Dutch payment processor valued at more than $15 billion in sector that has a lot of startups in the wings
Adyen IPO could unleash a backlog of fintech ‘unicorns’
Though U.S. investors aren’t able to trade shares of Adyen NV, the company’s public debut could still give an opportunity to investors interested in young financial-services companies.
Financial-technology companies have largely hesitated to go public in recent years, in part due to concerns about credit exposure. But the Wednesday IPO of Dutch payment processor Adyen ADYEN, -4.11% , now valued at more than $15 billion, may prompt peers to test the public markets both in the U.S. and abroad.
According to MarketWatch, “Having a successful company like Adyen go public gives a pat on the back to other fundamentally disruptive companies that are redoing the financial services infrastructure that’s existed for decades,” said Rohit Kulkarni, the head of research at SharesPost, which facilitates secondary transactions for shares of private companies.
Mitch Siegel, who leads the financial services strategy practice at KPMG, told MarketWatch that Adyen hits on a number of hot themes in the sector, including a global customer base and an ability to help merge the online and offline buying experiences.
“We think there are these types of players all over the globe that are going to continue to drive really high activity and acquisitions at strike prices people say are a little wild,” he said.
The financial-technology sector has the second-largest number of unicorns globally, according to Kulkarni, and the consumer-lending business in particular has a few high-profile upstarts. Among them are Social Finance, also known as SoFi, and Credit Karma. Fellow consumer-lending company GreenSky Inc. GSKY, -0.90% broke the IPO lull last month, raising nearly $900 million, but shares have budged little from their IPO price of $23.
Companies exposed to credit and lending were a concern for investors a few years back, but Siegel thinks there’s a view now that lending can be part of “business as usual.” There’s always risk of a downturn, but “it’s not like consumers are going to stop spending,” he said.
Outside the U.S., there’s Sweden’s Klarna, which counts Visa Inc. V, +0.07% among its investors. Outside of lending, there’s Stripe Inc., which was valued at $9.2 billion in the private market as of a 2016 funding round, according to The Wall Street Journal.
Profitability hasn’t always been a concern for IPO investors, but GreenSky and Adyen had the profit component in common. In the case of Adyen, the company’s record of profitability enabled it to do what few fintech upstarts could: Go public without raising money. The company’s offering consisted only of shares sold by secondary investors.
“If you’re able to self-fund growth from a highly profitable core business, that’s something shareholders love,” Kulkarni said. He argued that the threat of massive incumbents is greater for fintech companies than it is for companies in other industries, which is why investors may pay more attention to the profitability of new entrants in the payments space.
For companies that still need to raise money, profitability is still well-received.
“If you’re on a pathway to profitability and no longer burning cash, it’s a good time to go public,” Kulkarni said. Earlier this year, Klarna disclosed profit growth for the 2017 period.
Companies with global businesses should also be attractive to investors, according to KPMG’s Siegel, who noted that Adyen counted global giants like Netflix Inc. NFLX, -0.23% and Uber Technologies Inc. among its customers. Some investors viewed a bet on Adyen as a bet on the hot names that provide Adyen its revenue.
Siegel said a key question amid a potential fintech IPO flurry is “how little proof does the market need?” With Adyen, he argued, the company provided enough proof through its financial performance to justify its high valuation; shares jumped in the first day of trading.
“There might be some [future IPOs] that aren’t as successful because there’s not enough proof,” Siegel said.
He predicts the key themes of exposure to global commerce and a convergence of offline/online commerce will drive not just IPO activity, but also deals on the M&A front.
Fintech’s Adyen Shows the Long Path to Unseat Giants of Finance
According to Bloomberg, with Adyen NV almost doubling in its trading debut Wednesday and Ant Financial raising $14 billion in its latest funding round, it’s tempting to assume fintech’s rising stars are about to displace financial industry stalwarts.
Not so fast: There’s still just one such company among the 20 largest global powerhouses. And that firm, PayPal Holdings Inc., only cracked $100 billion in market cap in January — 30 months after going public and 20 years after its founding by a group that included future billionaires Elon Musk and Peter Thiel.
That’s not to dismiss the recent run of eye-popping initial public offerings like Adyen’s, which suggest it’s possible to compete with the big guys. Even after Ant Financial’s funding round gave it a valuation of about $150 billion, it still doesn’t crack the top 10, according to PitchBook Data Inc. In fact, the 2018 list of the biggest companies in finance doesn’t look all that different than it did in 2008.
Warren Buffett’s Berkshire Hathaway Inc. ranks first with a market capitalization of more than $480 billion. The conglomerate was No. 2 in 2008, behind only Industrial and Commercial Bank of China Ltd. ICBC now holds the third spot, surrounded by holdouts from a decade ago like JPMorgan Chase & Co., Bank of America Corp. and HSBC Holdings Plc.
While there has been some upheaval in the ranks, it’s resulted from self-destruction rather than usurpation. American International Group Inc.’s market cap is half as big as in 2008, before its near-collapse and government bailout during the financial crisis. Banco Santander SA and BNP Paribas SA are two other casualties of that debacle.
New entrants on the list include Visa Inc. and Mastercard Inc. Tempting as it is to christen them as the first wave of fintech disruptors, keep in mind that the two credit card companies were previously owned by groups that included thousands of old-fashioned banks.
After PayPal, Jack Dorsey’s Square Inc. is the next-biggest fintech company. The credit-card processor’s market capitalization jumped to $25 billion after its shares gained 80 percent this year.
A public offering by Ant Financial would immediately place the Chinese payments company among the world’s largest financial institutions. Founded by billionaire Jack Ma, the company was affiliated with online retailer Alibaba until 2011. Based on its latest private valuation, it’s worth more than the combined values of Goldman Sachs Group Inc. and AIG.