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Freeman & Co. reports mixed year for financial services M&A activity as market rises

Monday, January 06, 2014
Opalesque Industry Update - In 2013, the Dow Jones Industrial Average and S&P 500 both saw record highs. However, despite readily available credit, it was not an outstanding year for M&A in general. We expect the rehabilitation of the financial services industry, combined with a growing confidence in the markets, to lead to increased M&A activity in 2014.

In 2013, M&A activity was mixed across financial services sectors. In asset management, aside from a handful of mega‐deals that boosted transacted assets under management, the number of transactions decreased 15%, with 23% of deals with over $10 billion AUM compared to 19% in 2012. Activity among broker dealers, financial technology, specialty finance and private equity in financial services remained muted in 2013.

"2013 was a year of refocusing. Large asset managers continue to focus on solutions and broadening capabilities. Broker‐dealers are focusing on consolidation, with a new group of middle market firms taking the lead, and in specialty finance the appetite for acquiring niche consumer lending companies continues. We expect activity to accelerate into 2014, given divestiture activity to date and the larger deals as evidence companies are willing to pursue transformational M&A," says Eric Weber, Managing Director and COO of Freeman & Co. LLC.

KEY DRIVERS OF FUTURE M&A

Looking ahead to 2014 and beyond, Freeman & Co. projects the following M&A drivers:

Asset Management

  • Despite a decrease in the number of 2013 transactions, transacted assets under management have continued to grow at a 27% CAGR since a low in 2010
  • Institutional investors are changing the ways in which they allocate to alternatives. In 2013, we saw robust M&A activity in the illiquid space, such as private equity and real estate, as managers began to add capabilities to manage separate accounts across the entire spectrum. In 2014, larger franchises will continue to expand their allocation capabilities in these areas as smaller independent business models feel pressure in expanding distribution
  • Managers seeking scale, diversification and distribution afforded by larger platforms was a strong theme in 2013. New firms have emerged to address the distribution challenges mid‐sized asset managers face, building centrally located distribution capabilities and acquiring minority stakes in affiliate managers. These firms will continue to make acquisitions in 2014 as they add managers with good performance and long‐term track records

Broker‐Dealer

  • The current environment surrounding the securities industry favors consolidation, given continued cost pressures in the industry and reasonable valuations. We expect middle market firms to continue to lead this consolidation to round out their product, industry and geographic offerings. Middle market strategics will continue to look for high quality targets who have established strongholds in their niches, but lack broader scale and have burdensome fixed cost infrastructures
  • Recent divestitures from banks due to the Volcker Rule have accelerated as the regulations have taken shape, and we expect this to continue into 2014

Financial Technology

  • For FinTech M&A activity to stabilize and grow, strategic investors need to maintain and increase their acquisition activity
  • Private equity and venture capital investors have ramped up investment activity in 2013, but over the last four years, they represent only about one third of total acquirer activity in the FinTech sector, with the balance driven by strategic investors
  • Asset management and capital markets technology providers alike continue to pursue bolt‐on acquisitions to broaden the product offering for the front, middle and back offices of their respective clients

Private Equity

  • Private equity deal activity in financial services has been relatively flat the past 4 years, but a decreased portion of deals have come from buyouts
  • 2012 and 2013 have been particularly weak years for FIG buyouts, with under $10 billion of entry investments in each year
  • Portfolio company bolt‐ons surpassed buyouts in 2013, as PE firms continue to extend out boom‐era vintage funds to focus on growth

Specialty Finance

  • Mortgage banking and servicing was the most active sub‐sector in 2013, with the industry continuing to experience growth and widespread consolidation through strategic acquisitions of servicing and origination businesses
  • Equipment leasing companies and other non‐traditional, tech‐driven niche lending platforms garnered attention from acquirers due to attractive yields, limited CFPB monitoring and challenges generating earning assets
  • Auto finance companies continued to experience interest from both strategics and private equity firms due to the increased availability of financing and the creation of generous spreads, resulting from high subprime lending rates and low costs of funding
  • Certain business development companies (BDCs) have become more prevalent buyers of specialty finance companies, taking advantage of both their tax status and abundance of low‐cost, ready‐to‐use capital and public equity
  • A full‐fledged M&A market for specialty finance companies will require commercial banks to renew their participation. While regulatory and capital issues have kept most banks on the sidelines, recent market dynamics and transactions have hinted at increased bank interest in the sector

    2013 HIGHLIGHTS

    Asset Management

    • The number of global asset management transactions decreased to 120 deals in 2013, a 12% decrease from 137 in 2012
    • Asset management transactions announced in 2013 represented $1.8 trillion of assets under management, an increase of 33% over the 2012 figure of $1.4 trillion AUM
    • The number of large deals, involving over $10 billion in AUM, increased to 27 in 2013 from 26 in 2012, a modest increase, while the number of deals between $1 and $10 billion decreased 20% to 75 in 2013 from 94 in 2012
    • In the U.S., there were 69 transactions in 2013, down 13% from 79 transactions in 2012
    • European transactions included 42 announced asset management transactions, relatively flat compared to 43 in 2012
    • In 2013, large independent asset managers, such as ORIX and Aberdeen, have continued to pursue their growth ambitions in global asset management, acquiring large autonomous groups with broad ranges of strategies from banks

    Broker‐Dealer

    • The number of transactions remained relatively constant with 204 deals in 2013, as compared to 205 in 2012. The total value of transactions, however, decreased from $12 billion to $4 billion over the same time period, as several larger deals occurred in 2012. The average deal value for 2013 also declined to $64 million from $174 million in 2012
    • Deal activity in North America saw a 31% drop in the number of transactions, while the number of deals throughout the rest of the world increased slightly
    • Acquisitions of research, sales and trading firms experienced a 37% increase since 2012, while investment banking and retail brokerage acquisitions decreased by 17% and 8%, respectively. Acquisitions of online brokers also doubled in 2013

    Financial Technology

    • FinTech acquisition activity decreased in 2013 to 357 announced deals from 430 in 2012, a 17% decrease, after a 22% decrease in 2012
    • The decline in M&A volume was led by a significant pullback by strategic investors; acquisitions by strategic investors declined by 33% from 292 deals in 2012 to 196 deals in 2013
    • The decline was offset by increased deal activity from private equity / venture capital acquirers; acquisitions by financial investors are up 17% from 138 deals in 2012 to 161 deals in 2013
    • The Insurance Technology sub‐sector was the only sector that experienced an increase in transaction activity, rising slightly to 36 deals in 2013 from 34 in 2012, a 6% increase
    • The Capital Markets Technology sector showed the largest decline to 39 deals in 2013 from 65 in 2012, representing a 40% decrease

    Private Equity

    • The total number of private equity transactions (entry and exit) involving financial institutions (FIG) was 102 in 2013 compared to 115 in 2012, an 11% decrease
    • Average deal value increased 8% from $383 million in 2012 to $415 million in 2013
    • Total transaction value was $26.2 billion in 2013, slightly down from $28.0 billion 2012
    • Asset management and banks & brokerage sub‐industries experienced increases in transaction value, posting 76% and 11% increases, respectively
    • Deal value across all other sectors was down year‐over‐year
    • The largest transaction of 2013 was the third quarter acquisition of insurance brokerage provider Hub International by Hellman & Friedman, in a deal that valued Hub at approximately $4.4 billion

    Specialty Finance

    • Specialty Finance deal activity decreased from 107 announced deals in the banner year of 2012, to 98 in 2013
    • The most active areas for 2H 2013 consolidation were mortgage companies and diversified lenders, with niche lenders losing momentum at year‐end, representing 32%, 23% and 21% of deal activity respectively

    Freeman & Co

    Press Release

    BM

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