The Future of Money: The Battleground Between Unicorns and Legacy and What’s Ahead in MortgageTech

Investment Banking, Corporate Development, Fintech, Mortgage Services & Tech

December 2020 — By John Mathis


More Money, More Deals and More to Come

There is an accelerating pace of investments and acquisitions in the Mortgage Technology sector.  Even COVID-19 could not stop the mega deal of Intercontinental Exchange (“ICE”) acquiring Ellie Mae for a high-water mark of 12X revenue.  Excluding this $11bn deal, the sector may still close in on $4bn in transactions this year, roughly flat with 2019 activity.  

Over the past 5 years, the MortgageTech market has experienced more than $30bn of transactions.  In the past 24 months, nearly $20bn has gone into acquisitions and investments in the sector – more than the previous 5 years, combined.  The action is spread across go-privates, strategic combinations, and VC-backed rounds, including Unicorns (private companies >$1bn in valuation).  

In this note we consider what is driving the pace and what comes next – (hint, we see more coming).

The US Residential MortgageTech market is designed to serve the $4.0 TRILLION in first mortgages, refinancing and secondary market transactions that represent roughly 4-5% of the US economy.  Like other market segments, COVID has accelerated the forces of change.  MortgageTech is modernizing and digitizing what has traditionally been a fragmented and heavily regulated market.  We see three dominant trends: 

  • Digital Closing – provides straight through underwriting processing 
  • Consumerism – app-based solutions that disrupt traditional bank-centric or realtor models
  • Automation – technology enhancements that accelerate workflow and reduce risks

The MortgageTech Marketplace

From a big picture, the mortgage market is a marketplace where consumers and investors interact with the help of thousands of agents, technology solutions, banks, non-banks, and government entities.  The “flow” of the market works through residential real estate, lending, servicing the loans and the capital markets where loans are packaged and traded.

Investments and M&A in the technology that drives this market have been intensifying.  As our opening chart presented, more than $30 billion of transactions have poured in over the past 5 years as incumbents and new ventures strive to reshape the mortgage industry along three lines:

  1. Upgrade & Enhance Core systems:  As an example, the combination of ICE and EllieMae creates a force in mortgage workflow with more than 10% share of the total addressable market.  The combination creates a new industry standard to generating, underwriting, assembling and trading into the largest securitized market in the world.   Incumbents have pursued more than $20 bn in transactions – dominated by the $11 bn EllieMae/ICE combination, followed by $1.8 bn Black Knight/Optimal Blue.  CoreLogic is also in play and could fetch more than a $6 bn price.
  2. Disrupt the old models:  These fast-growing new entrants have raised more than $8 bn and several have attained Unicorn status.  They are intent on disrupting everything - from how homes are purchased (see our note on i-Buyers) to how consumers manage their mortgage and other consumer loans.  i-Buyers like Opendoor and Offerpad are changing how consumers buy and sell their homes.  Firms like Roostify and Blend are leading a revolution in loan origination and consumer successes and consumer loan firms like SoFi are moving into the mortgage arena.  Interestingly, the Unicorns that serve consumers are the success stories – few (if any?) have sprouted from a B2B focus. 
  3. Digitize:  More than $2bn worth of investments have funded new solutions in consumer direct applications and the firms that serve core mortgage origination and servicing including electronic notaries and new methods of appraisal and title and document management.  

Who is Driving MortgageTech Transactions?

We reviewed the past 5 years of transactions in search of patterns that might shed light on predicting the future.  What we found was that transactions – both investing and acquiring – were driven by four types of MortgageTech players:

 

Four Types of Dealmakers

  1. Craftsman – specialists.  These are the smaller new entrants or well-established niche players, often becoming acquisitive with private equity backing.  These firms, like regional Appraisal Management Companies (AMCs) or e-document or notary companies, are raising capital or acquiring.  Nearly 50% of all transactions occur with this group, however the dollar value is small, as players jockey for position on tight capital budgets.
  2. Transformers – the Unicorn lair.  A very select few of the Craftsman gain enough traction and financing to elevate into the billion-dollar private value club and most eventually take the IPO route.  We’ve seen firsthand how Unicorns seek to acquire very unique and specialized assets – while the success of their organic design builds scale. 
  3. Legacy – established, but often under appreciated.  This is the old guard with well-established brand and customer footprint that rely on M&A to drive innovation and growth.  Notably, these firms are putting just as much capital to work as the Transformers are in building the next Unicorn.  
  4. Intimidators – the incumbents with the power.  Two-thirds of all the value is controlled by these large-scale incumbents.  Few will argue that Fidelity (NYSE: “FNF”), and its Black Knight offspring and their owners are anything if not intimidators (don’t let the Las Vegas Golden Knight’s friendly mascot fool you).  The merger of EllieMae and ICE solidified their intimidator status.  Large backers, debt-financing and deal syndication is a bullish sign for more to come.

Outlook - In 2021 We Expect to See Three Areas of M&A Activity: 

  1. Big get stronger.  Just before print, CoreLogic announced it was exploring strategic options, brought about by an unsolicited offer from an investment group led by Fidelity’s Chairman.  The combination would bring the world’s largest title business and the Mortgage market’s leading data and analytics provider under a related corporate ownership. Tough to predict who wins the prize.  Any Corelogic deal (if it happens) will alter the balance of power and we expect the next largest title player, First American, to move nimbly.  Overall, we expect more consolidation with Title, Appraisal, Software and Analytics acquisitions.  
  2. Active pipelines.  Watch for strategics and PE backed holdings either coming to market or launching their own consolidation plays.  Our industry checks suggest a strong pipeline of activity, including:
    1. Software anywhere, anytime: By far the strongest demand is for technology providers that have gained traction – buoyed by a strong cyclical tailwind. 
    2. Appraisal management companies: We’ve seen select parts of the ecosystem rollup, for example, with Stewart’s acquisition of 2 appraisal management companies.  Several AMCs are in the market now – we expect further consolidation. 
    3. Title companies:  Whether agent based or independent, we see strong demand for these assets. 
    4. Secondary markets revived:  We expect loan QC firms to attract more attention. 
  3. Another wave of VC.  The bets over the past few years are working (OpendoorRedfin and Better), so watch for more.  For example, we expect larger rounds of investment for Series C+ players like Qualia in the digital closing space.  We’ve seen firsthand when Unicorns go acquisitive and it’s rarely for scale, more for capability.   Several early stage disrupters and established niche solutions may make for attractive accelerants including firms like BoweryAcuityDataTraceReggora and SimpleNexus

This next year is setting up to be very active indeed. 

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