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Financial institutions M&A: Sector trends - July 2020

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July 2020

We highlight the key European M&A trends in the first half of 2020, and provide our insights into the outlook for M&A moving forward.

Introduction

The COVID-19 pandemic has ravaged the European financial services sector, sending shockwaves across the FIG M&A landscape. It is no surprise that M&A volumes have plummeted. Yo-yoing valuations, buyer conservatism and the promise of "cheaper" stressed / distressed opportunities have compounded a cavernous rift between seller and buyer expectations. Reality is slowly sinking in—as the possibility of a v-shaped economic recovery becomes increasingly bleak, concern is growing around whether IFRS 9 loss estimation is much more than educated guesswork.

But all is not lost. The resilience of established financial institutions, fortified in the decade since the global financial crisis, agility afforded by digitalisation and evolution of customer interaction with financial services have contributed to M&A hotspots which burn bright amidst market gloom.

In this edition, we hone in on those hotspots and highlight the key M&A trends across Europe and the UK. Focusing on Banks, Fintech and Other Financial Services, we also provide our insights on the outlook for M&A in H2 2020 and beyond.

Key highlights from H2 2019 include the following:

  • Banks: Surge in strategic M&A, post-easing of lockdowns, as pent-up deal-making prowess is unleashed.
  • Fintech: Financial sponsors demand more bang for buck, as equity valuation volatility wreaks havoc for funding rounds.
  • Asset/Wealth Management: Differing bank prerogatives drives deal-making— some European banks tag-out from non-core business lines, while others tag-in for stable returns.
  • Payments: Lockdown utilisation levels encourage cross-border operators to scale-up and private equity investors to pile-in.
  • Stock Exchanges/Clearing Houses/Trading Venues: Clash of the pan-European titans—M&A plans signalled by LSE, Euronext and Deutsche Börse.
  • Brokers/Corporate Finance: Thinning of the herd continues as "traditional" brokers struggle to remain profitable amidst encroachment by Bulge Bracket and disruption by fintech.
  • Consumer Finance: A time of temperance as COVID-19 covenant breach forbearance, payment holiday and repossession deferral relief measures take their toll.
  • Specialty Finance/Marketplace Lending: Panacea or plague—what will the true impact of accreditation for government-backed loan schemes be?

M&A Forecast legend

European financial services M&A trends

Europe's post-GFC leaner and better-capitalised banks are put to the test by the COVID-19 pandemic

Banks with stronger balance sheets capitalise on M&A opportunities amidst COVID-19 market turmoil, while their weaker peers consolidate to survive.

vault

As the technicolour gloss of unicorns fade, investors attempt to back the right horses

H1 2020 heralds an entirely new era for fintech, a market segment which scarcely existed at the time of the global financial crisis. Many founders and investors, who have enjoyed a bull run since 2015, have had their first taste of the bear markets which banks endured in the years following 2008.

Buckingham Palace gate details

Asset/Wealth Management

Differing bank prerogatives drive deal-making—-some European banks tag-out from non-core business lines, while others tag-in for stable returns.

stock market display

Payments

Lockdown utilisation levels encourage cross-border operators to scale-up and private equity investors to pile-in.

banknotes

Stock Exchanges/Clearing Houses/ Trading Venues

Clash of the pan-European titans—-M&A plans signalled by LSE, Euronext and Deutsche Börse.

bank

Brokers/Corporate Finance

Thinning of the herd continues as "traditional" brokers struggle to remain profitable amidst encroachment by Bulge Bracket and disruption by fintech.

stock display

Consumer Finance

A time of temperance as COVID-19 covenant breach forbearance, payment holiday and repossession deferral relief measures take their toll.

credit cards

Specialty Finance/Marketplace Lending

Panacea or plague—-what will the true impact of accreditation for government-backed COVID-19 loan schemes be?

stock market display
stock market display

Specialty Finance/Marketplace Lending

Financial Institutions M&A sector trends: Specialty finance/marketplace Lending — H1 2020 and outlook for H2 2020

Insight
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6 min read

Panacea or plague—-what will the true impact of accreditation for government-backed COVID-19 loan schemes be?

 

Overview

Current market

  • Flat

We are seeing

  • Niche lenders successfully attract capital— particularly SME (e.g., a55, AlphaCredit, Liberis and Swishfund) and working capital lenders (e.g., Financia & Go and Previse)
  • Established Public-to-Privates opt for partnerships to weather the COVID-19 pandemic (e.g., Funding Circle's and Zopa's partnerships with Starling)
  • Investors raise capital for future investment (e.g., HPS Investment Partners' US$1.5 billion EAVF II fund)

Key drivers/challenges

  • Wide universe of backers:
    • Trade consolidators—seeking share-of-wallet (e.g., Creditgate24's acquisition of Advanon and Foresight's acquisition of a majority stake in Signature Property Finance)
    • Financial sponsors—opportunity to conquer underserviced markets
    • Global FIs—seeking diversification through complementary bolt-ons (e.g., L&G's acquisition of 20% of Household Capital)
  • Governments tip their hats to speciality finance— accreditation for specialty finance providers to distribute government-backed COVID-19 relief loans (e.g., British Business Bank—accredited specialty finance providers for the UK's CBLIS and the Bounce Back Loan Scheme)

Trends to watch

  • COVID-19 accelerates decision on market longevity for marketplace lenders:
    • Will accreditation for government-backed loan schemes hand marketplace lenders a new lease on life? (e.g., Funding Circle for the UK's CBLIS scheme)
    • Will dependence on secondary markets for capital destroy investor confidence in the long-term?
    • Will central banks buy government-backed scheme loans from marketplace lenders? If so, at what price?
  • Consolidation amongst "challenger" lenders

Our M&A forecast

M&A is likely to remain relatively flat in the shortterm as the true impact of COVID-19 governmentbacked loan schemes is assessed by specialty finance businesses, financial sponsors and public market investors alike

 

Publicly reported deals & situations

Growing buyer/ investor/partner interest

Market highlight:

The UK Government launched a first-of-its-kind £250 million co-investment matching scheme, the Future Fund. Promising UK start-ups, many of which are specialty finance businesses, are able to relieve COVID-19 strain by securing up to £5 million in government loans, as long as the amount is matched by private sector investors. These loans can then be repaid, or converted into equity at a discount at the next funding round or after 3 years

Private equity / venture capital:

  • SoftBank (Supply chain finance): US$500 million equity investment in Credit Suisse's supply chain finance funds (June 2020)
  • KKR (Insurance financing): Equity investment in Kilter Finance (April 2020)

Payments giants:

  • Square (P2P): Acquisition of Verse (June 2020)

FI:

  • UniCredit (Supply chain finance): Supply chain finance JV with Taulia (June 2020)
  • Legal and General (Retirement finance): Acquisition of 20% of Household Capital (March 2020)

Trade consolidators:

  • Alliance Funding (Beverage finance): Acquisition of Pinnacle Capital Partners and Specialty Coffee Finance (June 2020)
  • Creditgate24 (Crowdfunding): Acquisition of Advanon (May 2020)
  • Finora Capital (Leasing): Acquisition of Inbank Liising (February 2020)
  • Foresight (Property finance): Acquisition of majority stake in Signature Property Finance (January 2020)

Speciality finance businesses scaling up

  • AskRobin (Marketplace lending): Successful US$1.7 million Seed funding round, led by Change Ventures (May 2020)
  • a55 (SME lending): Successful US$5 million Series A funding round, led by Santander InnoVentures (May 2020)
  • Flagstone (Cash deposit marketplace): Successful £12 million Venture funding round, led by Omes Ventures (May 2020)
  • Lendify (SME lending): Successful €13.6 million rights issue (April 2020)
  • Previse (Invoice financing): Successful US$11 million Venture funding round, led by Reefknot Investments and Mastercard (April 2020)
  • Household Capital (Retirement finance): Successful US$16.6 million Series B funding round (March 2020)
  • Demica (Working capital finance): Successful US$30 million Series C funding round, led by Simcah Management (January 2020)
  • Financia & Go (Invoice financing): Launch by Santander (January 2020)
  • AlphaCredit (SME Lending): Successful US$125 million Series B funding round, led by SoftBank (January 2020)
  • Liberis (SME Lending): Successful US$42 million funding round, led by FTV Capital (January 2020)
  • Swishfund (SME lending): Successful €15 million Series A funding round, led by Slingshot Ventures and Shoe Investments (January 2020)

 

Partnering to Starling brave the crisis

  • Funding Circle (UK): £300 million Coronavirus Business Interruption Loan Scheme strategic partnership with Starling (May 2020)
  • Zopa (UK): Consumer loan origination JV with (February 2020)

 

Readying for the push

  • HPS Investment Partners: Launch of US$1.5 billion EAVF II, which target the specialty finance sector (April 2020)

 

Government/ regulatory support Coronavirus Business

  • Interruption Loan Scheme (UK): 20 asset finance providers and 18 invoice finance providers accredited by British Business Bank (June 2020)
  • Bounce Back Loan Scheme (UK): Three non-bank lenders accredited by British Business Bank (June 2020)

 

Click here to download Financial services M&A experiences shortness of breath in H1 2020 (PDF)

 

 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2020 White & Case LLP

 

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