As markets cool, fintech faces deep freeze

The value of fintech investment in Canada plunged amid last year’s market volatility, but the volume of deals held up better, according to a new report from KPMG.

The firm reported that there were 169 fintech investments (including venture capital, private equity and merger and acquisition transactions) in 2022, down from 217 deals in 2021. The value of those investments plunged, however, dropping from US$7 billion in 2021 to just US$1.3 billion last year.

The fall in Canadian fintech investment activity came against the backdrop of a global slowdown, with the number of deals down by about 18% year over year, and the value of these investments off by about 31%.

The second half of last year was particularly weak for Canadian fintech investment, KPMG noted, with just 68 investments valued at US$439.9 million. This was down from 85 deals worth US$810 million in the first half of 2022.

In the fourth quarter, there were just 27 deals worth $154.8 million, compared with 52 deals valued at US$956 million in the same quarter in 2021.

There were no fintech IPOs in Canada last year, KPMG reported. Instead, seed round transactions led the way, accounting for 57 investments, followed by early stage venture capital (41 deals).

“The number of seed round and early-stage investments is also a positive sign for the strength of Canada’s fintech ecosystem going forward,” said Geoff Rush, financial services industry leader at KPMG, in a release.

That said, the weakness in valuations is expected to persist in the year ahead.

“A potential recession, rising interest rates and inflationary pressures are top of mind for investors, so we expect valuations and deal volumes to remain subdued through 2023, with a slight pickup near the end of the year,” said Georges Pigeon, partner at KPMG, in a release.

Additionally, while the crypto sector led the fintech investment activity in Canada last year, the ongoing turmoil in that space may dampen activity in the year ahead.

“We expect to see a slimmed-down, more transparent and accountable cryptoasset ecosystem emerge this year. As long as transparency, trust, regulation and innovation are the forefront, the cryptoasset ecosystem has a sustainable future,” Rush noted.

“The fintech space is also undergoing a bit of a mentality shift,” Pigeon added. “In 2021, many companies saw a huge influx of capital from VC investors, so some of those firms won’t need cash until sometime in 2023 — maybe even 2024 — because they’ve streamlined and restructured their operations to make that cash last longer.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.