Current market volatility fueled by the global pandemic and subsequent economic disruption may seem to present an inopportune moment for companies to go public. Yet for integrated payments and commerce technology provider Paya Holdings, floating on the Nasdaq Stock Market this week came to fruition after careful consideration about the current state of the market.
According to Jeff Hack, CEO of Paya, today's climate has opened up significant opportunities for companies like Paya Holdings. Speaking with Karen Webster, Hack explored the value of becoming a publicly traded company at a time when organizations are scrambling to digitize.
Optimizing payments is increasingly climbing the priority list for middle-market firms, he said, and in a competitive and fragmented payments technology market, embracing the benefits of going public can help accelerated mid-market firms across verticals to accelerate their payments modernization initiatives. But, Hack noted, Paya needed a particular transaction structure in order to gain the most from going public, one that involved both a private placement and a special purpose acquisition company (SPAC).
The Path To Public
Hack noted that Paya operated as a private company "at a time when it was very beneficial," pointing to the ability for private companies to embrace "flexibility and focus."
GTCR, which acquired Paya in 2017 and remains the company's largest shareholder today, encouraged the company to accelerate product and technological development, a capability supported through operating as a private firm.
But there is value to becoming a public company that Hack said becomes even more beneficial as a result of the pandemic. While the coronavirus crisis did indeed impact Paya's payment volumes, Hack noted that its peak decline hit in April with a 7 percent year-over-year dip — not awful, compared to reports of double-digit drops among other firms.
And despite the challenges that COVID-19 brought, including the need to work from home and find alternative sales strategies to in-person trade shows, investors were ready to embrace a mid-cap payments FinTech.
"The public markets were saying, 'We want companies like them,'" Hack recalled. "We had a moment when we were saying, 'We're doing great in our second quarter ... on the other hand, we're in the middle of a pandemic.'"
Ultimately, Paya decided that becoming a public company would be beneficial to its customer base of mid-market firms in desperate need of integrated payment solutions amid a heightening digitization push. But key to a successful plan is an appropriate transaction structure, which, for Paya Holdings, meant a $250 million private placement in addition to the structure of a SPAC formed with FinTech Acquisition Corp. III in order to facilitate the Nasdaq listing.
While going public via a SPAC can be fast, speed isn’t enough to go public successfully. Combining a private placement, led by Franklin Templeton, allowed Paya to validate its business model for investors.
“SPAC investors don’t know what company will show up – they’re backing the sponsor,” he said. “What the private placement did is underwrite our business, our strategy, our management and our valuation. That was the linchpin for me, because we knew we had sophisticated institutional investors that believed in our company under the terms of the deal.”
Finding Mid-Market Opportunities
According to Hack, this particular structure not only aimed to elevate confidence in SPAC investors, but also increased confidence among potential new customers struggling to digitize and optimize their payment strategies.
"There is a level of transparency that comes with being a public company, which I think, for many software companies, can be valuable," he said. "There's always a little bit of uncertainty with privately-held businesses about their path and what will go on. This allows us to now, publicly, showcase the progress we've made as a company."
That's important in an increasingly competitive and fragmented market where firms are scrambling to capture their share of opportunity. There are trillions of dollars of transaction volume either in the form of checks or electronic payments that aren't truly integrated, said Hack. And as a result of the pandemic, middle-market firms are intensifying their search for payment software partners that can address this need.
Of course, in such a volatile market, not every middle-market customer will be a lucrative one. Hack pointed to municipalities, charitable giving and B2B as the customer categories that saw the greatest growth for integrated electronic payments as a result of the pandemic. Transaction volume for organizations in product areas like durable goods and PPE were up too, unsurprisingly.
"We had up categories, we had down categories, and we had categories that were just bumping along, flattish, up a little, down a little," said Hack. But regardless of these fluctuations, across the board, more enterprises were seeking to adopt tools that were readily available on the market, and to accelerate the implementation of those solutions.
Looking ahead, Hack expects organizations to continue to drive their demand for integrated payments technologies upwards, particularly among mid-market software firms. Many are owned by private-equity firms, and those owners are driving a focus on integrated and monetized payments within their portfolio companies to drive up value.
But it's not the only customer segment poised for growth. As more corporates navigate their way through the pandemic, the post-COVID market may present a greenfield opportunity for payment FinTechs, whether in healthcare, education, not-for-profit or other spaces.
"People simply understand there is a better way to conduct business in the middle markets," said Hack.