European private equity investment into financial services has been robust this year as managers target consolidation in fragmented subsectors, such as asset management and insurance brokerage.
The value of European financial services PE deals in 2023 has hit €59.5 billion (about $65 billion) across 267 deals, following a bumper July which saw €19.4 billion of deal activity, according to PitchBook data.
Financial services have stood out in an otherwise tepid year for European PE investment. The sector accounted for 15.2% of total European PE deal value in the first half of 2023, compared to just 6.2% during 2022. No other sector in Europe is on course to surpass 2022 PE deal value, according to PitchBook’s Q2 2023 European PE Breakdown.
This year is also well on track to top 2022 and 2021 by number of European financial services PE deals. There have been 267 deals in 2023, compared to 421 in 2022 and 418 in 2021.
By far the largest deal this year is GTCR’s leveraged buyout of Worldpay from Fidelity National Information Services, announced in early July—the largest ever European LBO in the financial services industry. GTCR will acquire a 55% stake in the London-headquartered payment services firm for an estimated $11.7 billion. But even after stripping out that megadeal, the deal value as of July 31 stands at around €48.7 billion—almost on par with the total for 2022, €49.2 billion.
Although a blockbuster tops this year’s league table, this is an exception—the vast majority of deals have been worth less than €100 million and have been in relatively niche operators.
Other than the Worldpay LBO, there have been no deals worth more than €2.5 billion. The next largest is Lansdowne Partners’ $1.1 billion buyout of Crux Asset Management, announced on May 31.
The median deal value for European financial services PE deals in 2023 stands at just €39.8 million. This is slightly higher than 2022, where it stood at €34.6 million.
In the current market with tight financing and lowered risk appetites, asset light financial services businesses have been appealing targets for PE investment. The hurdles to invest in more capital-intensive businesses, such as banks and other lenders, can be higher and the regulatory burden in these areas greater too.
There has been a surge in PE firms globally acquiring asset managers. In Europe this has included the Crux Asset Management deal and Searchlight Capita Partners’ acquisition of specialist asset manager Gresham House, both announced within the last three months.
“Market dynamics make asset and wealth management—and particularly wealth managers—a particularly attractive sub-sector of financial services for private equity,” said Joe Brassington, director in transaction services at Deloitte. “Businesses in the sector are characterized by high cash conversion, sticky customer bases and relatively capital light business models.”
Wealth management is also a fragmented market, he added, “giving rise to the opportunity for consolidation, scope for vertical integration and the potential for tech enablement, [making] it a key sub-sector of focus for many PE houses.”
These market dynamics are also driving PE investment into other fragmented market segments such as insurance brokerages and asset administration services, which are also ripe for consolidation and technology upgrades.
Although the factors supporting smaller transactions in these segments are likely to persist, there is little sign a wave of bigger deals is on the way.
“Uncertainty” continues to be a big watchword for the industry, said Hugh Lloyd Ellis, private equity lead at PwC UK, who points out that PE investment committees continue to set the bar for approving major deals at an exceptionally high level.
Deloitte’s Brassington added that major deals that do go ahead in the current market will mostly be driven by specific deal dynamics, adding that Worldpay’s blockbuster LBO should not be seen as the doors opening to a wave of large deals.
Featured image by lshomos uddin/Getty Images
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