Financial services

Mid-year Canadian M&A industry and market trends

It’s an exciting time in Canadian financial services. The push to deploy capital and optimize balance sheets and the need to add scale, technology and other capabilities are fuelling M&A activity in all subsectors. The pandemic has truly accelerated the pace of transformation in this sector, which has traditionally been resistant to change.

Here are some of the key M&A trends we’re seeing in financial services:

Insurance: We expect to see continued strong activity in insurance brokerage, benefits and underwriting. Consolidation of distribution has accelerated in the last six months, driven by the need to achieve scale, connect differently with customers through digital channels and realize synergies. Valuations are at a historic high, and this is bringing more vendors to market, while buyer demand remains strong from strategic carriers and traditional aggregators. Some life insurance carriers are looking to optimize their balance sheets, divesting themselves of blocks of businesses that are more capital-intensive and acquiring alternative fee-generating businesses. Private equity and traditional sponsors are showing significant interest in capitalizing new vehicles to be able to invest and acquire those blocks of business.
Digitization: COVID-19 has accelerated the shift to digitization. As more and more consumers conduct transactions online, from shopping for a sofa to buying insurance, financial institutions and regulators alike have been forced to evolve, allowing for e-signing of contracts, integrated point-of-sale finance solutions and digital binding of insurance. This pressure to digitize is driving an increase in M&A and partnerships between incumbent financial institutions and more FinTech and technology-driven startups.
Asset and wealth management: In the asset and wealth management subsector, despite Canada’s highly fragmented marketplace and significant buyer demand, owners don’t seem ready to sell—perhaps because of the market rebound and strong appetite for alternative investments among retail investors. But we expect M&A activity in this subsector to ramp up in the near term. High valuations are also leading to some innovative structures, such as step transactions with a disproportionate retained economic interest but a reduction in control and voting interest. We’re also seeing an increased focus on environmental, social and governance (ESG) factors, and this subsector is leading the way by offering sustainable investment products.
Banks: In the last six months, we’ve seen some Canadian banks interested in capital relief transactions, offloading portfolios of loans to private investment vehicles. For the most part, we anticipate Canadian banks will be acquirers of fee-earning, less capital-intensive businesses like wealth management and private banking, with particular interest in the US market. We’re also starting to see an increase in credit union merger activity, driven by the low interest rate environment, an influx of excess liquidity and a need to scale.