Singapore fintech funding dives 41% to 3-year low, but expected to start recovering next year

SINGAPORE fintech funding sank to a three-year low in the first half of 2023 as rising interest rates and economic headwinds continued to dent investor sentiment, but experts believe a recovery is on the horizon.

Total deal value fell by 41 per cent to US$934 million across 84 deals in mergers and acquisitions, private equity and venture capital, from US$1.6 billion across 117 deals in H2 2022, KPMG said in its July 2023 Pulse of Fintech report.

The H1 2023 tally marks a three-year low for Singapore, and fintech funding “has yet to fully correct from the pandemic funding surge that began in H2 2019”, the advisory firm said. Funding is still well above the US$344 million across 70 deals recorded in H1 2019.

Experts whom The Business Times spoke to believe that fintech deal volume and funding will start recovering from 2024.

“Singapore fintech funding values are primarily driven by large deals, and we don’t see (any) large deals happening this year,” said Shauraya Bhutani, co-founder of Singapore-based boutique investment bank Capital Connect Advisors.

He noted that bigger fintechs will prefer to wait it out as valuations are still relatively depressed, and most of the Series B+ transactions in the space are led by international investors who have pulled back and are unlikely to come in this year.

A NEWSLETTER FOR YOU

Monday, 3.30 pm

Garage

The hottest news on all things startup and tech to kickstart your week.

Sign Up

Global market challenges are expected to ease in the months ahead as interest rate growth slows down and inflation comes under control, said Sunil Rai, senior partner at Dentons Rodyk and co-head of its venture tech and emerging growth companies practice group.

He expects fintech deal volume to rise as investors become more confident in allocating capital towards early-stage investments.

He said: “We know of several fintech-focused institutional investors with ready funds to invest and (are) looking for the appropriate opportunities to do so. There is also an increase in family offices in Singapore (which) are looking to allocate some capital towards early-stage investments, including fintech.”

However, deals are taking longer to close, as investors conduct more extensive due diligence than before, he added.

Roshan Raj Behera, partner at Redseer Strategy Consultants, said fintech investment activity will improve gradually from 2024, underpinned by better unit economics, reasonable private market valuations, record levels of unused private capital, and potential initial public offerings.

While funding may not climb back to pandemic highs, it is unlikely to stagnate either, he said. This is because most South-east Asian economies have better macroeconomic prospects than their developed market counterparts, and also offer structural growth opportunities in various new-economy sectors.

Global Fintech Institute co-founder Chia Hock Lai said that the fintech sector is “still undergoing a funding winter and is unlikely to see any recovery until 2024”.

“We are unlikely to see the past highs as interest rates are expected to moderate downwards but not as low as previously – the days of ultra-cheap funding are over,” he added.

Investors are turning their attention to artificial intelligence (AI) and sustainability-related fintechs, and Chia believes these sectors will do well in the near future.

Payments and cryptocurrency continued to be among the top areas for fintech funding in Singapore, said KPMG. In payments, consolidation proved essential in driving funding activity despite economic headwinds and higher market volatility, as fintechs grew their reach through acquisitions, it said.

It added that the AI and machine-learning space was also well-funded, closing six deals worth US$129 million in H1 2023 from none before.

Anton Ruddenklau, global fintech leader at KPMG, said: “It is still very early days when it comes to the application of generative AI to use cases in financial services. But looking forward, it is an area that is attracting enormous interest and funding, particularly in areas like cybersecurity, (regulatory tech), and wealthtech.”

Globally, total funding and deal tally fell to US$52.4 billion across 2,153 deals in H1 2023, from US$63.2 billion over 2,885 deals in H2 2022. Supply chain and logistics, as well as the green sector, were among the top areas for funding, KPMG found.

There is a “cloud of uncertainty” in the global market that continues to affect investor confidence, driven by factors such as high inflation and increasing interest rates, geopolitical tensions and headwinds in the technology sector, the firm said. It noted that the collapse of some US banks earlier this year may have kept investors in a “wait-and-see” mode in H1 2023.

In the Asia-Pacific, fintech funding similarly fell to US$5.1 billion across 432 deals in H1 2023, from US$6.8 billion across 583 deals in H2 2022.

Two fintech deals by Singapore-based entities – credit services firm Kredivo Holdings and consumer finance company Trusting Social – were among the top 10 deals in the region in the period, raising US$270 million and US$105 million, respectively.

“The current funding winter is leading to more industry consolidation and focus on (the) path to profitability. However, the long-term prospects of fintech continue to be bright, both from innovative fintech solutions fulfilling gaps in emerging markets and financial institutions undergoing digital transformation to remain competitive,” said Global Fintech Institute’s Chia.

Judd Caplain, global head of financial services at KPMG, said: “The long-term business case for many sub-sectors within fintech remains very strong, particularly for sectors like payments, (insurance tech), and wealthtech. Once market conditions begin to even out, funding will likely rebound – if not to the record level experienced in 2021.”