The investing horizon can be a variable one. Some investors think in terms of minutes, others in fiscal quarters, still others in months and some in years. For private equity investors, who tend to be on the lookout for nascent companies about to latch on to waves of revenue and profitability growth, the timeframe stretches out a bit to include years. The same goes for strategic buyers, who operate within an industry and have an interest in snapping up competitors, with an eye on bolting on new technologies or gleaning the expertise of certain management or development teams.
Regardless of the investment horizon, the key is to have a finger on the pulse of what might signal a sea change in a given industry — for our purposes, of course, payments. In an interview with PYMNTS, Trevor Rich, principal at private equity firm Lovell Minnick Partners, said that the “playbook is changing substantially” in the industry, with a movement toward “merchant acquirers, as defined by the old guard … evolving beyond mere credit card and debit card” acceptance and simple payments (and hardware) to a more software-oriented mindset. “It used to be about what could be thought of as ‘dumb terminals,’” said the investor, with enough of a fragmented market to give rise to a successful rollup strategy, as smaller firms became fodder for larger ones. Now, the space has fine-tuned a bit to embrace certain verticals, such as restaurants, for example, or retailers.
And, Rich told PYMNTS, POS systems have found anchor well beyond serving as just the initial point of contact between a customer and the transaction itself. Software and the evolution beyond “dumb terminals” mean that the back end comes into play, so much so that inventory management (to name one example and one that can work across a supply chain) can serve as one differentiator in offerings with value to the enterprise — no longer a payments investment landscape dominated by ISO rollups but one where PE and other firms can choose among software development within new market segments.
For investors, said Rich, the net should be cast in a relatively narrow way — “looking for the products that are narrow rather than broad, with, for example, solutions that would cater well to the retail segment” but may not “be all things to all firms.” The hardware-housing tech at the point of sale, said Rich, is standardized enough so that Samsung, Apple or other marquee brands tend to be the go-to names for the actual tangible tech. But ease of use and what Rich termed a “plug-and-play” method of adoption become important.
“We tend to want to invest where the tailwinds are behind us,” as measured by a technology shift and where the exit strategy may be marked by the possibility of acquisition or IPO. But the emphasis now, he added, looks beyond growth (top line, that is) and even net income to project an inflection point where customer acquisition costs give way to positive cash flow, as management teams focus on organic growth.