The Regtech Paradox: Are Early-stage Regtech Firms Being Overlooked?

As artificial intelligence and machine learning transform industries from stock trading to customer service, one might expect equity investment in the UK’s early-stage regtech companies—key innovators in applying these technologies—to be robust despite broader challenges. However, the numbers suggest otherwise, with both the active company count and investment totals remaining stubbornly low.

Financial regulation is often perceived as a double-edged sword. While important in maintaining trust and stability, navigating the thicket of ever-changing compliance requirements can curtail innovation, slow growth, and inflate costs.

By leveraging data-processing technologies like artificial intelligence and machine learning, regtech firms promise not just to cut through the complexity but to turn compliance into a competitive advantage by improving efficiency in the back office.

Of course, compliance is not just about efficiency. For some firms, regtech can be the difference between scaling up or shutting down. Take the case of German fintech N26.

In May, the Financial Times reported that N26 saw its growth curbed and billions wiped from its valuation as it contended with regulatory action due to its weak anti-money laundering controls.

In an era where regulatory scrutiny can make or break a company, it seems that the value of robust, scalable compliance tools has never been clearer.

Given this backdrop, one might expect the UK’s vast financial services ecosystem—home to nearly 74,000 FCA-regulated firms and more than 181k individuals in regulated roles—to support a significant number of high-growth firms. After all, this is the same soil that nurtured fintech giants and attracted billions in AI investment.

Yet, the data paints a picture of a sector that is relatively underpopulated and underinvested. There are only 155 actively trading independent regtechs tracked by Beauhurst, compared to over 1,500 fintech firms and more than 2,200 working on AI tools and services.

While substantial investment has flowed to AI companies, the regtech sector has not seen the same relative influx. Annual invested capital and deal numbers are down from the stimulus-driven high of 2020 when companies raised £618m via 52 deals.

So far in 2024, regtechs have raised £155m via 44 deals for an average deal size of £3.88m (where the invested total is known). This compares to an average deal size of £4.19m in AI and £5.65m in fintech.

Of course, a large part of this downturn can be attributed to broader market conditions. An increased base rate to tackle inflation, borne of stimulus measures and energy market shocks such as the Russia-Ukraine war, has driven investors back to safer asset classes.

While there are positive early signs of activity returning to the market, invested totals for 2024 will be low nearly across the board, with a few notable exceptions. Developments in generative AI have encouraged investment in companies working on AI and machine learning tools.

However, it is surprising that this enthusiasm has not driven more money into regtech firms, many of which were offering machine learning-driven tools well in advance of the enthusiasm for generative AI that emerged in 2023. The sector seemed poised to attract more investment as companies sought practical implementations of AI, but the data so far does not reflect this potential. Of the money raised in 2024, five deals make up nearly 70% of the total amount raised.

These include a £37.2m round raised in March by GSS. Since its incorporation in 2021, the London firm has developed a software platform offering sanctions screening, compliance, and regulatory services. Investors included asset manager Cynosure Group and the Commonwealth Bank of Australia.

Another notable deal was Novatus Global’s £30.5m round in September, backed by US growth-equity firm Silversmith Capital Partners. Launched in 2019, London-based Novatus Global develops financial analytics software and provides consultancy services.

While the larger investments highlight the potential that some investors see in the regtech sector, they also show that most invested capital is concentrated among a small number of companies. At the very earliest stages, there are 11 regtech companies that have secured investment for the first time in 2024.

These startups are the pipeline of potential growth companies; it would be better if there were more of them. For comparison, 49 fintechs have raised money for the first time, as have 167 AI companies (excluding the firms that are also regtechs).

It will be informative to see how the early-stage regtech industry evolves as more liquidity returns to the equity markets. Is there a shortage of investible companies, a lack of capital, or simply not a large enough market for regtech services?

Do you lead a regtech startup or invest in regtech firms? Does the data in this article support or contradict what you see in the market?

I’d be interested to hear from you at daniel.robinson@beauhurst.com.