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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