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Finance

THE TEMPERATURE IS RISING AS UK MID-MARKET FINANCIAL SERVICES M&A ACTIVITY HEATS UP

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James Barraclough, Director, BDO LLP

As the temperature soars around the UK so is UK financial services M&A activity. The first half of 2014 has seen a real acceleration in volume of these mid-market transactions. 2013 ended significantly ahead of recent years with over £14bn of completed deals by value, almost double the level experienced in 2012, but already in the first half of 2014, year on year activity levels are almost a third higher than in 2013.

With average transaction sizes gradually increasing, which reflect greater optimism for the financial services market and the economy more generally, there has been growth in the number of transactions across the majority of subsectors. Indeed the first 6 months of 2014 have been remarkably active for investment management, financial services support businesses, insurance distribution and also a variety of consumer and business lending propositions.

James Barraclough, Director at BDOThese increased volumes are evident in the private and public markets with both trade and institutional players.   Whilst the headlines have featured high profile capital market transactions such as the flotation of TSB Bank, OneSavingsBank and the AA there has been considerable activity elsewhere. Trade buyers continued to be active with Equiniti acquiring the assets of Selftrade, Swiss Re picking up HSBC Life (UK)’s pensions business, Markit purchasing Compliance Technologies International and Reuters disposing of Extel to WeConvene to name but a few. Elsewhere private market investment continued apace with successful fundraisings for Atom Bank, Nutmeg and Transferwise amongst others.

Private equity continue to be dynamic players in the market with numerous deals completed such as Bowmark investing into Iprism, Capital Z into BMS and ECI Partners backing the MBO of Avantia. Other businesses who have received private equity funding since January 2014 include GoCardless, Zopa, Ogier, Interactive Investor Trading and Jumpstart.

This vibrancy has not been restricted to the UK with international M&A on the agenda for many UK businesses; for example June 2014 saw London Stock Exchange acquiring Russell Investments and Henderson Global Investors buying Geneva Capital Management.

This tangible increase in activity is driven by a number of factors. The continuing economic growth has boosted confidence in buyers and sellers alike. Many transactions which have been previously delayed are now coming to market.

From a structural perspective the worldwide economic recovery is creating new wealth and prosperity which is driving increased, substantial demand for financial services. These buoyant markets are attracting new entrants, often with innovative and technologically advanced business models.

In the regulated market sectors regulatory change is having its affect clearly felt. Under the FCA regime it is anticipated that there will be far fewer regulated firms operating in the market in the future. Again this is driving demand for those who are seen to be reputable and compliant, so are able to capitalise upon the clear market growth.

Acquirers and investors continue to be on the lookout for quality targets. In particular many of the successful mid-market private equity funds have recent closed out significant funds and this weight of capital is aggressively seeking exceptional, scalable business to invest in. Given the potential market growth and innovation within the rejuvenated financial services sector there is a real appetite to invest heavily. From a trade perspective larger, equally well funded corporates are focussed on driving growth, accessing new markets and acquiring innovative technology.

Against this backdrop owners of exceptional, well prepared businesses in the sector are often besieged by potential suitors and tightly run, well prepared transactional process are repeatedly finding not only that demand is far outstripping supply but that significant premiums are being paid for these exceptional businesses. That said a word of caution is in order, acquirers and investors are reluctant to proceed with transactions where there is uncertainty or insufficient comfort given. In short unprepared businesses remain difficult to transact.

Given that demand for exceptional financial services businesses outstrips supply it appears as if the heat will remain in the market for the foreseeable future. This in turn will in all probability continue to underpin strong valuations. The acid test will be the ability of these businesses to execute their strategic plans and therefore be able to crystallise the financial return at a future date.

High growth, compliant, technologically savvy businesses can look forward to a vibrant transactional market with fierce competition from trade and institutional acquirers and investors. Owners of these businesses are in the enviable position of having the ability to attract a premium valuation and effect a successful transaction, choosing from a wide range of parties. It looks like we are in for a long hot summer.

Global Banking & Finance Review

 

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