Value Creation Playbook for VC/PE owned payments and fintech companies

Value Creation Playbook for VC/PE owned payments and fintech companies

Martin Koderisch
January 31, 2023

Investors know that being actively involved in ownership can greatly influence the overall success of an investment, and in the current economic climate, it is more critical than ever for private equity firms and the management teams of their payments and fintech portfolio companies to align on value creation initiatives. The stakes are of course much higher now. Investment climate is no longer rewarding the ‘growth at any costs’ strategy and mindset that dominated the sector for past decade. Instead, private equity and portfolio management teams are under increasing pressure to identify and execute more profitable growth pathways. In this article, we outline our approach to value creation at VC/PE owned payments and fintech companies.

Payments And Fintech Expertise Driving Value Creation

Our approach to value creation combines our deep experience and expertise in the payments and fintech industry with the more common value driver maximisation framework. That is to develop value creation plans that seek to either accelerate top line revenue growth, expand profit margins, or thirdly expand valuation multiples. Often of course these objectives are interconnected. In our experience, the continued evolution of the payments and fintech sector offers significant scope to develop value creation plans and initiatives that drive all three outcomes.

Value Creation Objectives

For example, a typical investment thesis for value creation rests on a build-and-buy and business model transformation strategies that seek to build new payments or fintech business areas often by shifting or repositioning the core business into new areas of the payment or financial services value chain, and enter more regulated activities through add-on acquisitions or strategic partnerships with enabling providers. These are powerful value creation strategies. They are by definition transformative, resulting in transformational revenue growth, margin growth and most importantly expansion of valuation multiples.

Multiple expansion make a significantly greater contribution in buy-and-build deals than in standalone deals. However, buy-and-build deals in the payments and fintech industry are harder to pull off and sector expertise and operational experience are critical to driving success.

Strategic and Operational Levers to Drive Growth, Transformation and EBITDA Margin

We leverage our industry experience to evaluate value creation opportunities in the core business. To accelerate the process, we leverage a menu of initiatives that we typically see across payments and fintech companies, and tailor these to the individual situation at hand. This process typically yields low-hanging fruit to immediately work on and score quick wins. The below list of value creation drivers is illustrative and will vary considerably from one situation to the next.

  • Organic growth in adjacent markets: Identify, evaluate & prioritise new pockets of growth in adjacent markets as well as new geographic market entry and internationalisation
  • Accelerate and reinvigorate stalled growth: Optimise GTM planning and execution through commercial excellence, sales force effectiveness through better alignment of marketing, sales and partner channels
  • Customer retention and cross/up sell - Maximise overall revenue per customer focusing on customer retention and cross/up sell
  • Customer centric GTM planning - Disciplined planning and prioritisation based on deeper market understanding, segmentation, clear definition of ideal customer and alignment with value proposition  
  • Business model & transformational growth - Develop new capabilities to build entirely new lines of business through strategic partnerships and add on acquisitions.
  • Monetization & pricing - Review monetization options, optimise price levels and develop new pricing structures including better alignment with product bundles and consumption
  • Product innovation - Drive digital transformation programmes, build new products and customer experiences, and commercialise data and ever deeper AI/ML driven technology
  • Payment optimisation - Examine the full potential of payments from issuing including white labelling, co-branding cards, loyalty programmes, open banking, and wallets
  • Payment partner strategy - Uncover opportunities to reduce acceptance costs by optimising supplier relationships and partnerships including card networks, acquirers, gateway providers, PSPs and others to drive cost savings and efficiencies through better contract negotiations & RFPs
  • Operational efficiencies - Adopt a holistic view of payment acceptance and other related costs to benchmark and identify areas for improvement
  • Product portfolio optimisation - De-prioritise and sunset products and taper / scale back investments and costs of product support

Key stages of a portfolio company's investment lifecycle for value creation

There are several situations in the life of a portfolio company where more active value creation planning and execution by the private equity firm can be decisive in determining the ultimate exit value of an investment.

Value Creation At Key Stages Of The Investment Lifecycle

1. Pre-deal Due diligence

The value creation process should start during the pre-deal due diligence phase. Our experience suggests that a detailed assessment of value creation opportunities and initiatives during due diligence is vital to building confidence around the investment thesis and success of the investment.

2. Post deal 100 days of ownership

During the initial phase of ownership, commonly known as "the first 100 days", private equity firms have a unique opportunity to establish a foundation for future value creation. This is an opportunity for the new owners to set the stage for long-term success. Utilizing this time effectively is crucial, and a central objective should be gaining buy-in from management and achieving full alignment around a shared and management-owned value creation plan.

3. Turnaround or reboot situations

A proactive and decisive approach is typically more effective when addressing underperformance within portfolio companies than waiting for performance to improve on its own. The private equity firms that excel in this area tend to have a dedicated in-house operations and turnaround team in place that is armed with well-developed value creation plans, actions and initiatives.

4. Mid-term review and exit planning

As the business landscape shifts, it's imperative for private equity firms to stay agile and adapt their strategies to capitalize on new opportunities and changing priorities. One key tactic employed by many firms is the implementation of mid-term reviews as the start of proactive exit preparations. Our experience shows that reviews can be most valuable when they include a renewed evaluation of potential value creation opportunities beyond the initial plan, and assessments of the organization's capabilities to execute on these potential priorities.

Bridging the gap between strategy and execution

We know many value creation plans do not get executed as expected, and often the root causes are either a lack of alignment between management teams and their private equity owner, or simply poor execution. In our view, value creation must be delivered in the trenches, and there, focus is required to bridge the gap between strategy and execution.

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