A little over ten years ago, electronic payment processing was widely viewed as a boring back office function, including by banks that did.
A deal this week to create one of Europe’s largest payments companies is reminiscent of a group that has taken a very different point of view and is beginning to reap the rewards: private equity firms.
Italian payments group Nexi acquired Danish rival Nets for 7.8 billion euros, combining two companies that started life in banks but were later split up and run by buyout groups Advent, Bain Capital and Hellman & Friedman. Nexi concluded Nets just weeks after entering into an agreement with its national competitor Sia, a series of transactions that will value the group at 22 billion euros.
Payment companies help merchants accept payments in-store or online, charging a portion of the value of each transaction. With the need to invest in technology creating high fixed costs, the payments industry model has sparked a well-suited scale race to close deals that underpins the private equity industry.
The pandemic has done little to slow the pace of acquisitions. Nearly $ 32 billion in transactions were completed in the European payments industry this year, up from $ 8.5 billion in the same period in 2019, according to Refinitiv.
The relentless acquisitions have helped catapult the market value of the biggest players in the payments industry, including the newly expanded Nexi and its French rival Worldline, above some European lenders, stressing that banks have failed to capitalize on this opportunity.
Owning payment firms “has been one of the greatest investment successes in private equity,” said Charles Hayes, partner at Freshfields law firm who has advised on several transactions.
Nexi and Nets weren’t the private equity industry’s first foray into payments, nor are buyout groups the only ones struggling to gain a foothold in a rapidly growing market. But their tangled history illustrates how private equity has stepped in where many banks have failed to capitalize, just as e-commerce and digital payments have taken off.
In 2014, Advent and Bain bought Nets, itself created five years earlier by the merger of two payment groups owned by Nordic banks. A year later, the companies, alongside the Italian private equity group Clessidra, bought the Istituto Centrale delle Banche Popolari Italiane (ICBPI), founded shortly before World War II by a group of Italian banks. They renamed it Nexi.
A dizzying whirlwind of takeovers, private takes and lists was just beginning for Nexi and Nets.
After listing in 2016, Nets was privatized the following year by a consortium led by Hellman & Friedman and comprising Advent and Bain. In 2018, Nets took over the German payments group Concardis, also owned by Advent and Bain. Meanwhile, Nexi vacuumed a series of smaller payout groups before signing up for what was the largest initial public offering in Europe in 2019.
“This has been an incredibly successful sub-segment to focus on – certainly one of the most exciting we’ve seen in private equity,” said James Brocklebank, managing partner at Advent. “It’s a question of concentration. . . banks recognize that they are good companies [but] are not necessarily in the best position to develop the technology and spend the money to generate payments as a profit center. ”
The buybacks left a legacy of relatively high debt. Nets’ net leverage is 4.8 times, and the group combined with Nexi and Sia will have 3.3, according to an investor presentation. After the Nets deal, 38% of Nexi’s shares will be in the hands of public investors. Most of the balance will be held by Cassa Depositi e Prestiti, the Italian government vehicle that supported Sia, as well as Advent, Bain and Hellman & Friedman.
What few people dispute is that the industry’s push towards payments has been lucrative. Since 2008, buyout company investments in the payments industry have yielded 2.7 times the amount of equity invested, compared to 2.1 times for financial services operations and 2.3 times in technology, according to a report. published this year by the management consulting firm Bain & Company.
The aggressive forays into the European payments industry by buyout companies were made possible by the Payment Services Directive, a 2009 law from the European Commission that paved the way for non-banks to provide payment services. payment.
The expansion was not without controversy.
In 2010, private equity took its first big step towards European payments. Advent and Bain Capital bought the Royal Bank of Scotland’s payments business at a valuation of £ 2 billion after EU regulators forced the bank to sell the unit as a condition of its bailout during the crisis financial.
By the time the company, renamed Worldpay, was introduced in London in 2015, it commanded a valuation of £ 6.3 billion. Just two years later, US payment processor Vantiv swallowed it up for £ 9.1 billion. According to an analysis by Peter Morris, associate researcher at the Said Business School, Oxford University, buyout companies achieved a return of 5.4 times the invested capital based on the evaluation of the introduction in Worldpay purse. Advent and Bain declined to comment on feedback from the deal.
Worldpay’s skyrocketing valuation has led some politicians to complain that UK taxpayers suffered a gross transaction during the initial sale in 2010. Last year Natwest, until recently known as of Royal Bank of Scotland, has returned to the industry by launching a service allowing small businesses to accept card payments in store or online.
The race to scale is only intensifying – and not just among the industry’s private equity-backed groups. In February, Worldline agreed to buy rival Ingenico for 7.8 billion euros. In the United States, the $ 43 billion acquisition of Worldpay by financial technology specialist Fidelity National Information Services in early 2019 prompted panicked rivals to expand further.
“The consolidation process will continue,” said Luca Bassi, managing director of Bain Capital, who oversaw the Nexi deal and sits on the company’s board of directors. “There are a lot of countries where the banks haven’t sold their business.”
But this year has not been easy for the payments sector, the fraud of the German group Wirecard having focused the attention of regulators on the lighter treatment the sector enjoys compared to banks.
At the same time, the economic disruption triggered by the Covid-19 pandemic has hit consumer spending, causing the global income of payment groups to fall by around 22% between January and June, according to McKinsey – although leaders of the The industry’s insistence on a long-term shift towards online and contactless payments will ultimately compensate for this.
“The only thing that bothers us is the cash payments,” Bassi said. While some electronic payments generate higher fees than others, he said, “anything that isn’t cash is good”.
In Nexi’s domestic market in Italy, for example, electronic payments only represent 25% of all transactions, and Rome recently pledged to fight tax evasion by encouraging digital payments.
The buyout groups will likely sell their stakes in the new Nexi business over the next few years. In doing so, the payments industry that disrupted banks is facing a new threat: the prospect of a tech giant launching a global rival that, like China’s Alipay, offers merchants lower fees – or could. completely remove the middleman.
This is “a huge risk,” said a private equity trader who specializes in financial services but has not invested in the payments industry.
“Nobody really knows where the payments are going – will it be in the cloud or through the blockchain?” he added. “Everyone is trying to get as big as possible so that they can influence the final destination of payments.”