appeared in Blue Skies - Blue Islands' Inflight magazine March / April / May 2012
The trust and fund administration market within the Channel Islands is witnessing increasing appetite for mergers and acquisitions (M&A) with over 12 deals having completed in the last two years. Recent transactions include the investment by Close Brothers Private Equity in Jersey Trust Company, Europlan’s merger with Volaw and Kleinwort Benson’s acquisition of Close Brothers Offshore Group. Further M&A activity is expected in what is a fragmented but highly attractive market.
M&A appetite prompted by slow organic growth but overall sector stability
Administrators within the islands have resilient businesses which have fared well in the tough economic environment and it is their recurring revenues, generated from the administration of multi-year structures makes them particularly attractive to investors.
That being said, these businesses are now evaluating alternative means to achieve growth in what is an increasingly crowded market. With few signs of growing wealth across Europe, winning new business to grow organically is proving difficult. M&A is for many reasons now becoming the increasingly favoured growth strategy.
The Channel Islands currently has over 250 licensed fiduciaries and 200 investment fund administrators. Guernsey is particularly fragmented with a high proportion of small independently owned trust companies. Given the current economic climate and increasing legislative burdens on local management teams, market consolidation is inevitable.
Whilst also fragmented, consolidation within Jersey’s trust and fund administration industry has started earlier than in Guernsey. Smaller operators have either merged with or been absorbed by larger institutions. This phenomenon has meant there are now a greater number of larger businesses in play. Whilst there remains scope for further consolidation, there is now greater M&A activity at the larger end of the market with bigger businesses increasingly falling under the spotlight of off-island corporate buyers and private equity houses.
Understanding the significance for the industry
In addition to the resilience of business models held by local market players, there are additional market drivers that paint a picture of growing confidence for the industry’s continued sustainability, including:
It is great to see that both private equity funds and larger established industry players want in on the CI market. Private equity firms are particularly attracted to the islands’ larger businesses that provide an opportunity to establish a solid offshore presence upon which they can grow further through future M&A. Established institutions (including those with existing private equity backing) are also on the lookout for smaller “bolt-on” businesses that will allow them to build market share and diversify their existing operations.
In view of the growing interest amongst buyers, local players are increasingly looking to assess the worth of their businesses or indeed to take advantage of current market fragmentation in order to build larger businesses that may be better positioned to benefit from future outside investment.
How can CI businesses make the most of this period in market evolution?
Understand and articulate your real value
Despite the level of interest in the sector (both from within and outside the CI), achieving seller value expectations has been difficult and many local businesses are struggling to understand the dynamics of value drivers in the sector. There have frequently been disparate valuations on the part of buyers and sellers and this has caused many deals to collapse in recent years. [Consulting experts on valuation metrics can help you to understand what is driving value and what initiatives can be taken to boost this value in the short to medium term.]
Increase your value to potential investors / partners
To accurately assess your business’ worth and specifically its “readiness to transact”, it may be helpful to undertake an operational healthcheck, to identify any potential weaknesses in your business, how it compares to your competitors and what initiatives can be taken to make it more attractive to investors. Buyers will typically look for evidence of strong historic growth and will want to be convinced that there is a compelling business plan in place. They will also want to see robust internal controls including a strong risk and compliance culture. Investing now to review the fundamentals of your business and to address any weaknesses can significantly help in securing maximum value further down the line.
Seek assistance to access capital and a wider pool of investors
Local businesses often struggle to directly access debt financing and capital from onshore investors. Creating a greater awareness amongst both investors and providers of finance of the unique sector opportunity is key to generating momentum in this space. The use of advisors can certainly help here to unlock investment opportunities, access capital and marry up the objectives of buyers and sellers.
Consider cross border M&A
Emerging overseas markets are becoming increasingly attractive to local businesses given the tough European economic climate and evolving client demands. Local administrators are therefore reaching out to establish international distribution capabilities and a broader geographic presence. This is being done by accessing international intermediaries (such as law firms, tax advisors and accountants), setting up overseas offices and where opportunities and resources permit, through cross-border M&A.
Primed to support you
PwC has a local Channel Islands Advisory team with specialist sector knowledge, deep industry relationships and an intricate understanding of market fundamentals. The team is supported by London based M&A specialists with unrivalled experience in executing deals both within the Channel Islands and further afield. The UK team’s local knowledge has been further strengthened by the recent recruitment of Rick Chana who previously spent 4 years doing deals with KPMG in the Channel Islands. Rick brings with him a network of contacts and local market experience.
PwC also has access to an international network of relationships and can support businesses in this sector to deliver a bespoke M&A strategy. This may encompass evaluating local opportunities, accessing the London capital markets or indeed expanding global footprint.
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