Investment in Canadian fintech declined last year

Investment in Canada’s fintech sector dropped last year, as valuations declined more than five-fold and the number of deals slowed significantly towards the end of the year. Despite the slowdown, it was still the second-best year for deal volume.

There were 169 fintech investments worth US$1.3 billion in Canada in 2022, down from a record 217 deals worth US$7 billion in 2021, according to data compiled by PitchBook for KPMG in Canada. Seed round and early-stage investments drove more than half of last year’s activity, with 57 seed round and 41 early-stage (series A and B) investments.

“It’s not surprising to see a decline given the market rout, and the fact that fintech investments hit such feverish heights in 2021. But to put things into perspective: last year’s activity was still stronger than 2020, and we also saw the second highest number of deals ever, so clearly investors were still finding many attractively priced opportunities,” says Geoff Rush, Financial Services Industry Leader at KPMG in Canada. “The number of seed round and early-stage investments is also a positive sign for the strength of Canada’s fintech ecosystem going forward,” Rush adds.

• 169 total investments worth US$1.3 billion in Canada in 2022, down from 217 deals worth US$7 billion in 2021
• In H2’22, there were 68 investments worth US$439.9 million (down from H1’22 when there were 85 deals worth US$810 million)
• The fourth quarter was the weakest quarter of the year, with 27 deals worth US$154.8 million (down from the first quarter, which saw 41 deals worth US$285 million and the fourth quarter of 2021 which saw 52 deals worth US$956 million).
• There were no fintech IPOs in Canada

The slump in Canadian and global markets put downward pressure on valuations last year, a trend expected to continue this year. “A potential recession, rising interest rates and inflationary pressures are top of mind for investors, so we expect valuations and deal volumes to remain subdued through 2023, with a slight pickup near the end of the year,” adds Georges Pigeon, a partner in KPMG in Canada’s Deal Advisory practice who specializes in financial services.

“The fintech space is also undergoing a bit of a mentality shift. In 2021, many companies saw a huge influx of capital from VC investors, so some of those firms won't need cash until sometime in 2023 - maybe even 2024 – because they’ve streamlined and restructured their operations to make that cash last longer. So instead of a ‘growth at any cost’ mentality, many fintechs are now focusing on sensible growth while preserving the cash they have on hand for as long as they can with an eye to achieving sustainable profitability in a not-too-distant future,” Pigeon adds.

The decline in fintech investments in Canada mirrored a global trend. Around the world, there were 6,006 deals in 2022 worth US$164 billion, down from a record 7,321 deals worth US$239 billion the previous year. While lower, it was still the third best year for fintech investment ever and the second-best year for deal volume, according to Pulse of Fintech H2’22 – a bi-annual report published by KPMG International that highlights global fintech investment trends.

On a regional basis, the Americas continued to account for the largest share of fintech investment globally, attracting US$68.6 billion across 2,786 deals in 2022 — of which the U.S. accounted for US$61.6 billion across 2,222 deals, the report notes.

By sector, payments remained the hottest sector globally, while cryptoassets and blockchain companies garnered the most interest in Canada despite a year of volatility from the collapse of some stablecoins, cryptoasset exchanges and lenders.

While investor interest in Canadian cryptoasset companies could wane in 2023, Mr. Rush says it will be a critical year for cryptoassets as investors seek more clarity around regulations and transparency.

“We expect to see a slimmed-down, more transparent and accountable cryptoasset ecosystem emerge this year. As long as transparency, trust, regulation and innovation are the forefront, the cryptoasset ecosystem has a sustainable future,” Rush notes.