Untenable positions may force UK firms to seek buyers
Ray Soudah, MilleniumAssociates AG
A number of UK-based financial services firms are likely to come onto the market in the near future, but any such developments are more likely to be about sellers wanting out than buyers looking to get into private banking
Many commentators talk about how the private banking world has changed since 2008 and the onset of an ever-deepening financial crisis. But these changes become particularly evident in those jurisdictions which host a significant number of financial services firms, many of them private banks and wealth managers serving retail, affluent and high net worth individuals. One of the best examples of such a fluid environment is probably the UK.
It used to be that whenever there was a half decent business for sale, dozens of potential purchasers would express buying interest simultaneously and submit sensible offers in an effort to grow their franchises and/or enhance their own brands. Industry participants would typically crowd out private equity-backed management teams and wealth funds.
But in the post-crisis era, the profitability of these market participants has fallen dramatically. Many of them were only rescued from crippling losses by global and sovereign state quantitative easing, while much needed liquidity supported stockmarkets and revenue-based asset prices since the G20 April 2009 London summit brought the market back from the valuation brink.
More recently, several firms have changed ownership, such as Williams de Broë, absorbed by Investec in a takeover of the brokerage parent firm, Evolution Group. This transaction, apparently embracing integration into the new owners’ existing wealth division, was in fact a clear sign of a distressed seller exiting the financial industry.
Another recent example is the sale of Quilter to European private equity firm Bridgepoint Capital, the third time in 10 years that Quilter’s banking parents (this time Morgan Stanley) have abandoned it due to seemingly ever-changing strategic commitments to remote domestic markets.
We anticipate several more such disposals in the months and years ahead, a number of which will be a direct result of vendors’ untenable positions within the marketplace; be they foreign-owned firms which need to focus on their own brands rather than UK-centric subsidiaries or foreign-owned firms, whose parents need the capital as part of a retrenchment of their international operations. Likewise some domestic firms suffering from subscale volumes and succession issues will potentially seek to trade their shares for someone else’s stock, providing them with upside through a synergy-based merger.
The outlook is clear; there will be a number of disposals, some of which are currently underway, but we believe most of these will be seller inspired rather than buyer instigated.
Bag a bargain
But who will be looking to buy? Private equity firms will be seeking to take maximum advantage from the fact that there are fewer than normal industry buyers. They may be tempted to release their underinvested funds, seeking suitable opportunities for investment on the basis that the current low valuations are temporary and that there are likely to be a number of consolidation opportunities ahead.
Some foreign buyers will also try to upgrade their London presence, but these are likely to be few and far between; sovereign wealth funds will only be tempted by large firms with a strong brand such as Coutts, should they ever formally be put up for sale, meaning that most transactions will be modest, largely benefiting key, client-facing personnel, who will need to be well incentivised in order to protect the client assets being acquired.
Expect a few businesses to be sold following shareholder abandonment of the UK market – considered a key centre not long ago by most global firms – how times have changed! For shareholders, now is not really the best time to sell, while for key personnel, they will be indifferent as they will be rewarded whatever the outcome. Ultimately clients and/or new acquirers are financing their stubbornly high compensation and retention costs.
This is the second in a series of three articles by Ray Soudah, founding partner of MilleniumAssociates AG, the independent global M&A and corporate finance firm based in Switzerland and the UK, looking at the outlook for M&A activity within the private banking and wealth management industry in the UK. The first in the series focused on the Swiss marketplace and the third will focus on the outlook for the global market as a whole.
