Financial services repositioning for a recovery

The figures speak for themselves. In 2020, there were 669 financial services sector M&A transactions that involved a UK participant, according to Refinitiv. That was a 5% increase on the 637 deals of the previous year. Measured by deal value, the increase was even more dramatic. The sector’s 2020 transactions surpassed $57bn – a massive 58% up on 2019’s total of $35.8bn. Remarkable.

The pace has picked up even more this year, Refinitiv’s data shows. By the end of November, the UK financial services sector had recorded deals worth $56.1bn – $11.9bn and 207 deals ahead of the same time last year. The last two months of 2020 were incredibly active, as deals put on ice through lockdown completed. But, with a strong end to the year, there’s every chance M&A in the sector will exceed the $68.1bn of transactions completed in 2015. 

What explains the resilience of financial services M&A through the COVID-19 pandemic? Well, the first consideration, explains Tom Groom, UK financial services strategy and transactions leader at EY, is that the industry is now repositioning itself for growth in the wake of the global crisis: 

“While we’re not fully out of the woods yet, in the UK we’re looking to economic recovery underpinned by vaccine progress. Financial services firms have been addressing the numerous challenges they’ve faced over the past 18 months and in some cases M&A has been – and will continue to be – the answer. As a result, the number of M&A deals in financial services has risen this year and we expect this trend to continue to the end of 2021.”

Digitalistion and tech

Many of the industry’s incumbents are acutely aware of the disruptive threat they face from competitors who are exploiting digitalisation and new technology, from fintech players and new entrants from beyond the industry. M&A activity is a way of countering this threat, with deals offering access to emerging tech, new competencies and intellectual property.

The hottest areas reflect the potential of innovation to drive growth. Duncan Chandler, head of financial services M&A at BDO, points to the need for better client servicing and increased use of data analytics, particularly among financial services firms focused on consumers and small and medium-sized enterprises. “The spectacular valuations achieved in the recent Revolut fundraise and PensionBee’s IPO reflect that need,” he says. “The rise of ‘buy now, pay later’ firms is another example.”

The ‘robo advice’ sector is a case in point. This year alone has seen JPMorgan Chase acquire Nutmeg, the automated wealth management platform; insurer Royal London buy Wealth Wizards, a digital platform for advisers; and Aion Bank pick up robo advice firm ETFmatic.

Not that corporate buyers are the only players on the lookout for deals. “Another driver has been the growing interest of private equity in the sector,” adds Chandler. “Private equity is pushing hard, with buy-and-build strategies in sectors such as insurance broking and wealth management. With cheap money freely available, we’re also beginning to see the return of US credit funds to the UK.”

Preservation Capital Partners’ £102m purchase of the investment platform Parmenion from Standard Life Aberdeen in March was one prime example. Elsewhere, the private equity firm AnaCap has snapped up both Novia and Wealthtime in the past 12 months.

Ben Goldring, head of financial services at finnCap Cavendish, points to the open banking revolution as another area where technology disruption is prompting significant M&A activity. The UK is a world leader in this area, introducing digital payments systems and regulation to enable data aggregation and sharing ahead of most other countries – and into a thriving fintech ecosystem. With the sector now focused on how to exploit the opportunities this is creating, “there’s a race to acquire those disruptors with market-leading technology”, explains Goldring.

Goldring advised when Australia’s EML Payments agreed in April to pay around €110m for Sentenial, which offers open banking and account-to-account payments across Europe. For businesses such as Sentenial, which have successfully proved the business case for their technology, demand is very high, says Goldring: “The competition is global – strategic buyers from all around the world are looking for these assets.”

Indeed, many of the trends that are currently playing out in the UK’s financial services market reflect the evolution of the industry on the world stage, with global M&A deal-making also booming in 2021. Refinitiv’s data shows there have been 5,361 M&A transactions worldwide so far this year, against 4,528 in the first 11 months of 2020. Globally, there’s been $638.5bn of M&A in the sector so far this year, which is already a record. 

Some of that deal-making may presage further activity to come in the UK. For example, a wave of consolidation among mid-sized banks across continental Europe has yet to reach these shores. But, as all banks reconsider their footprint – shifting from branch networks to digital channels, for instance – that may change.

Where Britain leads

In other cases, the UK is at the front of the M&A wave. Its highly competitive asset management sector, for example, saw a dozen deals during the second half of last year, from Schroders’ acquisition of Sandaire to the merger of Tilney with Smith & Williamson. That consolidation is continuing across Europe during 2021.

Changing financial services regulation can also drive deal activity. The decision five years ago by the UK’s Financial Conduct Authority to cap interest rates in the payday lending sector has seen this area of the industry collapse, with the likes of MyJar now in administration. That has paved the way for the rise of different lending models, including ‘buy now, pay later’, where Sweden’s Klarna raised $639m in the spring, giving it a value of $45.6bn to cement its status as the most valuable fintech firm in Europe.

Is there anything that might stop the march of fintech and financial services M&A more generally? At EY, Groom thinks that even if there are market setbacks, these could boost deal-making further. “Downside risks to the recovery remain, particularly as government support tapers away and stimulus programmes reach the point of repayment. But these challenges would be likely to drive further M&A activity in the market,” he says. Industry consolidation as the number of distressed businesses increases could prompt opportunistic transactions.

Similarly, Goldring believes the drivers of deal-making are too strong – and too pressing – for the financial services sector to step back. “Open banking is going to fundamentally change the way we move money over the next decade and beyond,” he explains. “So, while we may see ebbs and flows in M&A activity, the right assets will continue to see very high demand.”