Fintech & British Patient Capital: Part 2

At the end of #UKFintechWeek, we sat down with Ian Connatty, Managing Director of Funds at British Patient Capital, to hear his views on the fintech industry…

Missed Part 1 of this interview? You can read it here.

British Patient Capital has a mandate to increase investment in the UK. How do you see UK fintech fitting into that, and what challenges and opportunities do you foresee over the coming years?

The UK is a global leader in financial services and the value to the economy is over £100bn – so there’s a large addressable market for start-ups to disrupt (PDF, 312 KB). This activity is wide-ranging, covering a host of activities in which the UK excels including insurance, foreign exchange, capital markets and asset management.

Britain is also unusual in having its financial centre and technology centre co-located in London (Silicon Valley is on the other side of the country from New York, for example), so there is the opportunity for cross-fertilisation of ideas, talent, and easy access to customers.

Moreover, we have a regulatory environment that has encouraged innovation. The Financial Conduct Authority’s innovation sandbox – where start-ups can test new products with real customers in a customised regulatory environment – is used not just by UK start-ups but by companies all over the world.

In our view, it’s therefore no coincidence that financial services technology has blossomed in London. Last year the city received more VC funding than anywhere else in Europe, securing 39 per cent of all European fintech funding (PDF, 2 MB).

However, there is still the opportunity for the UK to broaden this success more widely across the country. London-based companies accounted for 80 per cent by number of investments and 90 per cent by the value of the VC capital invested in fintech last year.

At British Patient Capital – along with the rest of British Business Bank – we have a mandate to help companies ‘scale-up’ throughout all of the UK, not just in London. We hope to see exciting new fintech companies emerging around regional hubs and in centres of excellence across the nation in the coming years.

How does fintech compare to the rest of the market?

British Patient Capital is a generalist investor, having a broad portfolio across a range of sectors and stages. We believe that trends in fintech are an echo of broader market developments.

Firstly, we see a trend towards larger rounds at every stage of the VC funding cycle, but particularly in number and value of later stage rounds. In Europe, total fintech funding increased by 180 per cent between 2017 and 2018, with much of that increase driven by large M&A and later stage deals, such as Stripe, UIPath and Revolut, all of whom raised over $200m in 2018, and iZettle, who were bought by Paypal for $2.2bn (PDF, 2.1 MB). Companies are now able to raise more while staying private, allowing them to continue to scale up.

We’re also seeing the increasing presence of corporates in funding rounds. Banco Santander is one of the most active investors in fintech in Europe, and we expect this to increase as European corporates follow the lead of US banks.

As the market matures, we’re also seeing the emergence of investors with significant experience and track record in fintech. We’re seeing specialist funds forming, as well as generalists with strong allocations to fintech. We’re pleased to say that some of the most active global investors in fintech in the last five years have been based in the UK, and we hope that continues to grow over time.

Finally, we’re now seeing the first meaningful exits start to come through. Prominent examples of fintech IPOs in 2018 include Funding Circle in the UK and Adyen in the Netherlands. It’s a good sign that fintech companies now have that option, although we suspect that the availability of funds for late-stage deals mean that this will remain the minority choice for now.

For us, this raises the question of what next for fintech. It can take a long time to build a large business. Whilst the progress of the initial wave of disrupters seems encouraging, it will be interesting to see what the end game will be and just how big and how valuable some of these businesses might become. In that sense, fintech is a microcosm of our portfolio at large; balancing the need for patience with a need at some point to get cash back to investors.