Cashing in: PE firms chase payments deals in the U.S. and across the pond

A spate of high-profile private equity deals has made the once-nerdy payments sector a superstar.

In September, Hellman & Friedman agreed to buy Nets in a $5.3 billion deal from sellers Advent International and Bain Capital. The transaction had long been expected. Vantiv in August made a $10 billion offer for WorldPay, which was owned by Bain and Advent until its 2015 IPO. Also in August, Blackstone Group and CVC Capital Partners agreed to buy Paysafe Group for $3.9 billion.

“There’s always been a lot of PE interest in payments,” said Peter Christodoulo, a partner at Francisco Partners. “The deals are just getting bigger and therefore people are noticing more.”

Across the pond

These recent large payments deals have something in common: They happened overseas.

“Large PE interest has moved to Europe,” said Steve McLaughlin, founder and managing partner of Financial Technology Partners, which is focused on fintech. Strategics are dominating the U.S. M&A market, gobbling up the bigger payments companies, bankers and executives said.

McLaughlin pointed to several strategic transactions this year, such as Paysafe’s $470 million buy of Delta Card Services, the holding company for Merchants Choice Payment Solutions in July; CardConnect’s $750 million sale to First Data that same month; and, in April, Vantiv’s buy of Paymetric.

TSYS this year bought the 10 percent of Central Payments that it didn’t own for $700 million. Cielo is selling Merchant e-Solutions, which is expected to go to a strategic, while First Data is considering Cayan, which Parthenon Capital has put up for sale, Buyouts has reported.

PE firms, hobbled by continued high prices in the M&A market, are losing to cash-rich strategics in the U.S. Globally, 14 PE payments deals valued at about $11.48 billion have been announced as of Oct. 25, Dealogic data shows. This compares with only four PE payments mergers in the U.S., valued at $260 million, Dealogic said.

General payments M&A is much bigger. So far in 2017, 248 global payments mergers valued at $34.5 billion have been announced. This compares with 54 announced transactions in the U.S. totaling about $6 billion, Dealogic said.

“There are not many large-scale payments deals left in the U.S.,” said Collin Roche, a GTCR managing director.

But in the U.S. middle market, private equity is still a contender. Roche pointed to companies like BluePay Processing (owned by TA Associates), Cayan (backed by Parthenon) and Evo Payments (Madison Dearborn Partners) that are up for sale. PE is bidding for all of them.

The payments segment also has produced some some notable middle-market exits this year. Francisco sold Paymetric to Vantiv earlier this year, scoring a more than 6x return, a source said. Vista Equity Partners scooped up PayLease from Francisco this year, while TA is expected to do well on its sale of BluePay. Bregal Sagemount made more than 3x its money with the $450 million sale of NMI in September.

“There is absolutely activity in the U.S. middle market,” GTCR’s Roche said.

Twenty years ago

For private equity, no deal symbolizes success in payments like TransFirst.

In 2000, GTCR recapitalized TransFirst, when it was known as ACS Merchant Services. The credit- and debit-card processor was much smaller, processing $2.3 billion in credit-card volume when GTCR invested $100 million.

TransFirst was sold to two other PE firms: Welsh, Carson, Anderson & Stow in 2007 and Vista Equity in 2014. TSYS acquired TransFirst in 2016 in a $2.35 billion deal. By this time the company handled $48 billion in annual transaction volume.

All the PE firms made money on their TransFirst investments, sources said. In fact, Vista’s sale of TransFirst to TSYS produced a 110 percent IRR, Buyouts has learned.

Payments deals have changed in the past two decades. Financing a payment transaction 20 years ago wasn’t easy, GTCR’s Roche said. Lenders back then were less familiar with the credit histories of payments companies, sources said. Banks didn’t realize that payments companies produced highly recurring revenue, even though they didn’t have hard assets, Roche said.

But from 2000 to 2006 banks discovered that payments, fintech and software companies posed lower risk because their cash flows and revenues were consistent. “Lender appreciation of payments deals has increased dramatically,” Roche said.

PE firms have also gotten quite good at performing due diligence on companies and determining how to grow and exit them, McLaughlin said. “The sector is extremely attractive. Prices are going up. There’s tons of room for growth in payments,” he said.

Payments companies are also resilient.

Many execs and bankers pointed to First Data Corp, the payments processor acquired by KKR for $29 billion in 2007. The bellwether deal, clinched right before the financial downturn of 2008, saddled First Data with nearly $20 billion in debt. The deal was long considered an albatross for the New York buyout shop.

KKR made several key changes to the company, including hiring Frank Bisignano, ex co-COO at JP Morgan Chase, which helped First Data become profitable again in February 2015. It went public later that year.

First Data is now considered an “OK deal” for KKR, a source said. The company earlier this year closed its $750 million buy of Card Connect, and it’s in the hunt for Cayan. “People are realizing how resilient these companies are,” McLaughlin said.

New investors

While not new, the payments sector has seen interest from some highly regarded tech-buyout shops. Silver Lake made its first fintech investment in 2010 when it acquired a majority of Mercury Payment for $450 million. Four years later, Silver Lake sold Mercury to Vantiv for $1.65 billion. The buyout shop completed its second payments deal, Global Blue, in 2012.

Vista Equity was known for its software deals when it made its first payments investment in TransFirst in 2014. It held the investment for a little over a year before selling the company to TSYS. Vista closed its second payments deal this year, buying PayLease from Francisco Partners.

“Seeing those two come and buy a payments player was unheard of,” said McLaughlin.

Action Item: Contact FT Partners’ McLaughlin at +1 415-512-8704

Photo courtesy pixdeluxe/E+/Getty Images