M&A activity in the Financial Services sector during 2016 was down marginally from 2015 in terms of the volume of deals, but is in line with the volume of deals between 2011-2014.
“There has been a drive for consolidation in the market, whether that is domestic or cross-border,” says Mark Flenner, Co-head of Global Financial Services M&A, KPMG. “The regulatory burden and associated costs are increasing, so many companies are looking to spread that out across a wider base. At the same time, there are limited opportunities for domestic organic growth, so people are buying capability, buying product or buying access to customers.”
Valuations have also increased, says Flenner. “Many buyers are paying a lot of money for the right business – and there has been a lot of private equity activity across the globe. Global pension funds, too, have been taking a more active principal investment strategy than they have done before.”
There continues to be a steady rise on bolt-on acquisitions as elevated valuations have deterred private equity firms. Add-ons made up 64 percent of buyout activity last year, up from 61 percent in 2015, according to Pitchbook.
The insurance market accounted for several deals in 2016, but the banking sector continues to endure a challenging environment, according to Silvano Lenoci, Corporate Finance Partner, KPMG in Italy.
“The banking sector continues to be under pressure,” says Lenoci. “There are still a lot of local issues to work through, not only in terms of new regulations like Basel IV, but also a general lack of capital. There’s also still a huge legacy on the non-performing loans side for the next 3 to 5 years.”
North American buyers were particularly busy in 2016, with the United States and Canada filling 2 of the top 5 slots in terms of deal origination.
This is expected to continue into 2017 when, despite the relatively low volume of announced deals, the level of M&A activity is expected to stay strong, particularly in the mid-market range.
“The big question Financial Services organizations are grappling with is ‘how do you find more customers?’ That’s the issue we expect to see driving M&A transactions over the next few years, particularly in sectors like fintech,” says Lenoci. “As long as there is weakness in certain currencies and interest rates remain low across the globe, it will naturally breed cross-border activity.”