China’s Tencent uncloaked as mystery lead backer of Neo’s $100-million-plus financing

Chinese technology giant Tencent Holdings Ltd. TCEHY led a recent US$80-million ($112-million) equity investment in Neo Financial Technologies Inc., valuing the Calgary online financial upstart at a steep discount to its last financing.

Neo did not reveal its lead investor when it announced the deal two weeks ago and has rebuffed queries about its identity. “We’ve disclosed all that we’re prepared to disclose at this time,” co-founder and chief commercial officer Jeff Adamson said Wednesday.

But a term sheet for the deal obtained by The Globe and Mail identifies Tencent as the investor, showing it committed to buy US$50-million of the offering, which values Neo at US$430-million before the receipt of funds, and US$510-million after.

Neo is one of several digital financial services startups seeking to challenge Canada’s big banks by offering a smooth online experience and low fees. The company, created and led by three co-founders of Canadian food delivery service SkipThe Dishes, has grown rapidly, surpassing US$100-million in annual revenue in April, according to a document sent to prospective investors. It has 1.3 million customers and expects to hit operating profitability in 2025.

The new valuation is at a steep discount from Neo’s $185-million financing in spring 2022, which valued it at more than $1-billion. According to a document filed by Neo with the federal government, investors in the new deal paid US$4.26 or US$5.33 apiece for two types of preferred shares, down from the US$16.01 issue price for shares sold in 2022 (A separate table listing investors prior to the recent financing shows the 2022 shares were valued at US$19.15 each). That is consistent with other financial technology firms that have been devalued since 2022.

In a Nov. 11 news release about the deal, Neo said only that several Canadian technology entrepreneurs including founders of Shopify, Slack, PointClickCare and Roblox had invested alongside previous backers, which accompanied a $250-million debt financing.

The release did not mention a lead investor, which is unusual for a big tech financing, particularly since Neo has attracted backing from Silicon Valley billionaire Peter Thiel’s Valar Ventures alongside other U.S. and Canadian venture capital firms and Thomvest, an investment vehicle founded by Peter J. Thomson. (The Thomson family holding company, Woodbridge Co. Ltd., owns The Globe and Mail). Canadian financial institutions ATB Financial and Concentra Bank and Hudson Bay Co. are also investors.

When asked who participated, Mr. Adamson initially told The Globe and Mail: “Obviously we haven’t listed every single investor,” adding the round’s backers included “a mix of global top tier investors” who have backed leading digital bank challengers globally. “They have made their pick in Canada and that pick is Neo.”

Online news publication The Logic subsequently reported securities filings showed Neo had raised most of the round from an unidentified Chinese investor. When The Globe pressed Mr. Adamson for its identity, he replied by e-mail: “We respect each investor’s right to privacy and confidentiality.” He told tech news site BetaKit that Neo lacked approval to name the investor, describing it only as “an experienced global investment firm” that had backed fintechs elsewhere.

Tencent has backed at least nine digital banks in Europe, South America, Japan and India, including two alongside Valar: France’s Olinda SAS (known as Qonto) and Germany-based N26 AG. Tencent has made several investments in Canada, backing Wattpad, Element AI, Kindred Systems, Real Ventures and financial technology company NorthOne.

The Tencent-led deal appears to be structured in a way to allay geopolitical concerns, should they arise, about a Chinese company owning just under 10 per cent of a consumer-focused Canadian financial services company. All Chinese-based companies are required under Chinese law to share information with its government, if requested. Similar concerns have led to bans on the use of telecom equipment made by China’s Huawei Technologies Co. Ltd. in Canada and its intelligence-sharing allies.

The deal establishes Tencent as a passive investor: It does not get a board seat and has limited information rights about the company’s performance compared to other investors. It gets no access to data or personally identifiable information about Neo customers. Mr. Adamson said Neo still qualifies as a Canadian-controlled business.

By contrast, TikTok’s Chinese owner ByteDance Ltd. collects user data including location, contacts, likes and shares. ByteDance this month was ordered by the Canadian government to shut its subsidiary here, although Canadians were not banned from using the social media app. TikTok has faced concerns related to safety and privacy stemming from the possible involvement of its home government and whether it has been used as a tool for propaganda or spying.

Questions about Neo’s mystery backer have overshadowed its fast growth. Investor documents show Neo’s growth is outpacing other global “neobanks” and the company forecasts it will surpass US$1-billion in revenue by 2028. By comparison, Equitable Bank (known as EQ Bank), one of the most prominent digital-only competitors to Canada’s big banks since starting online banking in 2016, reported revenue of $944-million in the first 10 months of 2023.

Neo offers core banking products including bank accounts, term deposits, credit and debit cards, as well as a loyalty program in partnership with 14,000 merchants including Shell, Subway and Harry Rosen. Like other bank challengers, Neo is at a disadvantage to regulated banks, as it cannot hold or use deposits for lending and must partner with licensed institutions to manage savings accounts, meaning it has a higher cost of capital than the incumbents.

One of the keys to its growth has been its 2021 partnership with Hudson’s Bay Co. to offer its branded Bay credit cards, securing a chance to build its client base by tapping into one of Canada’s largest loyalty programs.

Neo also landed deals to provide the platform underpinning credit cards offered by Tim Hortons and airline Cathay Pacific. The company says it consistently adds about 100,000 customers per quarter, as its average cost to acquire customers has fallen to the low US$20-range from above US$60 in early 2022. Its next big play is to go after small and medium businesses, targeting a market it sees as underserved by banks.