PE Firm's Rules: Invest in Experience, Be Wary of Online Lenders

Private equity investor Collin Roche is skeptical of online lending.

In evaluating investment opportunities in fintech, the private equity firm GTCR, where Roche is a managing director, has largely steered clear of marketplace lenders because most, he said, have yet to prove themselves.

The firm is also a big believer in experience, so GTCR will only invest in companies that have competent management with proven track records. For instance, last month GTCR announced it was pairing with Scott Happ, a veteran in the mortgage technology industry, to buy Optimal Blue Holdings, a cloud-based product and pricing engine provider that processes nearly a quarter of the mortgages originated in the U.S.

At $350 million, the deal was among the top 10 largest acquisitions within fintech in the first half of the year, according to data from Berkery Noyes Investment Bankers. (Overall, fintech M&A deal values totaled $37.5 billion in first half of the year, down 14% from the second half of 2015 but nearly twice totals from a year earlier.)

Roche recently talked to American Banker about the Chicago firm's take on fintech, where it sees other opportunities and what catches the firm's attention. The following is an edited transcript of that conversation.

GTCR has been a longtime investor in fintech, as in financial technology, long before the term was associated with startups trying to disrupt banking.

COLLIN ROCHE: Yeah, fintech is a funny word. We've been investing in fintech for 30 years and now it has this other meaning. It is all Web 2.0, software-as-a-service, products that leverage data for marketing, data portability — all of those things.

What do you think about new "fintech" then?

There is a big opportunity in financial services to leverage this newer form of technology. Before, technology was a heavy, heavy installment, with long implementations and, once installed, it was there. It didn't manage data well. They were point solutions, so they didn't manage workflow well. Now, the technology is much more flexible and there is a lot more consumer-facing technology, and it is changing the marketplace.

Are you interested in one particular area?

There are vertical opportunities in banking, insurance or what we are doing in the mortgage industry with Optimal Blue. But there are also a lot of horizontal opportunities. Compliance is a big area of focus. People tend to think of compliance as a regulatory issue, but it is so much broader. The fact is the world we live in today doesn't tolerate exceptions, whether it is someone sending money to the wrong place or outright fraud. But so much of financial services is still people-intensive and costly. Exceptions are embarrassing, they can give rise to litigation and the political outcomes can be bad. So technology that minimizes bad outcomes is interesting.

Are there areas where you're not interested?

We're a bit skeptical about marketplace lending. Every once in a while there is some hubris out of Silicon Valley that this new thing will change the world and then it blows up. Some of it survives, but there is going to be an adjustment. We are more inclined to wait and see how far it falls and then look to invest once the business models prove themselves, have more discipline and rigor and are more time-tested.

I recently heard this about fintech — when startups pitch to investors in Silicon Valley, they focus on the customer experience. When they pitch in New York, they focus on the money. What catches Chicago's eye?

You're right about the coasts. Companies like Apple and Amazon have definitely proven that the experience matters.

Chicago is a human capital town. For our firm, when you're pitching us, we want to know, "What's your experience in making things work?" The technology might be dynamic, but what's more important to us is who you having leading the business.