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Breakingviews

Private Equity’s Big Bets on Financial Tech

A customer paying with a contactless credit card at a store in Paris.Credit...Philippe Wojazer/Reuters

Private equity firms are rushing to bet on financial technology.

Permira Capital Partners, Advent International and Bain Capital have all recently announced acquisitions of payment processors in the hope of capitalizing on the cashless zeitgeist. The Blackstone Group and CVC Capital Partners, which just offered $3.7 billion for Paysafe of Britain, are placing a double wager.

Paysafe’s quirk is that approximately half of its revenue comes from online gambling and gaming. Investors have struggled with the associated risks — notably from Paysafe’s Asian business, which brings in about a fifth of its earnings before interest, taxes, depreciation and amortization, or Ebitda. A short-seller’s report alleging unsavory dealings in China wiped 38 percent off the company’s share price last December. Though the stock recovered, Paysafe still suffers from a stubborn valuation discount to peers like Worldpay and Nets — both acquisition targets themselves.

The buyout firms therefore spy an opportunity. They will end up paying close to $4.7 billion for Paysafe, factoring in fees, net debt and the extra borrowings from a $470 million acquisition it announced on Friday.

Assuming that the new owners can quickly sell the Asian business for a fairly modest five times Ebitda, their outlay would fall to around $4.4 billion. That is about 12 times the approximately $370 million of Ebitda that Paysafe is on course to make in 2018.

From there, the odds are in the private equity firms’ favor. Assume they fund around 40 percent of the acquisition with debt, that Paysafe’s Ebitda grows at around 10 percent annually for the next five years and that the owners use about one-third of that to pay down borrowings.

At the same multiple of 12 times Ebitda, Paysafe could have an enterprise value of $7 billion, with $850 million of net debt. That implies equity worth close to $6.2 billion at the end of five years — 2.5 times the buyout firms’ original investment, and equivalent to an annualized return of 20 percent.

Put more simply, Blackstone and CVC stand to make a decent return not just from riding the digital payments bandwagon, but also for taking on risk that public-market investors are less comfortable shouldering.

It is hardly radical. But ultimately, that kind of willingness to wade into the dicier corners of finance is what private equity is for.

John Foley is Reuters Breakingviews editor for Europe, the Middle East and Africa. For more independent commentary and analysis, visit breakingviews.com.

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