What the UK's record-breaking year for fintech could mean for VC investors
Investment into UK fintech companies has already hit record-breaking highs this year as the sector attracted an incredible £17.7 billion in the first half of 2021 alone.
Raising the positive question of how investors can capitalise on the rapidly accelerating sector on its upward trajectory, identifying the most effective routes within UK venture capital has been essential.
Second only to the US, the level of investment into UK fintech via venture capital (VC), private equity (PE) and merger & acquisition (M&A) deals in the first six months of 2021 exceeded previous records by some margin - attracting more than five times the £3bn invested throughout the whole of 2020.
The figures, released earlier this month by KPMG, highlighted VC investment into UK fintech as a particularly strong area of growth, with the £10.8 billion invested via the asset class in H1 2021 - far outweighing the entirety of 2020’s £6.5 billion.
Largely accelerated by intensified tech innovation and widening digital adoption off the back of the pandemic, fintech investment is playing a progressively significant role in fuelling the UK economy and strengthening the portfolios of experienced investors around the globe.
A post-Covid Britain primed for fintech investment
Over the past decade the UK financial technology industry has progressed at its fastest ever pace. Accounting for just 4% of UK VC investment in 2010, this figure had increased 7 fold by 2019, and in 2021 shows no sign of slowing down.
As quoted from government advisor for Fintech, Ron Kalifa OBE: “Fintech is no longer a niche – it’s a sector that is underpinning financial services, employing over 1m people, and is worth about £100bn today globally, with that figure expected to grow three-fold by 2030.”
Growing in value over the last 18 months, the heightened need for rapid technological innovation to combat issues emerging from the pandemic has made fintech an increasingly valuable sector.
From the rise of the neo-bank that’s called upon digital-first banks like Atom Bank to meet the needs of a digitally reliant generation, to the growing demand for accessible, hybrid lenders like B-North to offer SMEs financial support up to 10x faster than incumbent banks, pressures routing from Covid-19 have forced UK fintech firms to “pick up the economic pieces” caused by the virus and support the UK more diligently than ever.
Whilst this rapid reliance on fintech has birthed a new wave of innovative early stage companies, it has also birthed a generation ever more reliant on technology.
A study published in the 2021 Tech Nation Report found that 66% of people reported to have changed the way they interact with tech over the past year, with 55% of people who identified as being “less tech savvy” claiming they felt more confident using communication tools since the pandemic.
This accelerated adoption has created a number of significant spikes in demand across the UK fintech sector, both for existing fintech products and new innovations.
Just one example can be observed with touchless ordering provider Qikserve, who saw a 76% increase in their transaction volume just three months following the first UK lockdown in March 2020, their digital payment solutions since attracting the likes of Merlin Entertainments, Amsterdam Schiphol Airport and Britain’s largest motorway service provider, Moto.
An encouraging sign for VC investors across the UK looking to diversify their portfolio in the sector, the soaring demand for new, disruptive fintech impact investments have made the prospect of investing into the sector an increasingly attractive one.
Enhanced further by the range of tax efficient tools currently available to investors looking to take advantage of the sector’s most promising early stage companies, it comes as no surprise that VC investment into UK fintech is hitting record highs.
Optimising your fintech investments
When looking to seize the opportunity of a UK fintech sector at its prime growth, whether it be early stage fintech VC investments or late-stage private equity deals, a host of options are available to experienced investors.
Selecting the appropriate route will always be dependent on individual goals. For example, private equity deals into established companies may be an appropriate route for investors seeking gradual growth and often less direct impact from their portfolio.
But alternatively, for those looking to maximise the impact and growth of their VC investments, the generous tax benefits and high target growth associated with investment into early stage fintech startups have proven to be popular.
Tax-efficient investment tools such as The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) combined have attracted over £25 billion of investment into more than 45,000 early stage companies since their introduction, and have been highligihted as two of the most effective tools for investing into fintech by industry specialist Ron Kalifa.
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In ‘The Kalifa Review’ - a five point plan for fintech growth commissioned by HM Treasury - Ron outlines “The Enterprise Investment Scheme, Seed Enterprise Investment Scheme and Venture Capital Trusts” (VCTs) as essential to “level the fintech playing field” by allowing UK investors to benefit from the shared growth of the sector.
Acting as a bridge between private investors and promising early stage companies, the EIS and SEIS encourage the investment of growth capital into startups in exchange for a range of generous tax benefits and the potential of generating significant money-on-money, tax-free returns alongside measurable social, economic or environmental impacts.
Offering a range of valuable tax reliefs such as 30% income tax relief (50% for the SEIS due to its focus on particularly early stage startups), capital gains tax exemption and inheritance tax relief, the EIS and SEIS’s additional benefits can make the schemes especially attractive to investors looking to make best use of their venture capital whilst minimising the downside risks associated with it.
This focus on early stage, long term growth plays a key role in attracting so many of the investors looking to take advantage of the burgeoning fintech sector, with popular alternatives like venture capital trusts not offering the same ability to identify and invest in individual, high growth, impact driven opportunities, but rather distributing investor capital evenly across a pre-decided portfolio.
Channelling fintech investments through tax efficient schemes such as the EIS and SEIS - though potentially requiring more efforted judgement of opportunity - offers fintech investors a convenient way to diversify their portfolio and generate positive returns when compared to many traditional investment products.
Not only do the schemes offer economic and risk benefits for investors diversifying with fintech, but their incentives for investing in knowledge intensive companies gives them a proven ability to contribute to real social change simultaneously.
Though 2021’s surge in fintech VC investment is an encouraging sign for any experienced investor looking to capitalise on the sector’s growth, venture capital investment - especially early stage - does come with a high level of risk, and so portfolio diversification should be a key priority for anyone considering increasing their fintech VC investments.
Whether it’s via risk-spreading across different portfolio companies, industries or even investment methods, as put by Ron Kalifa “fintech no longer exists as a niche”, and so developing a fintech-oriented portfolio that targets an optimal balance of impact and return should be an accessible goal for any investor looking to reap the benefits of one of the UK’s most in-demand sectors.