Why wealth platforms could prove resilient amid tightening PE and VC space

Earlier this month, leading financial technology company CapIntel announced it had raised US$11 million in Series A financing, a vital capital infusion to drive the expansion of its wealth management sales platform in the U.S. market.

Since its 2019 launch, the platform has built a solid record of success that includes annual revenue growth of 640% and 800% in 2020 and 2021, respectively. With the latest financing, it intends to hire at least 150 new team members over the next two years.

The series A round is a testament to the tech company’s value as an enterprise, according to its founder and CEO, especially given the climate of private equity and venture capital investment so far this year.

“As somebody who's been exposed to this space as a tech company, I think there's been a general pullback in tech investing and IPOs during the first quarter of this year,” James Rockwood told Wealth Professional.

Rockwood estimates that last year, there were more than 100 tech company IPOs, while only a handful have debuted on public stock exchanges in the first half of this year. Coupled with media reports of tech sector valuations getting compressed in the face of rising rates, he sees a stark pullback in the market when it comes to investing in tech and startups.

That dampening of sentiment is reflective of a more uncertain climate in the broader markets. While COVID certainly isn’t at the epidemic levels that spurred widespread lockdowns during 2020 and 2021, it hasn’t truly gone away and continues to be a public concern. The conflict in Ukraine, which has short-circuited supply chains and sparked a geopolitical and humanitarian crisis, is also crimping investors’ ability to form a constructive outlook on the global economy and financial markets.

“I think when investors are focused on risk, you tend to see a pullback start in the most early-stage corners of the markets,” Rockwood says. “If you're looking at alternatives or other investment vehicles, other markets, and asset classes like fixed income, which are now starting to do better, early-stage investors take on a higher opportunity cost than before."

The current state of the investor landscape also stands in stark contrast to the past two years, when people had record amounts of savings and interest rates were historically accommodative. That created tremendous financing opportunities for private equity firms.

With rising interest rates and inflation putting pressure on portfolios, investors are increasingly looking afield and considering exposure to alternative investments, including PE and venture capital. Still, the stakes have gotten higher for tech companies seeking capital from PE and VC firms, who will be more inclined to focus on the quality of a company’s earnings, the customer base it serves, how efficiently it uses its cash, and so on.

“I think if you’re a tech company, you’ll also need to be able to tell a more compelling story about your particular business,” Rockwood adds. “Potentially, a lot of companies that are doing genuinely interesting and innovative things can get lost in themes or big, sweeping changes happening in the market. So the challenge is to get people to focus on what you’re doing really, really well so you can rise above the noise and sound of what’s happening. This needs to be backed by solid fundamentals, and profitable growth.”

While a lot of tech companies may struggle to convincingly express their value, Rockwood believes wealthtech firms have the potential to stand apart, particularly in environments like what’s happening today. Portfolio management and analytics platforms, he suggests, have the opportunity to show their real worth when investors are grappling with negative emotions and uncertainty from the markets.

“In these circumstances, advisors need more information, and more expedient ways to talk about investments to their clients, or address different questions they're going to have, and I think technology really facilitates that information,” he says. “I think in a lot of spaces, we’re going to see greater attention being paid to investor risk profiles, which means wealth technology that can provide information on investments in particular will be as in demand as ever.”