The financial crisis provided an opportunity for private equity firms to gain a foothold in the financial services space, and they haven’t looked back. As the opening figure shows, 2015 was a landmark year for sponsors, who had traditionally found it difficult to thrive due to tough competition from strategics within a regulated sector.
Following a dip in activity in 2016, this year saw a resurgence in activity. In 2017 so far, buyout firms have secured 37 deals worth US$6.47 billion within the Western European financial services sector, already overtaking 2016’s annual total.
This interest from buyout firms in financial offerings is showing no signs of slowing down. According to the recent White & Case report “How private equity is powering financial services M&A”, firms see three clear opportunities within the sector: The valuation dislocation within the sector is creating investment opportunities, the disruptive power of technology is upending traditional business models, and changes to legislation and regulation are encouraging more plurality in the industry.
Yet the growing presence of buyout firms within the sector is not just down to favorable external factors. The asset class has taken proactive steps over the last couple of years to build up financial services sector expertise. A key reason for the success of buyout firms has been their ability to leverage knowledge gained from prior investments in the sector and recognizing subsectors where private equity is best positioned to win deals and generate returns.
A cashless future
Payment processing has been one of the main sub-sectors on which firms have focused. Financial sponsors have been quick to take advantage of the shift toward cashless payments and moved to consolidate a sub-sector where new providers have proliferated thanks to technological advances. Nets and WorldPay have subsequently been subject to takeovers by buyout house Hellman & Friedman and debit and credit card processor Vantiv respectively.
Nordic Capital has also been active in the space, recently announcing the sale of Bambora to Ingenico for US$1.7 billion, and Scandinavian merchant payment services business Point International to Verifone in a US$1 billion transaction.
In the post-crisis years, private equity has been able to fill the space vacated by banks and insurers, investing in the development of specialist financial services skills and targeting specific niches within the sector.
Given the recent deal activity in the space, there is no reason to suggest that this pattern is likely to change any time soon, with private equity firms potentially becoming an even greater force in the financial services sector in the years to come.