Financial institutions M&A: Sector trends - January 2019
What's inside
January 2019
We highlight the key European M&A trends in the second half of 2018, and provide our insights into the outlook for M&A in 2019
Introduction
As 29 March 2019 draws closer, and the possibility of a ’no deal’ Brexit becomes ever more real, many financial services businesses across Europe are contending with operational uncertainty of monumental proportions. The same businesses are also shouldering the growing strain of market fragmentation, digital transformation, disruptive financial regulation, large-scale IT meltdowns and cybersecurity attacks.
Notwithstanding these pressures, many financial institutions have hardened their resolve that ‘the show must go on’.
Against this backdrop, we analyse M&A activity across 5 main financial services subsectors: Banks, Fintech, Asset/Wealth management, Market infrastructure and Consumer finance. In this report, we highlight the key trends across Europe and the UK in 2018, and provide our insights into the outlook for M&A in 2019 and beyond.
European financial services
M&A trends
Regional and domestic consolidation tops the agenda
2018 has been a transformational year for fintech M&A. Deal values and volumes have reached new heights as established financial institutions pin hopes on well‑placed bets to deliver competitive edge and market share. VC and late‑stage investment firms are also actively stoking the fintech fire.
Payment services M&A retains its spark on the financial services landscape. Stock exchanges poise for strategically significant deals. And, brokers resort to M&A to combat the impact of disruptive regulation.
Smaller and medium-sized asset/wealth managers consolidate at a feverish pace
Financial institutions M&A sector trends: asset/wealth management — H2 2018 and outlook for 2019
Insight
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9 min read
Smaller and medium-sized managers are seeking scale to compete with "the trillionaires", who have enjoyed the lion's share of business inflows in 2018. Industry-wide margin squeeze, fierce market competition, eager buyers and availability of new tech solutions are all fuelling M&A.
Outlook
M&A reaches the dizzy heights. Here's why:
Smaller and medium-sized managers: Research unbundling, rising IT costs and competition from passive options drives consolidation
Differing bank prerogatives: Some banks tag-out from non-core businesses, while others tag-in for stable returns and cross-selling opportunities
Technological embrace: Managers recognise the future‑proofing significance of robo-advisory, automation and AI
Current market
Upward, significant
We are seeing
High levels of market consolidation, some medium-sized but mainly smaller deals
Uptick in JVs and other co-operation arrangements
Active involvement of banks in M&A:
Certain banks are disposing of non-core businesses (both strategically less important business lines and in non-focus jurisdictions)
Other banks are keen to leverage cross-selling opportunities and new customer bases
"No-deal" Brexit planning—migration of activities and assets out of London (particularly to Dublin and Luxembourg)
Key drivers
Scale of itself is no panacea. Relentless pursuit and delivery of cost and customer relationship synergies are what actually define success of any M&A strategy in the asset/wealth management space.
Gavin Weir, Partner, London, Co-head of Financial Institutions M&A Group
Industry-wide margin squeeze across Europe:
Passive investment options have made customers more cognisant of spend on active options
Continual net outflows experienced by many market players (though there are exceptions)
Research unbundling—stringent fee transparency requirements imposed by MiFID II
Rising compliance costs and increasing cyber/technological malfunction risks requiring heavy IT investment
Fierce competition from:
Growing range of passive investment opportunities
Competitors reducing fees to counteract outflows resulting from market uncertainty (e.g., Brexit and "wealth tax" championed by UK's Labour party)
Competitors willing to slash fees to win market share (e.g., Fidelity's zero-fee campaign attracted US$6.6 billion of inflows)
Inorganic strategies offer:
Complementary product lines, capabilities and talent (though differing cultures need careful management)
Access to new geographical markets (e.g., China), customer bases (e.g., Shari'ah-compliant and ethical investing) and customer demographics (particularly robo-advisory and digital offerings)
Vertical integration to increase wallet share of the value chain
Cost reduction through automation
Enhanced utilisation of existing customer data resources (through AI and machine-learning)
New tools to battle rising compliance demands and cyber-attacks (e.g., deployment of blockchain)
Strong appetite for asset/wealth management businesses:
Regional/domestic strategic buyers—seeking scale
Foreign strategic buyers—tapping into EU markets and customer bases
Financial sponsors—disrupting "traditional" models and super-charging management incentivisation
Trends to watch
End of the capital markets bull run resulting in smaller asset/wealth managers selling out to larger ones
Brokers seeking to acquire scale for asset management operations
Increased concentration on intra-group restructurings—asset/wealth managers focusing on realising synergies from integration of newly acquired businesses and implementation of business-wide procurement processes
Kick-off of business integration workstreams earlier in the deal timeline
Regulatory intervention to encourage:
Uniform interpretation and implementation of MiFID II across Europe
Market competition (e.g., UK FCA's proposals for customers to switch investment management services more easily)
Transparency on vote decision-making by asset managers—Charities Responsible Investment Network's report a possible catalyst
UK-based asset managers consider relocation within the EU27 to secure continued access to the European direct-lending market
Our M&A forecast
Continued high levels of deal activity in the short term—competition between regional/domestic trade buyers, foreign trade buyers, stockbrokers and financial sponsors is likely to intensify, resulting in more hot auctions. However, the overheated market is likely to cool in the longer term.
Publicly reported deals & situations
Traditional stock-picking equity and bond managers will account for >1/3 of the global asset management industry within 5 years*
Market Consolidation
Deal Highlight:
White & Case advised Muzinich & Co. on its acquisition of Springrowth, an independent Italian alternative investment fund manager
Mid-sized:
Wealth Management Partners: Acquisition of Julius Bär's Dutch wealth management business (December 2018)
Bank J. Safra Sarasin: Acquisition of Bank Hapoalim's Luxembourgian and Swiss private banking businesses (November 2018)
Natixis Wealth Management: Acquisition of Massena Partners (November 2018)
PGIM Holding: Acquisition of Wadhwani Asset Management (November 2018)
Natixis: Acquisition of MV Credit (November 2018)
Heritage Bank & Sallfort Privatbank: Merger (November 2018)
Tikehau Capital: Acquisition of ACE Management (October 2018)
Generali: Acquisition of Union Investment TFI SA (October 2018)
La Francaise: Acquisition of Veritas Group (September 2018)
Investcorp: Acquisition of minority stake in Banque Pâris Bertrand Sturdza (September 2018)
Nordea Asset Management: Acquisition of 40% of Madrague Capital Partners (July 2018)
DWS Group: Acquisition of minority interest in Skyline AI (November 2018)
Fidelity International: Launch of Fidelity Wealth Expert (October 2018)
Capgemini: Acquisition of 20% of Azqore (October 2018)
Aberdeen Standard Investments: Launch of Artificial Intelligence Global Equity Fund (August 2018)
State Street: Acquisition of BestX (August 2018)
Brevan Howard and Stone Milliner: Acquisition of minority stake in Quant Insight (August 2018)
Established players bowing to pressure:
UBS: Disposal of SmartWealth platform (August 2018)
Established players rely on fintech:
UBS: Cross-border fund sales compliance JV with Investment Navigator (October 2018)
Growing competition from fintechs/new entrants:
Moneyfarm: Acquisition of vaamo (November 2018)
WMD Capital: Belvoir Capital's anchor investment in the German start-up (October 2018)
Plum: Tech fund JV with Legal & General, ethical fund JV with Standard Life Aberdeen and emerging markets fund JV with Vanguard (September 2018)
Revolut: Application for ETF broker licence (September 2018)
SigFig: Acquisition of SmartWealth platform (August 2018)
Wahed Invest: Launch of Shari’ah-compliant UK robo-adviser (August 2018)
Shifting regulatory/political landscape
Bank of England: Encouragement for asset managers to implement voluntary FX Global Code of Conduct (December 2018)
UK FCA: Proposals to enable customers to switch investment management services more easily (July 2018)
UK FCA: Requirement for UK fund managers to comply with the Institutional Disclosure Working Group's standards for fee disclosures to pension funds (July 2018)
UK FCA: Probe into inconsistencies in interpretation and application of MiFID II (June 2018)
Intra-group restructurings—Brexit planning
One-third of the UK’s 40 largest asset managers have outlined contingency plans to expand operations to Dublin or Luxembourg**
Ashmore: Establishment of investment hub in Dublin (September 2018)
First State Investments: Transfer of £4.3 billion of AuM from UK to Ireland, and establishment of Dublinbased management company (September 2018)
M&G Investments: Transfer of £34.2 billion of AuM (impacting Euro, Swiss Franc, US Dollar and Singapore Dollar share classes) from UK to Luxembourg (September 2018)
Baillie Gifford: Establishment of investment hub in Dublin (August 2018)
Columbia Threadneedle: Transfer of assets from UK to Luxembourg, and launch of 13 new funds in Luxembourg SICAV vehicle (June 2018)
