This is an exciting deal market for both buyers and sellers, but there’s also a lot of uncertainty. The sector is awash in capital ready to be deployed, with buyers—ranging from nimble private equity firms to sovereign wealth funds to large US financial institutions—lining up for a limited number of high-priced opportunities. We expect the robust market to continue as firms look to acquire new technology, augment their teams, change business models to compete, and control compliance costs.
Suitors seeking insurers. In 2017, dealmakers in the financial services industry sought opportunities to achieve scale by consolidating insurance companies. Capital flowed into the sector from private equity and pension funds in the US, as well as from foreign buyers.
Bank executives are cautious, and with good reason. Community bankers were active in 2017. In 3Q17, for example, bank deals under US$250 million were 79% of all transactions as firms sought to control compliance costs and expand. But the sector as a whole saw one of its lowest deal levels in a decade. While capital was available, there was also a lot of uncertainty about regulation, taxes, and interest rates. Since the stock market soared, deals have become more expensive, making potential acquisitions riskier. Without a compelling reason for a transaction, many executives took a wait-and-see approach.
Redefining deals. Among wealth management firms, deal activity hit a record level in 2017, while asset management deal flow remained slow. Not all deals followed the same playbook. Private equity firms and asset managers made a number of visible minority investments as they looked to balance risk and return. Some firms poached entire groups of portfolio managers from rivals.
Watch Uncle Sam. We expect deals to pick up in 2018 in response to tax reform and softening regulation. In particular, we anticipate more M&A activity among small- to medium-size publicly traded insurance companies. One proposal would raise the capital threshold for designating a bank as a systemically important financial institution (SIFI). If approved, we may go from 38 SIFI banks to 12, potentially reviving the anemic mega-deal market.
Busy year ahead. In 2018, look for firms to shed underperforming and non-core lines of business. We expect to see more consolidation of mid-tier banks as they redefine their business models through digital transformation. Beyond banks, we could see continued interest in alternative asset managers and FinTech startups. Property and casualty insurers may be vulnerable following the wildfires and hurricanes in 2017.
The serial acquirer. Could 2018 be the year of the roll-up? We’ve seen a number of financial firms in the marketplace doing multiple deals, particularly in the asset and wealth management space. Many of these will likely be minority investments, both from firms looking for ways to keep their options open and from firms prohibited from making outright acquisitions.
Buyer beware! As a buyer, you may be tempted to relax due diligence and rush forward, especially in the hot market for insurers and small banks. Don’t. Search for companies to acquire only after you’ve crafted a detailed strategy and a clear rationale for expansion.
Swipe left. Firms hoping to be acquired have multiple options these days as liquidity flows toward the most attractive opportunities in asset management, insurance, and banking. Sellers may think about outright acquisitions or IPOs. But they should think seriously about suitors from a range of sources, including private equity, sovereign wealth funds, and family offices.
One step ahead. Buyers are thinking about who they’ll compete against two years from now—and if they’re not, they should. Firms are looking to add technology, hire people with specific skills, and drastically change business models. In this setting, make sure that your long-term strategy is crystal clear. Also, update your due-diligence steps. If you want a specific RegTech capability, for example, look beyond the numbers. Make sure the company you’re targeting aligns with your business strategy and organizational culture, and that it would contribute your bottom line.
“Regulators are finally comfortable with banks starting to talk to each other about transactions. There’s a need for streamlining. So in the middle market especially—including regional banks—there’s got to be more consolidation.”
PwC's John Stadtler and Sam Yildirim discuss how companies and investors from other countries are eager to buy US firms across all sub-sectors of financial services. A variety of investors—from private equity to sovereign wealth.
PwC's John Marra says pension funds, private equity, and insurance companies from home and abroad are lining up like never before to buy US banks, asset managers, and insurance companies.
Our teams in asset and wealth management, banking and capital markets, and insurance are helping our clients tackle the biggest issues facing the financial services industry. With professionals across tax, assurance, and advisory practices, we can help you find ways to thrive even in a period of uncertainty. Whether you're preparing for regulatory changes, putting FinTech/InsurTech to work, or rethinking your human capital strategy, we work together with you to resolve complex issues, identify opportunities, and deliver value to your business.
US Financial Services Deals Leader, PwC US
Tel: +1 (646) 818 7983
Asset and Wealth Management Deals Partner, PwC US
Tel: +1 (646) 818 8229