Most private investment and venture capital (VC) firms use a formula for selecting entities to pursue for equity relationships. At the root, these formulas involve identifying companies with promising growth trends, as well as those offering the most distinctive products and services.
Naturally, investors and VC experts also look for the right mix of potential and flexibility to foster a winning proposition. For a long time, this has been the standard blueprint most capital management experts use to ensure victory for everyone involved. Investors, board members and company founders alike all rely on these time-proven tactics to achieve high-yield results and healthy returns for funding partners.
Investor activity in the electronic payments industry has followed suit, but today's saturated payment market adds a complicated dimension to the decision process. The rapidly changing landscape has also prohibited some companies from establishing stable, investment-friendly business plans, and a wave of attractive alternative payment solutions has knocked a few legacy payment providers out of the investment ring. Consequently, the industry has seen its share of ebbing and flowing of capital in recent years.
Nevertheless, many private equity firms still have a deep footprint in the industry. A number of payment companies have been led through successful mergers or acquisitions, and others have established well funded market positions. However, as the industry continues to evolve, the view of the investor is also shifting.
Darrin Ginsberg, Chief Executive Officer of Super G Funding LLC, calls it the Silicon Valley effect on payments. "The big investment dollars are chasing the big deals, and the smaller ISOs aren't growing as fast anymore, so investment dollars aren't flowing as much through smaller and mid-sized ISOs like they once did," Ginsberg said.
Like many investment firms looking for a healthy bite of the payments apple, Ginsberg's company is now turning its focus toward software makers with payment processing integrated into their service offerings. According to Ginsberg, independent software vendors are "becoming the new ISOs."
TA Associates (TA), an equity firm with a long investment history in payments, is following a similar track. With its recent investment in medical software company Procare Software, TA Managing Director Todd R. Crockett stated the company is "actively seeking investments in the integrated payments space." Crockett classified TA's interest in the industry in two categories: payment companies that are integrating into vertical or horizontal software companies, and entities like Procare, a vertical industry software maker that earns the majority of its profits processing customer transactions.
Crockett labeled this type of software product a "full integration" versus what he calls the typical "integration lite" offering through which software providers offer multiple payment options or link to payment data through an application programming interface. "When a customer buys this software, they don't have to use the built-in payment services, but it is virtually impossible to get another payment platform to integrate with the application," Crockett said.
Both Ginsberg and Crockett confirmed what many professionals inside the payments industry have known for some time. Obtaining interest in companies that offer both business software and integrated payment processing services offers a much higher value proposition, because the product promotes stickier relationships, and customer turnover is significantly less than that of a typical ISO.
Nick Jean-Baptiste, Principal at Peterson Partners, a private equity firm that recently began pursuing funding relationships in payments, agrees. "Becoming an integrated payments provider is a long term strategy," Jean-Baptiste said, adding that his firm is "looking for companies who understand this is the way things are going in this industry."
Jean-Baptiste said Peterson Partners is also seeking other criteria. "We feel the team is the most key component to a company, and we're focused on partnering with smart management teams, which are also innovative and believe they have a secret for winning in today's marketplace," he said.
As far as control, representatives from all three private equity firms claim to be ownership agnostic, indicating their funding decisions aren't driven by ownership potential. In Crockett's words, "We are as comfortable purchasing a minority stake as we are a majority interest, and the goal is to simply identify the best companies, then be flexible about how we structure an investment."
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