PE funds prioritise fintech, banking, NBFC investments: Grant Thornton

While the public markets have been thriving, deal-making in the financial services ecosystem has remained considerably subdued in 2023. Overall, Q3 (July-September period) saw 40 deals valued at $1.7 billion, a 30% fall in values, compared to the same period in 2022; volumes have seen a 23% decline, from 52 deals last quarter, as per the Grant Thornton Bharat Financial Services Dealtracker Report, 2023.

The report further reveals that investors are showing interest in credit-based financial companies with strong profitability indicators, but they are still hesitant to make new investments until they gain more confidence.

The mergers and acquisitions (M&A) landscape witnessed 10 deals at $1.1 billion. While volumes fell by 9% from the previous quarter, values saw an upsurge of 2,047%. Moreover, nearly 60% of M&A activities were driven in the country by investors in India, with only 40% of the balance being driven between the UK, Europe and Japan. Domestic mergers accounted for 60% of the volumes, while cross-border transactions, particularly in the inbound sector, contributed to 60% of the values in the segment, as per the report. Rapyd Financial Networks Ltd.’s inbound acquisition of PayU Payments Pvt Ltd’s for $610 million emerged as the top deal.  

Given the elevated inflation that has been experienced globally, interest rate hikes have been on an increasing trend for the most part of 2022 and the first half of 2023. Due to the food and fuel inflation, interest rates are expected to remain elevated for the foreseeable future.

Vivek Iyer, partner, National Leader Financial Services Risk Advisory, Grant Thornton Bharat, says, “As we navigate a landscape marked by increasing interest rates and global inflation, the balancing act of central banks becomes crucial to maintaining economic stability. The recent pause in interest rate hikes in India’s monetary policy meetings reflects this cautious approach, especially in the face of global uncertainties and geopolitical factors.”

Grant Thornton observes that even if fintechs are more concerned with profitability than cash burn, what stands out is that the bulk of private equity fund deals have primary investments in fintechs, banks, and NBFC—traditionally areas where capital defines development strategy.

In fact, 73% of the 30 deals that private equity completed during the quarter were in the fintech sector, with the remaining 27% of deal activities taking place in the NBFC sector, which is mostly concerned with housing, MSME, microfinance, and education.

“This shift aligns with a broader emphasis on sustainable profitability. As we navigate these dynamic economic conditions, investors are increasingly seeking clear and achievable paths to profitability in the ever-evolving financial ecosystem,” adds Iyer.

On the IPO and QIP front, two IPOs were launched, collectively valuing a substantial $186 million, marking a change in comparison to the previous quarter when no IPOs were observed. Further, the quarter saw three QIPs amounting to an impressive $1.2 billion. Notably, the banking sector played a dominant role in the QIP market, contributing a significant 54% to the overall QIP values for the quarter. This spike in IPO and QIP activity demonstrates a burgeoning investor appetite and interest in the sector’s offerings.

Moreover, three QIPs totaling a whopping $1.2 billion were approved during the quarter. With a noteworthy 54% of the total QIP values for the quarter, the banking industry clearly dominated the QIP market. A growing investor appetite and interest in the sector's products is demonstrated by the increase in IPO and QIP activity.

Recent trends further reveal that given the elevated global interest rates, global investors will continue to show increased interest in financial services, particularly lending-focused businesses with key areas for credit growth in India becoming affordable housing, MSMEs, and education. The insurance sector is also poised for growth with regulatory changes and global standards gaining prominence, although substantial investments are yet to come, says the report.

Meanwhile, investors are still drawn to fintech, but the DPDP Act of 2023 will have a big impact on data privacy, which will force financial services companies—especially those in the fintech space—to promptly reassess their operational plans.