The industry-wide need for digital capabilities, combined with sustained pressure from regulators and disruption from platforms and fintechs, means the FS industry remains primed for transformation. We expect this will lead to a healthy level of M&A activity during the second half of 2022, with a focus on the formation of strategic partnerships, consolidation and deals that help drive digital transformation.
Although the desire to do M&A remains strong, dealmakers are facing challenges due to the uncertainties arising from the current macroeconomic and inflationary headwinds and impacts from the Russia–Ukraine conflict.
Financing: We are seeing the financing of certain deals becoming more difficult, as interest rates continue to rise and lenders become much stricter in their lending policies.
Value: Investors now need to search for additional synergies, innovation and increased efficiencies to justify valuations and unlock value.
Valuations: Many buyers no longer appear willing to pay the high purchase-price multiples that were being achieved in 2021, and we expect valuations to come down further over the remainder of the year.
Dealmakers’ increased focus on different levers for value creation is leading to more in-depth due diligence processes before signing and deals transformation work after a deal closes. Due diligence is expanding from the more traditional focus areas of financial performance, tax, IT and operations to areas such as strategic fit, workforce, and environmental, social and governance (ESG). Buyers are increasingly evaluating ESG factors as part of the investment thesis for a deal to ensure that a target has a sustainable business model that aligns with the buyer’s own ESG strategy and goals.
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An active M&A market is expected to continue in the second half of 2022 in the FS sector. Asset and wealth managers are looking to expand into new asset classes; banks are being pushed to modernise with new digital solutions and to optimise their capital base; and insurance companies are looking for opportunities to divest non-core assets, including run-off blocks, and refocus core competencies.
Although technology is still in high demand, we expect to see deal multiples come down from recent highs due to macroeconomic headwinds. Overall, M&A activity in the FS sector is likely to remain high as more value opportunities emerge in the current environment.