FINANCIAL SERVICES SECTOR
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The document discusses the impact of COVID-19 on mergers and acquisitions (M&A) in the financial services sector, highlighting a significant decline in deal volumes and values in North America, contrasted with a more resilient market in Europe. It notes that certain subsectors, such as insurance and asset management, remain active, with private equity showing strong interest, while underperforming sectors are targeted for opportunistic acquisitions. The document outlines trends and the current M&A landscape, emphasizing the importance of adapting to changing market conditions and the role of technology.
FINANCIAL SERVICES SECTOR
- 1. C o n t e n t s North American Financial Services 4 European Financial Services 6 IMAP Financial Services Transactions 10 About IMAP 12 IMAP International M&A Partners IMAP INSIGHTS F E B R U A R Y 2 0 2 1 OUR M&A PERSPECTIVE ON THE GLOBAL FINANCIAL SERVICES SECTOR
- 2. INTRODUCTION In the US, Financial Services M&A has been significantly hit by COVID, with the number of deals decreasing considerably. Furthermore, at its peak, deal value was down over 90% and though this has rebounded, remains lower than in 2019. In Europe on the other hand, there was not as large a dip in deal volume and though the number of deals did drop in early 2020, the market rebounded at the end of the year. At the same time, several of the subsectors have been completely insulated from the pandemic, and insurance services, insurance underwriting and asset/wealth management all remain highly active. We will also see significant capital raising activity in the market in the form of scale-ups, as well as asset managers acquiring insurers to create permanent capital vehicles. Strong businesses continue to attract buyers and should the COVID pandemic continue to worsen, quality resilient companies from the first wave are likely to achieve higher demand and valuations, as capital, be it PE or trade is unable to flow into other affected sectors, an opportunity for buoyant companies in the Financial Services sector. Underperforming sectors on the other hand, primarily balance- sheet businesses, will be the target for value- orientated buyers looking for opportunistic acquisitions. SPACs will continue to be an active player in the market, along with PE. JONATHAN DALTON KHELAN DATTANI IMAP Financial Services sector Leaders: Jonathan Dalton and Khelan Dattani share insights into the global Financial Services sector. They look at how and why the COVID pandemic affected certain geographies and subsectors more than others and the subsequent impact on deal volumes and valuations. They identify the key areas of growth and common trends driving activity across the globe and examine why the sector is becoming increasingly attractive to PE investors, pinpointing opportunities for buyers and sellers. 3 2 OUR M&A PERSPECTIVE ON THE GLOBAL FINANCIAL SERVICES SECTOR IMAP
- 3. 5 4 NORTH AMERICAN FINANCIAL SERVICES NORTH AMERICAN FINANCIAL SERVICES IMAP FINANCIAL SERVICES M&A NORTH AMERICAN FINANCIAL SERVICES M&A VOLUMES The Financial Services business, especially in North America, is very relationship orientated. Whilst technology is player more and more of a role in these businesses, ultimately Financial Services is about advising individuals, companies and governments on money-related issues. Therefore, COVID has had a substantial impact on the relationship Several Financial Services subsectors have been completely insulated from the pandemic, such as insurance, as people typically tend not to reduce their insurance purchases in a recession. Therefore, M&A is currently focused on subsectors that have performed well on the S&P 500, with valuations similar to those seen pre-COVID. Furthermore, within Financial Services, there are 2 very different markets, and indeed economies; one, high-touch relationships, such as HNW advisors, and the other, low-touch, with the latter less affected by the COVID pandemic. Whereas technology is important to both, the future of the high-touch businesses in the long-term is much greater, and the low-touch businesses, which are tech-enabled, robot advisors etc. are a short-term trend. PE is particularly active in the Insurance Brokerage market, making up approximately 70% of the deal volume. The underperforming sectors, primarily balance-sheet aspect of the business. Investment banking is a high-touch business and adapting to social distancing restrictions etc. has resulted in a decline in deal values and valuations, particularly for balance sheet heavy businesses, which are credit/interest- rate sensitive in this market. At the very depth of the crisis, deal values were down approximately 90%. businesses, have been the target of value-oriented buyers looking for opportunistic acquisitions. There has also been significant activity by SPACs. Likewise, many businesses in the sectors are using the crisis as a means to grow, e.g., asset managers buying insurance companies as permanent capital vehicles. Though there has been a global bounce back, activity remains below that of 2019-year end. The normal rate of yearly transactions of 550-600 has reduced to closer to 250-300. Smaller deals have been affected less than the mega deals historically taking place in this sector. Interestingly, many of the property and casualty insurance brokers have been so busy consolidating in that space, that they’ve scaled to the point there are hardly any sizeable businesses left to buy, so they have shifted into group benefits brokerage, which is yet another area of the value chain they can sell. This is driving a significant amount of M&A activity. Financial Services M&A was significantly hit by COVID A Tale of 2 Markets ▪ # of deals down from 293 in H1 2019, to 214 in H1 2020, a decline of 27%. ▪ Deal values fell even more; down 52% from USD91 billion in H1 2019, to USD43.7 billion in H1 2020. ▪ Peak to trough deal value was down over 90% and # of deals were down ~40% (Q4 2019 vs. Q2 2020). ▪ Deal value began to rebound in Q3 2020. S&P Performance in 2020 -50% -40% -30% -20% -10% 0% 10% 20% Financial Exchanges & Data Insurance Brokers Asset Mgmt & Custody Banks Investment Banking & Brokerage Consumer Finance P&C Insurance Regional Banks Life & Health Insurance Multi-line Insurance Diversified Banks 12% 4% 1% -9% -19% -19% -23% -27% -30% -38% Deal Values (USD million) - by Deal Size Value (US$m) $250 $200 $150 $100 $50 $0 2014 2015 2016 2017 2018 2019 H12020 $5m - $250m $251m - $500m $501m - $2,000m $2,001m - $5,000m > $5,001m 74 217 88 163 90 191 44 Deal Count - by Deal Size Number of Transactions 700 600 500 400 300 200 100 0 2014 2015 2016 2017 2018 2019 H12020 Not Disclosed $5m - $250m $251m - $500m $501m - $2,000m $2,001m - $5,000m > $5,001m 517 582 532 550 570 607 214
- 4. 7 6 EUROPEAN FINANCIAL SERVICES EUROPEAN FINANCIAL SERVICES IMAP EUROPEAN FINANCIAL SERVICES M&A Europe is seeing very similar trends to Northern America in terms of balance-sheet and asset- light businesses. Balance sheet businesses are facing challenges not only in M&A, but also in terms of their business models, in a low interest rate environment where previsions and credit issues are increasing. On the other hand, Europe has not seen such an extreme dip in terms of M&A volume. There has been little movement over the past 5 years, with yearly deal numbers remaining around 150-200, though in 2020, there was a dip of almost 15%. In Q3 however, things began to rebound, closing the gap between 2019 and 2020 numbers. In the asset-light part of the market, deal volume is strong in Europe. Though it is difficult to pinpoint exactly what is driving this activity, there are some common factors; regulatory pressures, a tailwind in this sector, are driving consolidation, especially for smaller businesses. Be it asset wealth companies, BPO, fund administration or insurance brokerage, these smaller businesses have a more onerous regulatory compliance, and a burden of cost it’s impossible to contain, so M&A and the synergies gained from M&A can be a strong driver of value. Should the COVID pandemic continue to worsen, quality resilient companies from the first wave are likely to achieve higher demand and valuations, as capital, be it PE or trade is unable to flow into other affected sectors, an opportunity for buoyant companies in the Financial Services sector. KEY SUBSECTOR HIGHLIGHTS ▪ Wealth Management – Not so heavily impacted by PE as other sectors, yet not demonstrating the same level of growth or synergy potential as Insurance Brokering or Fund Administration. ▪ Insurance Brokerage – PE showing significant interest in this subsector which is demonstrating consistently interesting returns, due to synergies as buying small creates multiple arbitrages, as well as day-1 revenue synergy. This sector is still very fragmented so there is a high volume of companies to be acquired. ▪ Fund Admin – Most are global in nature, with primarily cross-border transactions. Has seen interesting tailwinds, including regulation, as well as the move from listed to alternative assets in the market at large, which has led to an increase in the need for administration and 3rd party administration services. Furthermore, a scarcity of assets in the market is driving demand, deal values and multiples. ▪ Group Pensions & Health Benefits – Seen a lot of activity. Many of the UK & Irish P&C consolidators for example, are selling off the Group Benefits area of the business as it is highly regulated and requires a high level of regulatory capital to be held against it. European Financial Services M&A 2019 – Key Figures & Sector Breakdown European Financial Services – Key Trends €132.9 bn(1) Total value of European Financial Services M&A in 2019 vs. EUR62 billion in 2009 548 Financial Services deals in Europe in 2019 vs. 449 in 2009 7 % Financial Services share of total # of European M&A deals in 2019 (1) Largely driven by FIS’ EUR43.0 billion acquisition in Q3 of Worldpay Source: PitchBook, White and Case Deals (#) by Sector Other 25% 10% 28% 37% Commercial Banks Insurance Capital Markets/Institutions Deals (#) by Region CEE France/Benelux DACH Nordic Region Southern Europe UK/Ireland 46% 10% 14% 12% 11% 7% Balance-sheet- light sectors ▪ PE funds are becoming increasingly interested in balance-sheet-light assets enabled by technology and regulatory change e.g., fund admin, insurance broking and wealth management COVID-19 creating opportunities for the bold ▪ E.g. Banks acquiring bargains and otherwise unavailable assets (e.g., BNP Paribas’s acquisition of Banco Sabadell’s institutional depositary business and Société Générale’s OTC metal trading portfolios) Other notable trends ▪ P&C run-off companies acquiring legacy liabilities in Europe ▪ Closed book consolidators acquiring life and annuity books ▪ Pension buyout specialists transferring corporate liabilities, especially in the UK ▪ PE firms have come back to Lloyds of London to capitalize P&C insurance platforms expecting the market to turnaround Consolidation of general insurance broking ▪ Insurance companies seeking to scale up and benefit from economies of scale – Marsh’s acquisition of JLT for EUR4.8 billion ▪ PE implementing buy-and-build strategies in attempts to roll-up the sector and establish a larger, dominant player Digitization ▪ M&A involving fintech companies is at record levels ▪ As companies come under margin pressure, technology-enhancing M&A is becoming more popular e.g. CPPIB’s investment in UK-based BGL Group Vertical integration ▪ Payments: e.g., Klarna’s acquisition of Moneymour (to deliver POS offerings), Worldline’s USD7.8 billion acquisition of Ingenico, KKR’s HeidelPay acquiring Tillhub ▪ Insurance: product producers acquiring distribution
- 5. 9 8 EUROPEAN FINANCIAL SERVICES EUROPEAN FINANCIAL SERVICES IMAP EUROPEAN FINANCIAL SERVICES M&A – PE ACTIVITY Transactions, Valuations & Trends M&A Expectations Due Diligence, Transaction Structure & Risk Sharing Drivers for Buyers and Sellers BUYER MIX A blend of PE, pure trade and PE- backed trade, the latter is very much driving demand in asset-light sectors and indeed, could be deemed the “bravest” during the COVID pandemic, having underwritten very significant M&A strategies and continuing to deploy capital. Financial Services-focused PE investors tend to invest across the globe and are not limited to a narrow mandate. Unlike other sectors which have struggled to attract US PE into Europe, for Financial Services the US is an important buyer universe, that tends to pay higher values, especially for growth wealth. Financial Services M&A Landscape Recap 4 Deal multiples in certain sub-sectors such as Insurance Distribution and Services are not impacted 4 Interest sensitive and credit sensitive businesses are severely impacted in terms of multiples and lower earnings 4 Insurance services, insurance underwriting, asset/ wealth management remain active 4 Significant capital raising activity in the market in the form of scale-ups that involves acquiring an existing platform and adding significant capital 4 Asset managers acquiring insurers to create permanent capital vehicles 4 Greater use of earnouts to account for the uncertainty 4 Debt markets continue to work for good businesses 4 In-person meetings remain important to supplement virtual due diligence 4 Strong businesses continue to attract buyers 4 Marginal businesses do not have good prospects to trade Status of European Financial Services PE Activity and Sectors in Focus ▪ Over the last decade, strategic Financial Services M&A has accounted for the majority of deal activity. However, we’re seeing more and more financial sponsor capital enter the space. ▪ In particular, there is an increasing trend of US PE investing in European assets. ▪ Below highlights PE’s increasing average share of European transaction value: Sectors in Focus Attractive Characteristics of Financial Services to PE Investors Financial Services-Focused PE Investors 2008 – 2013 (PE % of total deal value) 2014 – 2019 (PE % of total deal value) 21.8% 33.4% Trust and Corporate Services Intermediation (e.g. Insurance Broking) Asset/Wealth Management Source: PitchBook ▪ High levels of recurring revenue ▪ Multiple expansion – European PE deals are commanding higher and higher multiples making investments more attractive on exit ▪ Sticky client bases ▪ Underlying growth tailwinds: e.g. hardening insurance market, growth in private assets & outsourcing of fund admin ▪ Balance-sheet-light characteristics (in certain subsectors)
- 6. 11 10 IMAP FINANCIAL SERVICES TRANSACTIONS IMAP FINANCIAL SERVICES TRANSACTIONS IMAP IMAP TRANSACTIONS – FINANCIAL SERVICES Selected IMAP Transactions Private equity investor UNITED STATES Acquired Majority Control of Business Operations Insurance broker and roadside assistance IRELAND ADVISED ON SALE OF COMPANY 6th largest independent insurance brokerage in the USA UNITED STATES Acquired 100% of Business Operations One of Canada’s largest independent specialty P&C managing general agents CANADA ADVISED ON SALE OF COMPANY Asset reconstruction company INDIA Acquired the Debt Obligations of Indian Steel Company from Financial institution INDIA ADVISED ON DEBT OBLIGATION TRANSACTION Listed Italian-based commercial banks ITALY Acquired a 39.99% Stake Leading Italian asset management company ITALY ADVISED ON SALE OF COMPANY Growth-oriented private equity firm focused on investing in recurring services companies UNITED STATES Acquired Majority Control of Business Operations International money transfers and bill payment services UNITED STATES ADVISED ON SALE OF COMPANY Largest life assurance company in Ireland IRELAND Acquired 100% of Business Operations Provider of corporate pension administration IRELAND ADVISED ON SALE OF COMPANY Insurance and wealth management CANADA Acquired 100% of Business Operations Insurance marketing CANADA ADVISED ON SALE OF COMPANY Fintech company specialized in providing investment platforms to financial institutions UNITED KINGDOM Acquired 100% of Business Operations Provides third party administation solutions to global life and pensions companies IRELAND ADVISED ON SALE OF COMPANY Private secondary school student insurance UNITED STATES Acquired 100% of Business Operations Provider of insurance to international schools UNITED STATES ADVISED ON SALE OF COMPANY Leading independent insurance intermediary UNITED KINGDOM Acquired Majority Stake of Business Operations Commercial insurance broker IRELAND ADVISED ON SALE OF COMPANY Insurance and warranty products and services for individuals and groups CANADA Acquired 100% of Walker Group’s B2B Warranty Businesses Warranties and related products for auto, consumer electronics and appliances CANADA ADVISED ON SALE OF COMPANY Financial leasing EGYPT Acquired a Minority Stake in Insurance services EGYPT ADVISED ON PURCHASE OF COMPANY
- 7. 13 12 ABOUT IMAP ABOUT IMAP IMAP GLOBAL REACH Our cross-border experience extends across Europe, the Americas, Asia and Africa 450+ PROFESSIONALS WORLDWIDE 43 COUNTRIES 60+ OFFICES North America U.S.A. Boston Chicago Dallas Denver Detroit Greenville Greenwich Houston Los Angeles Naples New York Philadelphia Richmond San Diego San Francisco St Louis Tampa Washington DC Canada Toronto Vancouver Latin America Argentina Brazil Chile Colombia Mexico Peru Panama Africa Congo Egypt Ghana Ivory Coast Mauritius Morocco Nigeria Senegal South Africa Asia China India Japan Thailand Europe Belgium Bosnia & Herzegovina Croatia Czech Republic Finland France Germany Hungary Ireland Italy Netherlands Poland Portugal Russia Serbia Slovakia Slovenia Spain Sweden Turkey United Kingdom ABOUT IMAP INTERNATIONAL MERGERS & ACQUISITION PARTNERS Consistently ranked among the Top 10 middle market M&A advisors worldwide GLOBAL PERFORMANCE 2020 450+ TEAM OF IMAP PROFESSIONALS WORLDWIDE 218 M&A TRANSACTIONS 47 YEARS OF M&A EXPERIENCE IN THE MIDDLE MARKET $12.5bn TRANSACTION VALUE 60+ OFFICES IN 43 COUNTRIES 30% CROSS-BORDER DEALS 1 PwC 2 KPMG 3 Deloitte 4 Houlihan Lokey 5 Rothschild 6 IMAP 7 EY 8 Oaklins 9 Goldman Sachs 10 Lazard $12.5bn CLOSED DEAL VALUE 2020 6th IN THE WORLD GLOBAL PERFORMANCE ENTREPRENEURIAL SPIRIT • IMAP is a partner-driven, client- focused and independent M&A advisory. • Senior experience and hands on involvement in deals – 230 Senior Transaction/ Transaction Advisors. • Worldwide IMAP team comprising 450+ professionals. MIDDLE MARKET FOCUS • Sell-side advisory for primarily privately held companies and spin-offs from large groups. • Strategic acquisitions for international corporates. • “Sweet –spot” Transaction Values $20 – 250 million. • Strong PE and Family Office Coverage. GLOBAL REACH • Proven cross-border advisory practice. • Global sector & project teams across 15 sector groups. • Leveraging local knowledge and corporate access in all relevant international markets. EXECUTION EXPERIENCE • IMAP has closed over 2,100 transactions valued at $90 billion in the last 10 years. Ranking based on number of transactions closed in 2020. Undisclosed values and values up to $500 million. Source: Refinitiv and IMAP internal data. Building Products & Services Business Services Consumer & Retail Energy & Utilities Financial Services Food & Beverage Healthcare Industrials Materials, Chemicals & Mining Real Estate Technology Transport & Logistics Automotive Education & Training 4% 9% 9% 7% 7% 7% 12% 6% 5% 14% 6% 4% 5% 5% DEAL DISTRIBUTION BY SECTOR
- 8. CANADA CANADA PORTUGAL ARGENTINA MOROCCO IRELAND PERU FRANCE GERMANY ITALY POLAND INDIA HUNGARY CROATIA & SEE MEXICO USA BRAZIL COLOMBIA USA ANDREW KEMPER Partner Capital West Partners Vancouver, Canada [email protected] BRENT WALKER Managing Director Morrison Park Advisors Toronto, Canada [email protected] GONCALO VAZ BOTELHO Managing Partner & CEO Invest Corporate Finance Lisbon, Portugal [email protected] MARIO HUGO AZULAY Partner Mario Hugo/FS Partners Buenos Aires, Argentina [email protected] ABDELLATIF IMANI Partner Ascent Capital Partners Casablanca, Morocco [email protected] JONATHAN DALTON Head of Corporate Finance Key Capital Dublin, Ireland [email protected] CARLOS A. GARCIA Founder & Managing Partner SUMMA Asesores Financieros Lima, Peru [email protected] FRANCK CEDDAHA Managing Partner Degroof Petercam France Paris, France [email protected] PETER A. KOCH Managing Director IMAP M&A Consultants AG Mannheim, Germany [email protected] DANIELE SOTTILE Managing Partner Vitale & Co. Milan, Italy [email protected] PIOTR CHUDZIK Managing Partner Trigon, Warsaw, Poland [email protected] ASHUTOSH MAHESHVARI Managing Director IMAP India, Mumbai, India [email protected] MARTON MICHALETZKY Managing Partner Concorde MB Partners Budapest, Hungary [email protected] GORAN POPOVIC Partner IMAP Southeast Europe Zagreb, Croatia [email protected] GILBERTO ESCOBEDO Partner Serficor Partners Mexico City, Mexico [email protected] DAVID FRANCIONE Managing Director Capstone Headwaters Boston, USA [email protected] TOM WASLANDER Managing Partner Brasilpar Sao Paulo, Brazil [email protected] MAURICIO SALDARRIAGA Partner Inverlink SAS Bogota, Colombia [email protected] KHELAN DATTANI Managing Director Capstone Headwaters Washington DC, USA [email protected] EGYPT SOUTH AFRICA KHALED EL GHANNAM Chairman Intelligent Way Capital Partners Cairo, Egypt [email protected] EDMUND HIGENBOTTAM Managing Director Verdant Capital Johannesburg, South Africa [email protected] 15 14 IMAP GLOBAL IMAP FINTECH & FINANCIAL TEAM GLOBAL IMAP FINTECH & FINANCIAL TEAM IMAP GLOBAL SECTOR COVERAGE FINTECH & FINANCIAL SERVICES
- 9. IMAP Contact: IMAP, Inc. Balmes 151, 1st floor 08008 Barcelona - Spain T. +34 936 026 710 www.imap.com © IMAP, Inc. 2020 International M&A Partners KHELAN DATTANI Managing Director Capstone Headwaters – IMAP USA [email protected] JONATHAN DALTON Head of Corporate Finance Key Capital – IMAP Ireland [email protected] Report Contributors