H2 2021 M&A performance predictions - Financial Services bouncing back

09 September 2021

Duncan Chandler, who recently joined BDO as Head of Financial Services in the M&A team, discusses the M&A outlook for Financial Services (FS). The data referred to is published in BDO’s Horizons report on mid-market deal activity and trends.

In H1 2021, overall transaction value was up 49% against H2 2020 and up 75% against H1 2020.  This clearly indicates that the recovery in mid-market M&A deals, which began in the second half of 2020, is continuing at pace.

The pace of recovery has varied among sectors throughout the last few quarters. An interesting development is the significant increase in anticipated deal activity in the FS sector, with 17% of predicted deals in H2. FS has one of the highest predicted year on year increases.

After the enforced pause during the COVID-19 pandemic, FS has bounced back particularly strongly. The reasons for this are two-fold: as with several other sectors with turbo-charged digitalisation, COVID-19 saw the acceleration of many business plans. Secondly, the secular trends already supporting FS growth were deemed to be intact, indeed arguably enhanced.

Trends supporting growth in Financial Services

The secular trends supporting FS growth include the UK’s long-term demographic challenges, in particular an ageing population with underprovided pensions. In addition, there is a large incumbent banking sector with legacy IT systems and generally a low appetite for risk and specialisms. Finally, FS continues to have a number of products which are complex and have opaque charging structures, which coupled with generally low consumer financial literacy regularly lead to poor customer outcomes.

The “hottest” areas are those which address many of the above issues including better servicing and use of data analytics, especially for consumers and SMEs. The spectacular valuations seen in the recent Revolut fundraise and PensionBee IPO can be seen in this context. The smart but worrisome (to regulators and incumbent card players) rise of buy now, pay later (BNPL) firms is another good example.

Alternatively, there can be a focus on fixing the underlying FS infrastructure, for example the plethora of payments companies working to provide efficient, better priced, and more tailored services.

The continuation of specialist FS firms focusing on specific products and processes like specialist buy to let and bridge lenders, where high street banks prefer not to play, is expected. This is as well as those focusing on the use of AI to provide the cutting edge in terms of speed of response, underwriting performance and cost to service such as increasingly automated SME lending.

Growing interest of private equity

Another factor of FS activity is the growing interest of private equity. From just a handful of funds a few years ago to becoming more mainstream as private equity pushes hard with buy and build strategies such as in insurance brokering and wealth management. The availability of “cheap money” is tentatively also seeing the return of US credit funds into the UK after Brexit and COVID-19.

Possible clouds on the horizon include the unwinding of financial COVID-19 support globally such as furlough and bad debt risk. The effects of inflation, high debt piles (where more than 100% of government debt levels seem to be the new norm) and the tightening of regulation in certain areas such as BNPL and fund management are also potential issues.

SME lending has been a very distorted space due to Coronavirus Business Interruption Loan Schemes and recovery loans. It will be interesting to see who has been lending well and compliantly when the dust finally settles. In the meantime, expect lots more M&A activity!

TMT continues to lead by wide margin

The BDO heat chart also predicts that TMT (Technology, Media and Telecommunications) M&A activity will continue to lead all sectors by a wide margin in the second half of 2021 with 21% of all expected deals.

Gordon Carstairs, Managing Director of the TMT M&A team, comments: “As a tech M&A team we continue to see full valuations across both the information and communication technology (ICT) channel and software, which is in part driven by the combination of ever-increasing investor wallets and an increasing appetite from generalist investors to transact in tech. We’ve seen private equity houses be opportunistic in their approach to portfolio, recognising that multiples (exit and entry) are particularly racy in current times. Across the ICT ecosystem vertical focus is more relevant than ever before, with mid-market channel players looking to stand out and add value in a crowded market.”

Read the full Horizons report here