The Lure Of B2B For Private Equity

The financial trade press may be dominated by the push and pull of stock prices of B2C firms — Square, PayPal and any number of others. And there is endless talk of unicorns and down rounds and worries over whether venture capital may be shying away from lighting a match under dry kindling, in terms of capital deployment.

But to borrow a quote from the dark years of the Nixon era and Watergate: Follow the money.

Late last week, it was announced that Texas B2B payments firm StoneEagle Services had raised $76 million from San Francisco-based FTV capital, a vote of confidence in a burgeoning platform for payments outsourcing.

Under the terms of the investment deal, Andy Roberts takes his position as chief executive officer of StoneEagle, and Bobby Allen, who founded the firm, becomes chairman of the board. FTV also gains some real clout in determining the direction of the firm, with three FTV executives, Chris Winship, Richard Garman and Robert Anderson, joining StoneEagle’s board of directors.

In an interview with PYMNTS, Winship, a partner with FTV, said that the landscape for investing in payments in general, and B2B payments companies in particular, remains an attractive one.

“We love to invest in payments companies,” he said, “because this is an industry that is growing globally, one that is changing rapidly, and fundamentally there is the shift that is moving from paper checks and cash to electronic payments.” In addition, and of particular interest to investors such as FTV, added Winship, is the fact that the payments market, regardless of B2B or B2C designations, is big enough and undergoing such a sea change that the trend is a steady one, does not fluctuate year to year and is not dependent on market cycles.

Discussing B2B specifically, Winship noted that B2C has tended to get the lion’s share of both interest and capital from other firms and certainly as measured in the last five years. The fact remains, however, according to Winship, that B2B as an investment arena remains “underfunded and underinvested,” even when, as FTV has estimated, that the commercial B2B market remains staggering in size, to the tune of $20 trillion, as measured by commercial spend in the United States alone.

The continued reliance of that market on checks speaks to the challenge of changing corporate behavior, Winship added, and yet the longer-term trend is one toward increasing automation, especially as companies move toward cross-border transactions.

Within the investment landscape, then, FTV looks for a three- to five-year holding period, said Winship, and within B2B, looks for firms with technology that helps streamline certain verticals. Some verticals, such as health care, are in significant need of better payments processes. That led to the funding for StoneEagle, said Winship, with a focus on the v-card that is offered through the payments firm for insurance claims payments to hospitals and physicians, with the payment processed in much the same way as a credit card transaction would be, once a claim is approved. And, with the absence of paper transactions, said Winship, transactions themselves are cheaper and speedier.

FTV sees potential in v-cards, given the one-time use of those cards and the attendant security improvement. “Adoption, thus far, is quite low, and this is a large greenfield market [with] double-edged growth,” as the B2B payments industry at large is growing and adoption of v-cards is growing as well.

For FTV, Winship said, amid a growth equity mindset employed by the firm when making investments, StoneEagle proved to be especially attractive, given the fact that it generates recurring revenues, with positive net income and positive free cash flow; he added that the top line has been growing at north of 50 percent. Traditionally, FTV, with roughly $1.8 billion raised to date, has taken stakes in companies that Winship described as “not startups but young companies,” with revenues above a $10 million threshold.

“If VCs turned their attention to B2B,” said the investor, “they would realize that they’d be better off than solely investing in B2C, especially with the demand, the need and the growth.”