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.
Global M&A trends in financial services
Asset and wealth management
- The asset and wealth management (AWM) sector is holding up well amid the uncertain global macroeconomic and geopolitical environment. Despite the weaker performance of capital markets in the first half of the year, strong investment appetite remains, and the AWM deals market is still active.
- Investors are looking increasingly at alternatives as they focus on longer-term objectives and ways to navigate the current uncertainties in the market. Alternatives and funds focused on sustainability are expected to attract strong investor interest and result in opportunities for M&A.
- AWM firms are taking note of investor demand for sustainable investment options and are re-evaluating product design, fund allocation and performance objectives. We expect this will likely create impetus for further M&A, although a limited supply of suitable targets may constrain some dealmakers’ ambitions.
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Banking and capital markets
- Technology capabilities remain central to M&A strategies as corporates seek to build market position against the backdrop of disruption from fintechs and non-FS companies.
- Across the banking sector, in an effort to meet customer expectations for convenient and secure digital banking, we are seeing business leaders attempting to modernise their operations by acquiring new digital capabilities and investing in cloud technologies.
- The growth of the digital economy is fostering partnership opportunities with digital distribution channel partners (e.g., platforms) that create transaction flows and FS opportunities, such as consumer lending through B2C digital channels.
- Banks are facing their own internal challenges with optimising and digitising their business models, and they appear to be taking a more conservative approach when considering potential acquisition targets—a strategy that helps them avoid those businesses with their own set of challenges. As a result, we are seeing banks perform more in-depth due diligence to measure a target’s performance against key value drivers and improve the prospects for better integration.
- We will likely see banks continuing to divest non-core assets. As part of a strategic portfolio review, exiting businesses in which the company does not have a competitive advantage will reduce complexity, sharpen operational focus and free up capital for reinvestment in higher-growth areas.
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Insurance
- After an active year of deal-making in 2021, insurance M&A activity slowed in the first half of 2022, driven by economic uncertainty and factors such as inflation and rising interest rates. Interest rate increases may actually present an opportunity to increase profitability for life insurance and long-duration property and casualty (P&C) targets. Higher interest rates will relieve some of the pressure on generating investment returns for long-duration businesses and allow insurers to rebalance portfolios in traditional investments and rely less on alternative asset classes. This has the potential to drive activity and valuations for life insurance targets, which are already seeing significant interest from private equity (PE) and AWM investors.
- We continue to see PE and AWM firms expanding their footprint in the insurance sector. We expect competition for insurance carrier targets and run-off blocks to remain strong as PE and AWM firms look to grow their assets under management (AUM). An increase in AUM offers opportunities for PE and AWM firms to generate better risk-adjusted returns on assets and increase fee income.
- In the first half of 2022, we continued to see strong insurance distribution deal activity. We expect continued interest from both consolidators and PE investors in insurance brokerage companies, specifically managing general agents (MGAs) and managing general underwriters (MGUs) in specialty lines.
- Insurtech valuations and stock market performance have cooled in 2022 following a period of significant investor interest in 2021 and late 2020. As valuations come down, these insurtech companies may present attractive acquisition targets for legacy players in the insurance space that are looking to harness technological capabilities, drive revenues and define their future success.
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Mid-year M&A outlook for financial services
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.
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