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Expert voices: Mercury Fund's Blair Garrou on the return of fintech M&A

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Apr 18, 2024
Photo illustration of Blair Garrou with the Mercury fund logo and abstract shapes.

Photo illustration: Gabriella Turrisi/Axios. Photo: Courtesy of Mercury Fund

After two slow years, growth equity investors and potential acquirers are revisiting the fintech market, says Mercury Fund founder and managing director Blair Garrou.

Why it matters: Leading a fund focused on startups in middle America, Garrou has a unique view into fintech dealmaking between the coasts.

Context: M&A activity in the financial services sector in 2023 was down by more than 50% from 2021 highs.

  • But fintech funding continues to stagnate, with venture capital dollars committed to companies in the sector reaching the lowest quarterly level in seven years, according to CB Insights data.

Yes, but: Garrou sees signs of optimism in the market. In our conversation, he suggested that dealmaking could pick up as soon as this summer.

(This conversation has been edited for brevity.)

The last time we talked was about a year ago. What's changed in the venture market since then?

  • With the banking implosion, growth equity investors raised the bar on growth rounds. What tended to be a $4-$5 million run rate requirement for a Series B for the last 20 years became a $10 million run rate overnight and almost perfect unit economics.
  • In the middle of the country, you had all these companies that had raised early-stage rounds from venture funds that could only fund them for about 12-18 months. But these rounds were done at maybe a half-million dollar run rate, maybe a $2 million run rate.
  • So there was this massive gap in capital, and now you've got funds that aren't going to raise anymore, you've got funds going out of business. … For companies in the middle of the country, it has been really challenging.
  • The second piece is that we have found so many companies with really great product-market fit, anywhere from $2-$7 million ARR, that just aren't quite big enough to get that next round of capital. They've figured it out. They're profitable, and they're growing.
  • A lot of them would potentially look like lower-middle-market buyout, because they haven't had any institutional investment yet. We've just been so surprised at how many of those companies are out there, so we've been making a lot of investments in them.

What appetite are you seeing for growth equity to come back into the market?

  • Things have changed. You saw multiples correcting in the public markets. Because of that I think it's given everyone comfort to start putting money to work.
  • I think everybody's hopeful. But I think what growth equity is expecting is that there is an M&A market that will get here by the summer and will be pretty robust for the next 12 months.
  • But I also feel like growth equity can't sit on the sidelines forever and take down management fees while they don't put money to work. So I'm sure they all had annual meetings, and [LPs] are like, "Hey, what am I paying you for? Get out there and get some investments done."

How about the M&A market, which has also been notoriously slow over the last couple of years?

  • Things have really heated up. It's less about closed transactions, but more about the bid-ask spreads of what private or public companies are looking to buy for and what the expectations of venture-backed companies are.
  • I think we're pretty close to seeing a lot of transactions happening. A number of our companies have hired bankers getting ready for what we think the next big M&A wave is going to be — just like 2021. We think that'll start happening in the summer.
  • There's a big M&A push, I think, because a lot of these PE-backed software companies are buying while they look to test the public markets in '25-'26 and beyond.
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