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UK fintech investment drops 57% year on year

Author: ICAEW Insights

Published: 22 Aug 2023

KPMG analysis finds geopolitical tensions and tech challenges contributed to the fall in fintech investment – although British firms attracted more than half of European funding.

The UK’s fintech sector is facing a substantial setback as investment dropped to $5.9bn (£4.6bn) in the first half of 2023, marking a staggering 57% decline compared to the same period in 2022, according to a new KPMG report.

The rapid decline in fintech investment from H1 2022 to H1 2023 underscores the prevailing market uncertainty that is adversely impacting investor confidence, according to the Big Four firm’s Pulse of Fintech report, a biannual analysis of fintech investment trends. 

A combination of factors, including elevated inflation, surging interest rates and geopolitical tensions, alongside depressed valuations and a persistent lack of exits within the tech sector have cast a shadow over investor enthusiasm. The early 2023 collapse of several US banks is likely to have further deterred many investors from active engagement during the first half of 2023, KPMG warns.

The UK saw 215 mergers and acquisitions, private equity and venture capital fintech deals executed in H1 2023, reflecting a decline from the 392 deals recorded in H1 2022. 

The UK remains a global leader in the fintech space

Despite the contraction in the total number of deals, the UK maintains its status as a frontrunner in European fintech investment. Notably, British fintech firms secured more funding than their counterparts across the entire Europe, Middle East and Africa (EMEA) region combined.

Highlighting the UK’s ongoing fintech prominence, the nation secured five out of the 10 largest deals in the EMEA region during H1 2023. These included the $3.1bn (£2.4bn) acquisition of data insights company Wood Mackenzie by Veritas, a $602m (£472m) funding round for AI-powered lending firm Abound, and a $250m (£196m) investment in e-trading platform eToro. 

Other EMEA countries also attracted significant deals, including France’s $493m (£387m) investment in Ledger, Switzerland’s $299m (£234m) in Teylor and $250m (£196m) in Metaco, Sweden’s $229m (£179m) in SignUp Software, and Germany’s $152m (£119m) in Moonfare.

John Hallsworth, Client Lead Partner Banking and Fintech at KPMG UK, says: “Despite a slowdown in UK fintech investment compared with last year, the UK remains at the centre of European fintech innovation, with British fintechs attracting more than half the funding of Europe.”

To bolster the fintech landscape, the UK enacted the Financial Services and Markets Act during H1 2023. This legislation introduces a range of measures aimed at reinforcing the UK’s leadership and competitiveness across both financial services and fintech, including provisions to encourage Initial Public Offerings, progress on crypto assets for regulation to spur adoption, and the establishment of sandboxes (testing environments) to facilitate testing of emerging technologies within the sector.

Hallsworth adds: “The UK is working hard to become a leading global centre for crypto and digital assets, building on its natural advantages – the legal and regulatory environment, the availability of skills, the quality of the universities, the language and time-zone positioning. 

“While the UK may not be first out of the blocks with its crypto and digital assets regulations – they are likely come into force in early 2024 – it is working to create the right regulatory environment to support a sustainable crypto and digital assets ecosystem and make it an attractive location to participants, while also protecting consumers.”

Despite the challenges of the global fintech market, certain sectors still managed to attract robust funding. In particular, fintechs with a focus on supply chain and logistics garnered $8.2bn (£6.4bn) in funding, exceeding the sector’s 2019 annual record of $5.5bn (£4.3bn). At the same time, green fintech also saw strong interest, securing $1.7bn (£1.3bn) in funding during H1 2023, already surpassing its 2022 performance of $1.5bn (£1.1bn).

Judd Caplain, Global Head of Financial Services at KPMG International, says the fintech funding decline in the first six months of 2023 was unsurprising, given the enormous headwinds pressuring the market at the moment. 

However, the long-term business case for many subsectors within fintech remains very strong, “particularly for sectors such as payments, insurtech, and wealthtech. Once market conditions begin to even out, funding is likely to rebound – if not to the record level experienced in 2021,” Caplain says.

ICAEW’s Head of Corporate Finance David Petrie says post-pandemic normalisation was one reason for this fall in investment: “Equity investment was greatly accelerated during the second half of the pandemic. As we emerged from lockdown, a backlog of deals completed in all sectors – including fintech.”

Petrie also said that a longer-term perspective on the numbers was more meaningful in highlighting buoyancy of the sector. “The high numbers are partly a matter of fashion. Fintech in the pandemic was a very hot sector – valuations and volume were abnormally high. Adverse comparisons with deals in 2021 does seem a little unreasonable given that the UK is still very much the European market leader in fintech development and investment.”

ICAEW Know-How from the Corporate Finance Faculty

This guidance is created by the Corporate Finance Faculty – recognised internationally as a centre of professional excellence in corporate finance. The Faculty is the largest network of professionals involved in corporate finance and represents the interests of its members with policymakers and facilitates a highly effective business development network.

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