It may seem like a lifetime, but it was only a few years ago — nearly three, in fact — when the payments mega-deals began to surface.

Global Payments inked a deal to acquire TSYS for more than $21 billion. First Data was bought by Fiserv for $22 billion. FIS bought WorldPay in a whopper of a deal valued at $35 billion.

The common theme back then was bringing software and payments together to grapple with the threat of disintermediation and generate economies of scale.

Managing Director Ganesh Rao of private equity firm Thomas H. Lee Partners (THL) told Karen Webster that variations on those themes are driving acquisitions today, perhaps on a slightly smaller scale. But opportunities abound to find, invest in and develop companies that seek to bring payments and software together in what he called a very competitive market.

The conversation came against a backdrop in which THL announced last month that it had closed its ninth flagship $5.6 billion Fund IX, focused on middle-market firms that are in turn targeting secular growth trends.

Even now, he said, finding and investing in emerging companies that are out to change the way payments and financial services are done is very competitive. There’s still a lot of capital chasing deals even as 2021 draws to a close — and for private equity firms, a focused investment strategy is critical.

THL’s Strategy

Generally speaking, Rao said THL focuses on three industry verticals: financial services; healthcare; and technology automation/business services (and, as he noted, those verticals can overlap). Within those three verticals, THL focuses on what Rao termed ISOs or identified sector opportunities.

“We try to be extremely deep and extremely narrow to enable that sector specialization,” Rao told PYMNTS.

And within those subsectors, within the financial services segment, lies software tied to payments. Rao noted that THL has staked claims in this space, having acquired AbacusNext, a Software-as-a-Service (SaaS) company focused on professional services, earlier this year, according to a press release. The company also has holdings in Nextech, which helps healthcare providers run their practices more efficiently.

As Rao told Webster, THL starts with a large funnel of investment and acquisition candidates under consideration. In payments, for example, the company started with 2,000 companies, winnowing down the list to about 10 to 20 firms.

Within financial services, the firms that ultimately make the cut are dedicated to improving existing infrastructure and payments-related activities — or disrupting them.

The payments software space itself is undergoing a seismic shift, said Rao. A few decades ago, the software traditionally belonged to banks. More recently, third-party firms and merchant acquirers have come into the space. And across the spectrum of payments, the challenges remain the same — funding the accounts and then getting those funds disbursed.

Within the last few years, THL has seen the emergence of integrated payments. Through its acquisition of AbacusNext, “We’ve gone ahead and built out our own payments offering, utilizing a [payments facilitator (PayFac)], and we think there’s a huge opportunity to provide a better value — first to our customers, but then also being able to monetize that payment stream” through the B2C economics tied to credit cards and interchange, Rao explained.

The B2B Opportunity

Opportunity abounds in disrupting and modernizing B2B payments too, said Rao.

“We’re seeing a lot of interesting software businesses here,” he said, focusing on accounts receivable (AR) automation companies that are not only providing the software to make the process more seamless but also monetizing those streams. THL has been an early investor in B2B’s ongoing transformation, having invested in ComData in 2008 before the business was ultimately sold to FleetCor in 2014.

Automating back-end processes represents some of the most compelling value propositions in payments, allowing firms to reduce their operating expenses.

“You get paid for doing it,” Rao said of automation — as companies can share the interchange with their customers. In other cases, many firms are enabling real-time communications and payments between buyers and suppliers, where the latter firms are willing to take discounts in order to get paid earlier than stated terms.

Recent months have brought some notable trends within financial services mergers and acquisitions, Rao noted. He pointed to the explosion within the buy now, pay later (BNPL) space and deals such as Square’s buyout of Afterpay as key developments, although he contended the threat to legacy financial institutions (FI) is overstated.

InsurTech remains a space that is underinvested, said Rao. THL is “actively trying to find a lot more investments in the insurance technologies and the life and annuity space,” he noted.

CFO-focused software is another space that holds promise, Rao said, where “you’re really displacing Excel and manual processes.”

As he told Webster, “these are not going to be short-term trends; they will accelerate into longer-term trends.”

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NEW PYMNTS DATA: THE 2021 HOLIDAY SHOPPING OUTLOOK

About: It’s almost go time for the holiday shopping season, and nearly 90% of U.S. consumers plan to make at least some of their purchases online — 13% more than did in 2020. The 2021 Holiday Shopping Outlook, PYMNTS surveyed more than 3,600 consumers to learn what is driving online sales this holiday season and the impact of product availability and personalized rewards on merchant preference.

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