(Almost) Daily Musings

Evening all

patience is a virtue. So they say. What this implies about German VCs and marathon notary sessions is not up for debate. But one thing is clear: Equip a notary with a shareholder agreement and a voice recorder and lullabies will have been a thing of the past.

So before listening to Reps and Warranties lulls me to sleep, I share today’s musings.

Cheers
Phil

Chart Art

Turning TVPI to DPI: Magic Tricks Coming To a Fund Near You

The transition from TVPI to DPI remains elusive, leaving limited recycling options for fresh capital. Unsurprisingly, fundraising has slowed, and the capital economy is all but circular. Alas there is an emerging silver lining: M&A activity in FinTech is heating up. A cocktail of lower interest rates and a POTUS signalling looser regulations for FinTech integration into traditional banking has bolstered corporate confidence. Some stats:

• US acquisitions of B2B FinTechs surged ~42% YoY in Q3 after several quarters of stagnation

As mentioned earlier this year in a piece on US election implications, payments and POS platforms are anchoring M&A activity, fuelled by consumer strength and falling rates:

• Projected deal count: 56 by year-end.

• Expected deal value: USD 20.2bn, representing 55.3% of total FinTech deal value.

• Notable movers:

  • Shift4 Payments made waves by acquiring AHTPOS, a POS solution leader

It’s not just payments riding the M&A wave. Accounts Payable/Receivable automation + AI = not just buzzword bingo but a deal making hotbed:

• Deal count has doubled YoY

• Players to keep tabs on: Respaid, Fazeshift, and Humanlike

Looking at who is driving this momentum in deals, I feel with the junior analysts that have hit PE desks recently:

PE buyers:

• Q3 PE buyout count surged ~77% YoY, with disclosed value reaching USD 13.8bn, compared to a quarterly average of USD 7.7bn over the last four quarters.

• While the value was skewed by two blockbuster transactions (Apollo’s acquisition of Everi Holdings and Bain’s Envestnet buyout, totalling USD 10.8 billion), the trend points to sustained interest in platform deals.

US banks are reviving their M&A ambitions:

• 2024 estimate: 12 acquisitions by the top 30 US banks (vs. 10 in 2023)

• A standout transaction: Capital One’s proposed USD 35bn acquisition of Discover, would mark a 10-year high in disclosed deal value

Key players include JPMorgan, Capital One, and BMO, who have collectively driven FinTech deal activity since 2023 with a combined disclosed value of approximately USD 62bn

Publicly Traded FinTechs — subdued confidence

While PE and banks are making moves, publicly traded FinTechs appear to have missed the memo:

• 33 acquisitions in 2024, down from the 2018–2022 annual average of 62.

• Notable exception: Visa and Mastercard are enhancing their cybersecurity portfolios with acquisitions like Featurespace, emphasizing fraud prevention and client retention.

Clouded

Equity markets are rallying, but SaaS multiples remain below their long-term averages. While this appears to signal a discount, comparing multiples to expected growth reveals a different story: relative overvaluation.

For those bracing for Thanksgiving discussions about cloud metrics, here’s your current cheat sheet (median figures):

• NTM Growth Rate: 12% (vs. 15% median LTM)

• Gross Margin: 75%

• Operating Margin: (9%)

• Free Cash Flow (FCF) Margin: 16% (boosted by deferred revenue accounting)

• Net Retention: 110%

• CAC Payback: 41 months

APAC Watch

Japan: Inflation = Hot. BOJ = Warmer

• Inflation in Japan is sitting at ~2.3%, continuously overshooting expectations.

• Traders are already pricing in BOJ rate hikes. Turns out, patience isn’t infinite—even in Japan.

  • This, after decades (since the 1990s) of the BOJ trying to resuscitate inflation. They finally got their wish. Careful what you wish for.

China: Bond Market Steam

• Over in China, bond yields have made history, with 30Y spreads reversing against Japan’s for the first time ever—diverging economic paths

• Core inflation? Barely there at 0.2%, as deflation looms

• Investors are ditching battered property and equity markets for safe-haven bonds, driving 10Y and 30Y yields lower. Deflation might be a bondholder’s dream, but it’s a nightmare for growth narratives

• The PBOC has tried pulling every lever, including a USD 1.4tn stimulus package since COVID, but the economy remains unmoved. Some might call it policy fatigue. Even that Feels optimistically phrased