Financial institutions M&A: Sector trends - June 2018
What's inside
June 2018
We highlight the key European M&A trends in the first half of 2018, and provide our insights into the outlook for M&A moving forward
Introduction
In 2017, the European economy expanded by 2.5 per cent, its strongest performance since before the global financial crisis. However, economic growth has done little to ease mounting stakeholder pressure on the bloc’s financial institutions. Persistently low interest rates, increasing regulatory burden, competition from fintechs, unavoidable IT cost hikes and elevated consumer expectations are only some of the factors which have led to declining revenues for many of the region’s largest and most well-established financial services businesses.
The call of the global financial elite in Davos for consolidation across Europe’s financial services industry was somewhat inevitable.
Banks have emerged from the global financial crisis with a clearer picture of how they need to be structured. Strategic M&A is back as banks across Europe consolidate and lean in to the fintech revolution.
State-aided banks are a fertile source of deal flow. Institutions continue to deleverage balance sheets and dispose of non-core businesses, while governments seek privatisation. But make no mistake — deals are hard fought, with risk allocation needing to be carefully managed at every turn.
Fintech M&A volumes and values soared in H1 2018 as banks embraced fintech as a key enabler of operational efficiency and customer satisfaction. Private equity and venture capital houses continued to invest aggressively in the space, buoyed by a series of strong exits and growing buyer demand.
New regulation, competition from fintech disruptors and ever-more sophisticated and demanding retail investors (wanting more for less) have forced asset/wealth managers to build scale through mergers of equals, acquisition of smaller players and buy-in of technology. The global financial crisis is behind them, but the new challenges are no less daunting.
M&A in payment services is red hot, but anti-trust concerns in the trading platform space and dominant incumbents in the custodian sub-sector has meant deal activity as a whole has been uneven.
Regulation has put the brakes on deal activity involving credit card providers and payday lenders, but specialty and marketplace lenders are continuing to attract large amounts of strategic and private equity interest.
Consolidation activity intensifies with possible mega-mergers on the horizon
White & Case partner Gavin Weir shares his predictions for the asset/wealth management sector over the next 12-18 months and discusses what has been driving consolidation within the sector.
Asset/wealth managers feel the weight of regulation and market disruption
Insight
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7 min read
Consolidation pressure on asset and wealth managers shows no sign of ebbing. Competition for targets and merger partners is stiff. Decisive deal execution has never commanded such a premium.
New regulation, competition from fintech disruptors and ever-more sophisticated and demanding retail investors (wanting more for less) have forced asset/wealth managers to build scale through mergers of equals, acquisition of smaller players and buy-in of technology. The global financial crisis is behind them, but the new challenges are no less daunting.
Outlook
The asset/wealth management industry is consolidating at a rapid rate. Here's why:
Economies of scale: Regulatory pressures and back-office costs have increased exponentially
Higher market expectations: Investors demand more for less
Technology disruption: Emergence of disruptive new technology and digital solutions means many asset managers would rather eat than be killed
Our M&A forecast
High levels of deal activity will be sustained over the medium-term. Regulatory pressures and rising costs will drive M&A, as asset managers pursue consolidation in search of synergies and growth.
Current market
Upward, significant
We are seeing
Market consolidation, particularly medium-sized and smaller deals. Mega-mergers remain a strong possibility
Uptick in M&A involving banks:
Some banks are disposing of non-core asset/wealth management businesses
Other banks are attracted by stable returns and significant cross-selling opportunities from asset/wealth management
Financial sponsors and foreign strategic buyers show strong appetite for asset/wealth management businesses
Increasing focus on intra-group restructurings and outsourcing arrangements
Key drivers
Profit margin squeeze from regulatory change. MiFID II has increased the cost of research, imposed restrictions on commission-based arrangements with brokers and levied stringent fee transparency requirements
Investors have higher expectations:
Institutional investor demand for customised investment solutions and global products
Millennial attraction to the perception of lower costs associated with robo-advisory and online distribution
Achieving economies of scale, operational synergies and greater access to the most talented asset allocation specialists
Diversification and differentiation of product offerings through passive/alternative strategies as well as by tapping into new markets, geographies and distribution channels
Upscaling of infrastructure to actively manage customer satisfaction — information sharing with customers (carefully orchestrated in volume and complexity) can be useful for stemming customer outflows due to short-term fluctuations
Possible end of the capital markets bull run resulting in smaller asset/wealth managers selling out to larger ones
Asset/wealth managers ramping up digital capabilities, process automation and innovation capacity
US and Chinese inbound investment into Europe — weaker £/€ creates more opportunities for buyers paying in US$
Trends to watch
End of the post-financial crisis investment cycle. The 'Goldilocks' combination of strong growth and low inflation has fuelled demand for passive strategies. The next phase of the investment cycle could favour active strategies, resulting in an uptick in asset/wealth managers actively seeking to scale up
Rise in intra-group restructurings, driven by cost savings, integration of newly acquired businesses, optimisation of internal resources and Brexit contingency planning
Rise in outsourcing of back and middle office functions, together with increased deployment of fintech solutions
Heightened regulatory scrutiny — national regulators being willing to prosecute anti-transparent business practices (e.g., UK FCA's enforcement action against 'closet trackers')
Expansion of traditional asset managers into private debt, including through peer-to-peer platforms
Publicly reported deals & situations
M&A in asset management sector climbs to 8-year high.*
Market consolidation
Asset/wealth management is the most fragmented global finance sector, with the 32 largest managers having a collective market share of only 50%.**
Deal highlight
Oddo BHF's merger with Frankfurt-Trust created Europe's third-largest independent asset manager with AuM exceeding €60 billion.
Banca Profilo: Acquisition of Dynagest (April 2018)
Athora: Acquisition of AEGON Ireland (April 2018)
Alm. Brand Bank: Acquisition of a majority stake in Saxo Privatbank (February 2018)
Natixis: Acquisition of a minority stake in Airborne Capital (January 2018)
Apex: Acquisition of M.M. Warburg's Luxembourg asset management and servicing business (January 2018)
Anima Holding: Acquisition of Aletti Gestielle (January 2018)
ActivumSG: Acquisition of fairvesta (January 2018)
Smaller:
ALTUS TFI & Esaliens TFI: Merger (June 2018)
GWM Investment Management: Acquisition of stake in Optimus Capital (May 2018)
Old Mutual Wealth Private Client Advisers: Acquisition of DG Pryde (May 2018)
Harwood Wealth Management: Acquisition of Fund Management and AE Financial Services (March – May 2018)
Catella: Acquisition of APAM (March 2018)
Ambassador & Antaurus: Merger (March 2018)
Sanlam UK: Acquisition of Grennan Advisers (February 2018)
Azimut Holding: Acquisition of funds from Sofia Gestione del Patrimonio (February 2018)
Quaero Capital: Acquisition of Tiburon Partners (January 2018)
Franklin Templeton: Acquisition of Edinburgh Partners (January 2018)
High buyer appetite
Financial sponsors:
Endeavor Catalyst and Fondazione di Sardegna: Equity investment into Moneyfarm (May 2018)
Toscafund: Minority equity investment into Plurimi (May 2018)
Dragon Capital: Acquisition of Investcapital (April 2018)
Foreign:
Federated Investors: Acquisition of 60% of Hermes Fund Managers (April 2018)
Brookfield Asset Management: Acquisition of 25% of LCM Partners (March 2018)
Fosun Group: Acquisition of Guide Investimentos (February 2018)
Storebrand Asset Management: Reported exploration of European M&A opportunities (February 2018)
Intra-group restructurings & outsourcings
Deal highlight
The Janus Henderson mega-merger-of-equals created a global business with AuM of US$331 billion in 2017. To realise the expected US$110 million of cost synergies, the outsourcing of back- and middle-office functions was a "must have".
Credit Suisse US: Establishment of its Directs & Co-Investments Group (April 2018)
Janus Henderson: Outsourcing of back and middle-office functions to BNP Paribas Securities (April 2018)
Standard Life Aberdeen: Disposal of its insurance business to focus on investment services (February 2018)
UBS: Merger of US and international wealth management divisions (January 2018)
Old Mutual Ltd: Acquisition of Old Mutual Plc (January 2018)
Expanding into new markets
Fidante Partners: Acquisition of a minority stake in Latigo Partners (March 2018)
Differing bank prerogatives
Non-core disposals:
Banco BPM: Disposal of Aletti Gestielle (January 2018)
Nordea: Disposal of its Luxembourg-based private banking business (January 2018)
AXA: Disposal of AXA Wealth Management (January 2018)
Banks searching for stable returns:
Deutsche Bank: Partial Frankfurt Stock Exchange float of its asset management unit (March 2018)
Julius Bär: Acquisition of the remaining stake in Kairos Investment Management and 95% of Reliance Group (January – June 2018)
Shifting regulatory/political landscape
Deal highlight
Less than half of the major asset/wealth managers with material UK operations have publicly disclosed their post-Brexit restructuring plans.****
Impact of other regulatory changes:
Greater transparency for consumers: UK FCA's requirement for firms to issue investor annual reports showing how they offer value for money (April 2018).
UK FCA's approval for asset managers to provide additional explanatory materials alongside performance forecasts (January 2018)
Uptick in enforcement action: UK FCA's requirement of payment of £34m in compensation to investors and ongoing enforcement investigation into an (unnamed) firm in connection with anti-transparent descriptions of how investors' money is managed (March 2018)
Possible impact of Brexit:
Hubs outside the UK: Larger asset managers establishing business hubs outside the UK (e.g., Standard Life Aberdeen's investment and distribution business in Dublin) (February 2018)
Exclusion of UK asset managers from European markets: European Commission's warning of 'shutout' for UK asset managers (February 2018)
UK needing to do more to attract asset managers: Possibility of favourable tax treatment for asset managers who relocate cash resources to the UK post-Brexit (January 2018)
Technological advancement
Blockchain is estimated to save asset managers US$2.7 billion per year.***
Established players believe the hype:
Schroders: Acquisition of minority interest in WeInvest (June 2018)
Invesco: Acquisition of Intelliflo (June 2018)
Taaleri Wealth Management: Acquisition of Evervest (May 2018)
Warburg Bank: Launch and expansion of robo-adviser Vermögensverwaltung (March 2018)
Standard Life Aberdeen: Digital fund management services JV with Virgin Money (March 2018)
Brown Brothers Harriman: Launch of InfoNAV (March 2018)
Natixis: Acquisition of the remaining stake in Dalenys (February 2018)
BlackRock: New Palo Alto AI research facility (February 2018)
The Investment Association: Launch of VeloCity (February 2018)
Allfunds: Acquisition of Finametrix (January 2018)
Growing competition from new entrants:
Scalable Capital: AuM of €1bn (May 2018)
Surge of passive investment strategies
Global ETF industry has exceeded the US$5tn barrier, with new European business inflows doubling in 2017.***
Riding the trend:
Mirae Asset: Acquisition of Global X (February 2018)
BlackRock: iShares ETF arm's 76% growth in 2017 (January 2018)
