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The Increasing Role of Financial Sponsors in M&A

Home » Insights » The Increasing Role of Financial Sponsors in M&A

The Increasing Role of Financial Sponsors in M&A

by Khadija Tahir

Private equity’s share of financial sponsors in M&A has increased dramatically since the global financial crisis, and financial sponsors are now estimated to be involved in up to one-third of all competitive auctions in the global Financial Institutions (FIG) sector. While some well-capitalized banks are beginning to consider strategic acquisitions after a long hiatus, financial sponsors will continue to serve as a crucial source of new capital into and deal flow in the sector. 

The universe of sponsors actively pursuing financial services targets is also broadening. Alternative capital providers, family offices, and sovereign wealth funds such as Temasek have also been drawn to the space. 

But at this time of macroeconomic and geopolitical uncertainty. With increasing regulation, and technological disruption, how do financial sponsors see the market? And where will the best opportunities for private equity participation lie? 

White & Case conducted a series of in-depth interviews with senior FIG industry leaders. Including c-suite executives, bankers, and private equity partners, to understand where financial sponsors are focusing their resources. 

This is a very exciting time for private equity firms with FIG expertise to be in the market. Political uncertainty in the UK and Italy has put these regions firmly on the radar for bargain hunters, and in Germany and across central Europe governments are actively disposing of stakes in bailed-out banks to comply with EU state-aid rules. 

Deals such as Warburg Pincus’s acquisition of Banca Monte Paschi Belgium and Nordic Capital’s bid with Sampo to take Swedish bank Nordex Group private demonstrate private equity aptitude and appetite for complex deals in a highly regulated environment. 

Financial sponsors are also picking areas of financial services. That has been vacated by traditional bank incumbents and is now serviced by fast-growing new entrants using technology to create digital distribution channels and lower operating costs. 

Specialty lending, encompassing peer-to-peer lending, crowdfunding, payday lenders, and specialist consumer and small and medium-sized enterprise (SME) lenders, has received substantial investment. Atomic and GP Bullhound, for example, led a US$40 million round for the property loans platform Lend Invest. 

The SME and consumer space have become very difficult for banks. Who has stepped back to focus on their lowest-risk customers? This makes leasing, asset finance, SME lending, and any consumer lending at the prime/sub-prime margins very attractive for sponsors. 

The non-performing loans (NPL) market. Although more competitive and less attractively priced than a few years ago, is also set to remain a hot area. 

“The NPL servicing platforms backed by private equity remain hugely active. And there is still huge NPL volume coming out of southern Europe, central Europe, and Ireland,” a FIG investment banker said. 

Just some of the NPL deals announced recently include Apollo acquiring €2.8 billion of mortgage NPLs from Bank of Cyprus, Cerberus’s acquisition of €1.4 billion of NPLs from Ulster Bank, and Oak Hill Advisors and Varda Partners buying a US$1 billion batch of shipping NPLs from Deutsche Bank. 

Private equity firms have also strategically invested in debt-servicing companies, which they then use to service their NPL portfolios. This means sponsors benefit from the fees and rising equity value of the servicing companies. In addition to the primary NPL assets. One of Italy’s largest NPL servicing companies Does Bank is 50 percent by Fortress Investments. Interim Justitia, which is 2018 a deal to acquire the debt collection business of Italian bank Intesa Sanpaolo, is also private equity. 

Financial sponsors are also moving back into the adjacent area of credit cards. As regulatory and Brexit pressures create opportunities in specific jurisdictions. 

Anything that involves unsecured credit and debt collection will be very attractive for sponsors. They have the technology to manage these assets, which up and are easy to sell. Losses have historically been low; funding costs are low and volumes have been climbing. 

Investing in financial services, however, does require a clear strategic approach from financial sponsors. Identifying sub-sectors under-serviced by traditional providers. Picking the parts of the industry that are growing the fastest, and avoiding head-to-head confrontations with strategics in auction processes form the foundations for financial sponsor investment in the FIG space. 

The greatest assets of the independent sponsors are their deal-sourcing ability and industry relationships. In an environment where good deals have become scarce. The ability to find these deals and bring the sellers to the table is a key asset. Private equity firms are competing with strategic acquirers. Who also have plenty of cash to deploy, and who have an insider’s knowledge of their industry. Debt continues to be easily available, so access to capital is not determinative. Independent sponsors provide access to deal flow that is under the radar of big private 

equity firms and their relationships can go a long way in closing a transaction. Today’s independent sponsors know the current issues in their industry. They have connections to current management that can help a deal survive during troubled negotiations. 

The potential targets are in the lower middle market. Those deals with a closing value of $25 million to $100 million, are particularly susceptible to the advantages of the independent sponsor. Many of these sellers involve family businesses facing obstacles in succession planning and are looking for the next generation of management. The founder is looking to sell, as a form of retirement planning. But also holds the continuation of the business as a fundamental goal. With independent sponsors who have industry expertise and connections, they can identify these potential targets. Independent sponsors tend to be much more involved with the sellers. Engaging them in succession planning and then bringing investors a growth plan. Some independent 

sponsors plan to stay involved and bring to bear their managerial and operational expertise. Bringing additional value to both the seller and the investors. 

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