High finance

Dealmaking in financial services is back. London Stock Exchange Group data reveals there were 557 M&A transactions in the financial services sector with UK involvement over the first three quarters of the year. Those deals were worth a combined $32.3bn (£25.1bn). To put those figures into context, there were only $29.7bn-worth of financial services transaction over the whole of 2023, although this year has yet to eclipse 2023’s total deal volume of 722 transactions – but it’s on course to.

The shape of the recovery in UK activity mirrors trends seen in global financial services M&A. Following the pandemic and lockdowns, dealmaking reached exceptional levels in 2021 before slowing in 2022 and to an even greater extent in 2023. Now activity is bouncing back.

Major deals this year have included corporate transactions, including Barclays Bank’s takeover of Tesco Bank and Coventry Building Society’s swoop on the Co-operative Bank. But private equity has also been an active participant in the recovery. In October, a CVC Partners-led PE consortium finally clinched a deal to buy Hargreaves Lansdown (see Bristol mega-deal, below), for example, while Pollen Street Capital snapped up Mattioli Woods.

Activity in the mid-market has also been on the up. Data from City law firm White & Case suggests that mid-market financial services deals in the UK increased in volume in each of the first three quarters of the year. Only the technology, media and telecoms sector saw more mid-market M&A activity than financial services during this period.

“The market has definitely picked up strongly over the year,” says Baber Din, UK M&A leader for the financial services sector at Deloitte. “Our team is really busy at the moment – the phone keeps ringing with requests from clients.”

At PwC, head of fintech corporate finance Jeremy Sweetnam adds: “Last year was definitely one of the more challenging years for dealmaking in financial services since the financial crisis, but 2024 is shaping up to be much better.”

Private equity exits

In part, that improvement in circumstances reflects the improving macroeconomic backdrop. With inflation now falling sharply across most developed economies, central banks have once again begun to loosen monetary policy. In the UK, Goldman Sachs is now predicting that the Bank of England will reduce base rates to 3.0% by November 2025 in a series of reductions from today’s level of 4.75%.

With political uncertainties in the UK now easing following October’s first Budget from new chancellor Rachel Reeves, and forecasters such as the International Monetary Fund raising their growth forecasts for the UK, corporates are feeling more confident about committing to strategic goals requiring M&A. What happens in the US in 2025 will have an impact, but possibly of least concern there is the economics. The PE sector, meanwhile, sees a path towards deployment of some of the record amounts of dry powder it has amassed. Global PE and venture capital funds held $2.62tn of uncommitted capital at the end of the second half of the year, according to data from S&P Global Market Intelligence and Preqin.

Exit activity has already increased, both from PE funds now finding buyers a little more willing to pay the valuations they hope for, and from entrepreneurs. “All the speculation ahead of the budget about the UK government planning to raise capital gains taxes definitely motivated some business owners to get sales done before the announcement,” says Paul Lynch, a partner in the financial services due diligence team at Grant Thornton UK.

Still, this is not a free-for-all. “We are seeing a flight to quality, with an obvious bifurcation between businesses with highly visible growth prospects seen as attractive to bidders and weaker assets commanding less interest,” adds Sweetnam. “There is also a strong sub-sector story, with some areas of the financial services industry seeing much greater levels of activity than others.”

The wealth management sector is leading the charge. “There are corporates looking to make acquisitions, but they’re competing with as many as 50 PE buyers pursuing consolidation and buy-and-build,” says Duncan Chandler, head of financial services in the M&A team at BDO. “The UK’s demographics are attractive: we have a large middle-class population that is ageing and in need of financial advice as people come under pressure to make more provision for themselves.”

Consolidators in play

The industry remains remarkably fragmented, Chandler points out, with at least 5,000 advisory firms spread across the UK. Single advisers – often older and eyeing retirement, now run many of these practices. The growing compliance burden in the sector – including the Financial Conduct Authority’s new Consumer Duty requirements – adds to the pressure for consolidation.

For buyers, meanwhile, scale offers real potential. “For consolidators able to smash together the back and middle offices of wealth managers, there will be significant efficiency savings,” Chandler adds. “There’s also a vertical integration narrative: if you can add additional services, such as discretionary fund management, you can create new sources of fee income and drive value.”

The pace of activity is accelerating, with consolidators now eyeing one another. For example, Perspective, which now has more than £8bn of assets under advice after acquiring 80 firms over the past 15 years, was bought by US PE firm Charlesbank earlier this year at a valuation thought to be above £300m.

The Hargreaves Lansdown deal is also part of this story, with consolidators eager to exploit the direct-to-consumer (D2C) model of businesses with the strongest technology platforms. Asset manager abrdn bought Interactive Investor in 2022 with similar goals in mind.

“D2C platforms are a way to benefit from the explosion in interest in self-invested personal pensions in the age of increased responsibility for financial security,” says Tandeep Minhas, head of the corporate finance and equity capital markets team in the UK at Taylor Wessing and a member of the Corporate Finance Faculty board, who cites JPMorgan’s purchase of Nutmeg as another example. “They are also ideal for collecting data that you can leverage to launch other services, or as part of new strategies dependent on technologies such as artificial intelligence.”

Many options

Asset managers themselves are also increasingly active dealmakers, points out Deloitte’s Din. “There is a lot of interest in private markets, such as private credit, real estate and infrastructure, where investors have traditionally been arguably underweight in their portfolios but are now increasing their allocations,” he says. This is seeing asset managers racing to add competency in these asset classes, often through M&A. The UK-based sustainable infrastructure specialist Actis, for example, was sold to General Atlantic earlier this year.

Elsewhere, the consolidation theme is also continuing to play out in the insurance sector, says PwC’s Sweetnam. “We’re continuing to see broker consolidation – and the UK has seen a record number of broker deals over the past two years, bucking the wider trend across financial services – but average deal sizes are falling,” he says. “Financial sponsors are increasingly attracted to niche areas, such as specialist personal or commercial cover, and are beginning to look further afield, too, to markets such as Germany.”

Banking is also seeing increasing amounts of activity. “We’ve been talking about a wave of challenger bank consolidation sweeping across banking for at least a decade, but it’s never really materialised,” says Din. “This past year, however, a number of landmark deals are a sign that the wave is finally breaking.”

In the UK, four big deals have caught the eye, with Nationwide Building Society’s purchase of Virgin Money and NatWest’s takeover of Sainsbury’s Bank coming, in addition to the Barclays-Tesco and Coventry-Co-op tie-ups. And in October, Legal & General (advised by Grant Thornton) invested in Boston-based private equity real-estate platform Taurus.

To some extent, such transactions reflect the headwinds facing challenger banks in banking, with mid-market operators struggling without scale. That said, players such as Monzo, Atom Bank, Zopa and Tandem have all managed to raise growth capital from investors over the past 12 months. And in the case of the supermarket banks, their deals also reflect the desire of parent groups to focus on core activities.

One question in the banking sector now is whether the growing number of deals in the UK will be matched by increasing activity in continental Europe, where there have long been similar predictions about consolidation. Transactions such as the hostile bid from BBVA for Banco Sabadell in Spain – and the rumoured bid by Italy’s UniCredit for Germany’s Commerzbank – suggest this is possible, although such deals often face political or regulatory opposition. “The European banks have been in rebuild mode since the financial crisis more than 15 years ago,” says Taylor Wessing’s Minhas. “But they are now on a much stronger footing following years of recapitalisation and they see an opportunity to go back into the deals market.”

That could also see European banks become more active in the fintech sector, particularly in the consumer space where continental players have been slower to progress than their peers in the UK. Credit Agricole, for example, has this year bought buy-now-pay-later operator Pledg and employee benefits specialist Worklife as it seeks to expand its distribution channels. Recent months have also seen fintechs acquire new banking licences in countries including France, Italy, Austria, Portugal and Turkey.

Regulatory changes

In the UK, however, fintech M&A activity has come under pressure. Data from KPMG shows there were 198 UK M&A, PE and venture capital deals completed in the fintech sector during the first half of the year, compared with 284 in the same period of 2023. There were a couple of large deals, including US PE group Leonard Green’s purchase of IRIS Software for $4bn and a $621m fundraise at Monzo, but KPMG describes the market as “subdued”.

There are a couple of things going on here, says PwC’s Sweetnam. “Among the consumer-facing fintechs, we now have established leaders in most key markets, such as Monzo, Revolut and Starling Bank. While it’s still too early to say if they will survive and thrive, it’s probably too late for everyone else in B2C,” he says. 

“That has seen fintech investment pivot towards B2B, but it’s hard work – it takes a couple of years to persuade a large financial services company, say, to commit to buying your product.”

Some fintechs are pursuing partnerships and joint ventures with industry incumbents, but there are no easy options, says Sweetnam. “Certainly, if you’re a mid-market player in most of these verticals and you don’t already have some sort of collaboration with a trade partner, you’re probably not going to get bought out of the blue,” he says. “But making those partnerships work so that you can monetise the relationship is often as challenging as signing the contract.” 

This is not to suggest that fintech M&A is over. There is still significant interest in certain areas of fintech – technology-enabled professional services for financial services businesses, for example, innovators in the crypto space, and insurance solutions built on artificial intelligence and machine learning.

Regulatory change is also driving fintech growth, adds Paul Lynch of Grant Thornton. “The Consumer Duty regulation, for example, means that firms must act to deliver good outcomes for retail customers, such as fair pricing, among other things,” he says. “Data solutions and AI technologies that can help you track this and do that much more quickly are valuable.”

Still, investors and acquirers are far less willing to take a punt on fintechs than in previous years, says BDO’s Duncan Chandler. “Fintechs with provable unit economics and a record of discipline will find there is money out there, and potentially at higher valuations,” he says. “But there is certainly more scepticism about early-stage ventures.”

It’s quite the turnaround. For some years, all the M&A excitement in the UK has focused on fintech businesses. Today, by contrast, enthusiasm has cooled – just as appetite for dealmaking across the sector as a whole is picking up.