Fintech investment and M&A deals saw a sharp downswing in March due to the COVID-19 outbreak, according to a new report by investment bank Houlihan Lokey.
In March, North America and Europe recorded 28 M&A deals in the fintech sector, representing a 45% decrease in deal activity against recent monthly averages and a 40% decrease year-over-year, the research says. The decline in M&A deals can be explained in part by the drop in share prices of strategic buyers, which are now shifting their focus to internal initiatives.
Much like M&A activity, private capital activity towards fintechs in March was far below average monthly volumes and approximately 50% below 2018 and 2019’s record-high averages. The decrease in VC activity can be explained by private equity and VC firms spending most of the month focusing on stabilizing their portfolio companies due to the strong headwinds caused by COVID-19, the report says.
Some fintech segments more exposed than others
The research paper, which analyzes the impact of the COVID-19 outbreak on fintech markets, argues that some areas are more resilient than others to the effects of the pandemic.
Banking and lending stocks, for example, have performed rather strongly when compared with other fintech segments. Business-to-business (B2B) information providers with subscription models and relatively fixed costs base have too demonstrated robustness. Meanwhile, exchanges and execution platforms have even benefited from the increased trading volumes and volatility that ensued.
Moving forward, investors will continue to favor companies with platforms, high recurring revenues, high operating leverage, and robust cash flow generation. In the short term, B2C models will be more vulnerable than B2B models, especially those with subscription revenues, it says.
Market volatility
The report notes the extreme market volatility caused by the pandemic, with fintech segments retracing between 13% and 29% in the immediate aftermath of COVID-19.
According to the report, volatility peaked at an all-time high in mid-March, exceeding the levels seen during the 2007-2008 financial crisis.
Though volatility has already recovered strongly, the market will likely remain bumpy until there is more visibility on the progress of the virus and potential COVID-19 exit strategies, among other key factors, it says.
The report notes that China has already been back to work with Chinese government efforts of the past several weeks being gearing towards normalizing product and reducing supply disruptions.
SMEs hit hard by COVID-19 crisis
With half of the world’s population under lockdown, businesses are struggling to stay afloat and many are forced to close their doors.
In China, a survey of small and medium-sized enterprises (SMEs) in February showed that a third of SMEs only had enough cash to cover fixed expenses for a month, with another third running out within two months.
In Italy, an early March survey of micro and small firms found that 72% of the 6’000 responding firms were directly affected by the situation because of a drop in demand or problems along the supply chain and/or transport and logistics.
And in the UK, a research by MarketFinance released in early March, found that more than two thirds of SMEs had significant cashflow problems as a result of the COVID-19 outbreak.
With SMEs being under incredible strain, banks across the world have implemented an array of measures to ease their burden, notes a new report by banking and insurance non-profit Efma.
Governments too have formulated policy responses to foster SME resilience. In Singapore, the 2020 Budget, announced in February, included a special package aimed at supporting firms and workers with exceptional measures such as a rebate on corporate tax, the Jobs Support Scheme, as well as the enhancement of the Enterprise Financing Scheme’s Working Capital Loan program.
In Indonesia, the government announced in March a stimulus package that includes exempting some manufacturing workers from income tax and reducing corporate tax payments for manufacturing companies.
And in Thailand, the government has introduced several measured specifically targeted at SMEs, including low-interest loans, relaxed rules governing the granting of commercial bank loans, and credit lines provided by the Social Security Fund.
According to the OECD Economic Outlook Interim Report of March 2020, projections for annual global GDP growth for this year have dropped by half a percentage point to 2.4% due to the COVID-19 outbreak. China and other G20 emerging countries such as Argentina, Brazil and India, are set to be the most affected.
