UK launches £1 billion fintech fund to compete with Silicon Valley

The U.K. has created an investment vehicle to back growth-stage financial technology companies until they can go public, in a bid to bolster Britain’s global image as a fintech investment hub.

Backed by the likes of Mastercard, Barclays and the London Stock Exchange Group, the Fintech Growth Fund aims to invest between £10 million to £100 million into fintech companies, ranging from consumer-focused challenger banks and payments tech groups to financial infrastructure and regulatory technology.

The fund, which is being advised by U.K. investment bank Peel Hunt, looks to support companies at the growth stage of their funding cycle, as they seek Series C rounds and above.

The venture was created in response to a 2021 government-commissioned review helmed by former Worldpay Vice Chairman Ron Kalifa and examined whether the U.K.’s listings environment is unattractive for tech firms.

“It’s definitely a start,” Gautam Pillai, an equity analyst at Peel Hunt covering fintech, told CNBC in an interview Wednesday.

It marks a rare commitment to a specialized fund focused on fintech backed by mega-industry players. While fintech-focused funds like Augmentum Fintech and Anthemis Group exist, the U.K. has yet to see a fintech-oriented fund that came about from a government-led strategy.

Britain has faced some industry criticisms that it poses barriers to fintech entrepreneurs and forces them to consider listings overseas — particularly after the country’s exit from the European Union, which has cast some shadow over the U.K.’s status as a global financial center.

The London Stock Exchange has committed to a number of reforms to encourage fintech firms to float in the U.K. rather than in the U.S. — a particularly pressing step, following British chip design firm Arm’s decision to ditch a London listing for New York.

“It’s about finding the next Stripe, the next Worldpay, the next Adyen,” Pillai said.

The fund also counts Philip Hammond, the former U.K. finance minister, as an advisor.

The move could also be an opportunity for financial heavyweights to access to expertise in the development of new technologies. Big banks and financial institutions are trying to advance their own digital ambitions, as they face competition from younger tech upstarts.

The aim is for the Fintech Growth Fund to make its first investment by the end of the year, Pillai said.

While £1 billion pales in comparison to some of the huge sums being deployed in fintech and tech more broadly, Pillai said it’s “definitely a start.”

The U.K. is a hotbed of fintech innovation, only behind the U.S. when it comes to the scale of its fintech industry, he added. The U.K. is home to 16 of the world’s top 200 fintech companies, according to an analysis from independent research firm Statista conducted for CNBC.

The fintech industry is facing a period of turbulence, as rising inflation and macroeconomic weakness soften consumer spending. The valuations of companies such as Checkout.com, Revolut and Freetrade have dropped sharply in recent months.

Last year, the internal valuation of Checkout.com plunged by 73% to $11 billion in a stock options transfer deal.

Revolut, the British foreign exchange services giant, suffered a 46% valuation cut — implying a $15 billion markdown — by shareholder Schroders Capital, according to a filing. Atom Bank, a U.K. challenger bank, meanwhile had its valuation marked down 31% by Schroders.

U.K. fintech investment plummeted by 57% in the first half of 2023, according to KPMG.

Pillai said now is the right time to start a new fintech fund, as the entry level for investors to take positions in privately-held mature companies has been reduced heavily.

“From a pure investment standpoint, you couldn’t find a better time in fintech history to start a fintech fund.”

While 2020 and 2021 experienced a “bubble” of sky-high valuations in the tech sector, Pillai believes this correction “killed some very weak business models butt the stronger business models will survive and thrive.”

“There’s still an active investment market in the U.K., we still have one of the world’s leading financial centers — no matter what was assumed would happen in the last 10 years or so,” Phil Vidler, managing director at Fintech Growth Fund, told CNBC in an interview.

“A center for business — time, location and law, etc. — those fundamentals are still here, and similarly we’re now getting to a point where second-time founders are starting companies, and large, global venture firms touted as the best in the world are setting up here in the U.K.”