

About Andrew Backen 

Andrew Backen is a Partner at Equistone Partners Europe, having joined the company from PwC Corporate Finance in 2009. Andrew has a particular focus on the Financial Services sector and has worked on investments including A-Plan Insurance, Apogee, Cabot Financial, FirstAssist, and Small World Financial Services. He graduated from Cambridge University with a degree in Chemical Engineering. 

About Equistone Partners Europe 

Equistone is an independent private equity firm founded over 40 years ago. It typically invests between EUR 25 million and EUR 200+ million of equity in mid-market businesses and generates returns by supporting these companies’ growth, both organically and by acquisition. Equistone has offices in France, Germany, the Netherlands, Switzerland, and the UK, and provides its capital and the deep experience and networks of its local teams to support growing companies.

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Keywords: Equistone, Andrew Backen, private equity, payments consolidation, payments , M&A, investment
Categories: Payments & Commerce
Countries: Europe
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