Financial Services focus

Financial sector dealflowand multiples remain buoyant. Clearwater International’s James Barraclough speaks to Unquote about the opportunities driving the market.

Evolving market dynamics, driven by technological innovation, regulation and changing consumer habits, are creating a raft of opportunities in the financial services sector.

MiFID II, Basel III, AIFMD, EMIR and RDR are all part of the alphabet soup of new regulations financial services firms have had to contend with over the decade since the financial crisis, with technology vital to meeting the challenge.

“There is disruptive innovation coming in. A lot of it is about improving business models and responding to regulatory challenges, which are only going in one direction,” says Barraclough.

But it is not just regulation. The relationship between financial services providers and their customers has been fundamentally changing, with customers becoming less loyal and shopping around.

Barraclough adds: “From the consumer’s point of view, trust relationships have changed. It is no longer the case that you go to the bank that you have banked with since you were a teenager -people are more interested in switching and more accepting of digital channels. It has been a massive 10-year tsunami of change that has created lots of opportunities.”

People are more interested in switching and more accepting of digital channels. It has been a massive 10-year tsunami of change that has created lots of opportunities.

The response to many of the challenges thrown up by the evolving market environment has been for financial companies to seek scale. One of the best ways of getting new customers on board and expanding product lines has proven to be through acquisitions.

“Once you have got a back office, and compliance and marketing systems established, you can scale up rapidly. What you need is more clients, so firms start buying other business and there has been massive consolidation,” Barraclough says.

This is where technology helps, with a number of applications in financial services such as streamlining compliance processes, client data collection and handling, and marketing. For example, better use of data should enable more targeted marketing for cross-selling, which reduces the cost of consumer acquisition –a major theme driving acquisition sprees and tech innovations.

Insurance boom

Evolving technical and market dynamics are compounded by the fact financial services is a robust sector. Most people and businesses require some kind of insurance, corporates have legal requirements for pension provision, and the declining popularity of defined-benefit pension schemes and more self-employment means vanilla products no longer suit the needs of many households.

M&A in the sector has been buoyant, especially acquisitions by PE houses. The level of competition for quality assets can be seen by the strong multiples being secured by vendors. One major sector has been insurance, where 15 transactions were completed across Europe last year, more than any other financial services sub-sector.

“Insurance and wealth management are behind the curve in terms of their back office efficiency. That’s why they are really interested in technical innovation that streamlines back office processes,” adds Barraclough.

Added to this, there are numerous small and medium-sized insurance brokers in the UK and dotted across the continent, providing plenty of potential targets.

In wealth management, changing fee structures and greater transparency have encouraged clients to shop around, putting downward pressure on fees and commissions. Low interest rates have also contributed to financial companies’ impetus to seek scale. Advisers are also spreading into wealth management as competition chips away at fees.

Financial services is likely to remain an M&A “hot spot” for the foreseeable future, given the continued interest of not only private equity but also significant trade buyers. There remain significant opportunities for innovative, technology enabled businesses to gain market share and create shareholder returns.

Internationalisation and the continued creep of regulation are likely to spur on yet more innovation and opportunity for investors and acquirers. Against this backdrop, it is highly likely prices for quality assets will remain high.

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