VENUE ® ® Market Spotlight

FINANCIAL SERVICES

November 2017 Edition

VENUE® Market Spotlight: Financial Services

Dear Valued Reader,

Welcome to the November 2017 edition of the Venue Market Spotlight. This month, we will examine deal activity in the global financial services sector.

This is an industry characterized by rapid change, as digitalization sweeps into so many areas of financial services, as well as tough challenges – not least the increasing regulatory burden many businesses have faced following global regulators’ attempts to prevent a reoccurrence of the financial crisis of a decade ago. However, the industry is benefitting from mega-trends such as the demographics of Western economies, where aging populations require more savings, investment and insurance products, and the increasing wealth of customers in developing markets. The recovery of the global economy also represents a tailwind.

Against this backdrop, M&A activity in the sector is strong. Our research shows that dealmaking has held up well during 2017, although it may struggle to match the records achieved over the previous two years. And the majority of respondents to our survey expect activity to increase further over the 12 months to come.

As a global leader in financial services, at Donnelley Financial Solutions we take pride in being an industry thought-leader. This month’s Venue Market Spotlight, focused on the trending challenges and opportunities within the financial services space, is especially important and relevant to our business. Providing the dealmaking community unparalleled technology solutions service expertise is the cornerstone of our business, and we hope you find this month’s edition particularly thought-provoking.

As always, please enjoy this month’s Spotlight.

Sincerely,

Craig Clay President, Global Capital MarketsDonnelley Financial Solutions

WELCOME

Foreword 3

Survey 4

Financial services 10 deals in the room

About Donnelley 11 Financial Solutions

CONTENTS

Donnelley Financial Solutions is the sponsor of the Venue Market Spotlight. All information contained in this publication is for informational purposes only and should not be construed as legal, accounting, tax, or other professional advice of any kind, on any subject matter. Donnelley Financial Solutions expressly disclaims all liability in respect to actions taken or not taken based on any or all the content herein.

METHODOLOGY

In November 2017, Mergermarket interviewed 25 global dealmakers from across the corporate, private equity, and investment banking communities for their views related to financial services M&A activity and trends. Respondents were split between the US (36%), Europe (32%), and APAC (32%).

3

M&A activity in the financial services sector remains strong, with businesses throughout the industry under pressure to identify new sources of growth in both developed and developing economies. In a sector where scale is important to mitigate costs, such as regulatory expense and high technology spend, access to a growing customer base is crucial. And the need to secure that access through a range of channels in a digitalizing marketplace is another potential driver of M&A. Meanwhile, the emergence of disruptive new technologies provides the industry with further motivation to pursue transactions.

These themes have underpinned buoyancy in the M&A market over the past two years. Deal volumes in the sector reached a record US$450.4bn in 2015 and while last year’s total, US$304.2bn, was significantly lower, it was still high by historical standards; deal numbers, in any case, were consistent, with 1,441 M&A transactions in the global financial services industry during 2016, against 1,479 the previous year.

One such deal in July, the acquisition of Intacct, a North American provider of cloud financial management solutions, by Sage for US$850m, saw the expansion of the company’s offering and geographic diversification, clearly illustrating the trend for both digitization and rapid customer base growth.

Deal activity to date suggests this year’s volumes will fall short of the past two years, but remain healthy. Over the nine months to the end of September, there were 946 transactions in the sector worth a combined US$189.7bn. At this rate, M&A activity is on target to be broadly similar to 2013 and 2014, which were themselves strong years for dealmaking.

Our survey respondents certainly do not see slower transaction numbers signalling a reversal in financial services M&A. In fact, 80% of respondents expect M&A activity in the sector to increase over the next year – almost one-third expect significantly so.

The potential for further financial services M&A is strong. There will be hurdles to overcome – the rapidly changing financial services landscape worries many buyers, while valuation levels are also a concern – but the conditions remain right for dealmaking.

Other key findings include:

FOREWORD

72% of respondents expect private equity

(PE) activity in financial services M&A to increase over the next 12 months.

Cross-border expansion (cited

by 48% of respondents) and fintech acquisitions (44%) will be the two most important drivers of financial services M&A activity in the year ahead.

64% of respondents pick the US as the

developed market where M&A activity in financial services will increase most significantly in the coming year; amongst developing markets, 68% tip India.

VENUE® Market Spotlight: Financial Services

SURVEY

Q1 What do you think will happen to financial services M&A activity in the coming 12 months?

Dealmakers are optimistic about the outlook for financial services M&A in the coming year. Some 80% of respondents anticipate an increase in dealmaking — 24% expect significantly so. Just 4% of respondents forecast a decline in M&A in the year ahead.

This optimism reflects the continuing strong drivers for M&A activity. At the top end of the market, leading financial services firms’ desire to pursue cross-border opportunities has prompted deals such as the Hong Kong group AIA’s US$3.02bn acquisition of Colonial Mutual in Australia. Industry consolidation is another important theme. In the UK, for example, Standard Life is merging with Aberdeen Asset Management in a deal worth US$4.6bn. Lower down the scale, many financial services companies aim to build new digital capabilities through acquisition policies, giving rise to a series of deals across the fintech sector.

Many respondents cite the strength of the global financial services sector 10 years after the financial crisis. “The financial sector is past its bad times and even past its recovery stage – it is growing at a good pace, and more than that, it is now transforming to the digital era,” said the director of M&A and strategic planning at an Italian insurance company. “Although there are uncertainties in a few subsectors and countries, financial institutions will continue with M&A activity in the coming year.”

Q2

What do you expect to happen to PE activity in the financial services sector over the coming year?

PE investors are set to continue to play a significant role in M&A activity in financial services. However, such firms are expected to be less bullish. Overall, 72% of respondents expect PE activity in the financial services sector to increase in the next year; 28% expect a significant increase.

PE buyers have executed some of the biggest deals in 2017 so far. For example, Canada’s Caisse de Depot et Placement du Quebec and KKR paid US$3.3bn for the US insurer USI Holdings, while Australia’s Macquarie acquired the UK Green Investment Bank for US$2.9bn. By the end of Q3, PE deal values totalled US$38.7bn — eclipsing 2016’s total value of US$32.4bn.

Nevertheless, some PE firms are cautious. “Although the market is highly bullish for the financial services industry, many PE firms are wary of the

56%Increase somewhat

24%Increase significantly

16%Remain the same

4%Decrease somewhat

Q1

44%Increase somewhat

28%Increase significantly

24%Remain the same

4%Decrease somewhat

Q2

5

uncertainty and volatility prevalent in the market,” said the managing partner of a Singapore-based PE firm.

Q3 What will be the most important effects of blockchain and cryptocurrencies on the financial

services sector over the coming 12 months?

Emerging technologies present both a threat and an opportunity for the financial services sector. More than two-thirds of respondents (68%) cite increased regulatory oversight as a likely consequence of the growing use of blockchain and cryptocurrencies, while 52% point to the potential for start-up competitors to challenge established businesses. Forty percent of respondents anticipate lower transaction costs for the industry’s customers, while 36% expect these technologies to lower capital-raising costs.

Blockchain and cryptocurrency deals remain below the radar, with most such businesses at the venture capital funding stage rather than engaging in M&A. However, the potential for future deals is clear by the number of transactions seen this year in the payments sector, expected to be a major adopter of these technologies. In one of the biggest such deals in the US, global payment technology solutions company First Data agreed to acquire fellow payment processor CardConnect for US$583m.

“The immediate effect of the cryptocurrency trend is lower transaction costs for the financial services provided,” said the managing director of a US-based investment bank. “The next major effect will be an increase in regulatory policies, as the risk of unlawful activities is higher in this field.”

Q4 What do you expect will be the most important drivers of financial services M&A activity over the

coming 12 months?

Some 48% of respondents expect companies’ desire for cross-border expansion to drive activity over the next year, but 44% cite the potential significance of fintech acquisitions. Inorganic growth (36%) and product diversification (28%) are also strong drivers, while 24% of respondents see deals inspired by the desire to reduce costs.

Such drivers are reflected in the year’s deal activity to date. For example, Japan’s SoftBank paid US$3.3bn for US PE firm Fortress in order to diversify and add investment expertise. Cross-border transactions to Q3

Corporate divestmentsand demergers

Private equity demand

Need for synergiesto cut costs

Product diversification

Drive for inorganicgrowth

Fintech acquisitions

Cross-borderexpansion

28%

48%

44%

36%

16%

4%

24%

Other

Cheaper methodsof raising capital

Lower transactioncosts for usersof financial services

The rise of startupcompetitors tolegacy financialinstitutions

Increased regulatory oversight of thefinancial sector

36%

68%

52%

40%

4%

Q4

Q3

VENUE® Market Spotlight: Financial Services

2017 totalled US$74.8bn in the financial services sector, accounting for almost 40% of all transactions, up from 36% in 2016.

In the fintech space, established players are looking to M&A to acquire new technologies. “A lot of technology start-ups are constantly developing new and stronger technologies for financial services; these start-ups are targets for companies that don’t want competitors to get their hands on these technologies,” said the managing director of a US-based PE firm.

Q5 What do you expect will be the most significant barriers to financial services M&A activity over the

coming 12 months?

While financial services M&A activity is expected to increase over the next year, there are potential hurdles. Some 48% of respondents say rapid change in the sector makes long-term strategic planning difficult. And after an extended period of strong deal volumes, 48% of respondents point to high valuations, while 28% worry about a lack of attractive targets.

According to the managing director of a Chinese PE firm, these issues are linked: “The constant change experienced by the industry is blocking investors from making long-term plans and leaving them open to risk. The constant change also affects valuation – valuation has always been a steady problem when it comes to M&A activity in the sector.”

Clearly, high valuations are good news for sellers and can even drive certain deals. In the US, MetLife’s spin-off of its Brighthouse Financial subsidiary was a deal worth US$6bn when the business listed on Nasdaq in August. However, buyers are nervous about paying high prices, particularly against a volatile regulatory and technological backdrop.

Q6 In which of the following developed countries or regions do you expect to see the biggest increase

in financial services M&A over the next 12 months?

Almost two-thirds of respondents (64%) expect the US to see the biggest increase in deal activity over the next 12 months. More surprisingly, given the potentially disruptive nature of the UK’s Brexit negotiations with the European Union, 36% of respondents cite Western Europe as a recipient of more deal activity. Some 32% of respondents predict that Canada is also set to see higher volumes of M&A.

Other

Antitrust regulation

Brexit impact

Lack of attractivetargets

Regulatory changesand uncertainty

Rapid pace of changein the industry

High valuations

20%

48%

48%

44%

28%

8%

4%

Q5

USA64%

Australia 24%

Canada32%

Japan24%

NorthernEurope20%

WesternEurope

36%

Q6

7

These predictions are already taking shape. In the US, deal values totalled US$67bn during the first nine months of the year, well on the way to eclipsing the total of US$81bn for full-year 2016. Western Europe’s total to end Q3 was US$38bn — some way off 2016’s US$72bn.

Four of the 10 biggest deals of the year so far involved US companies, while the 11th largest saw Canadian asset manager Sprott agree to pay US$3.3bn for Central Fund of Canada. That deal boosted values in Canada up to Q3 2017 to US$6.5bn, compared to US$2.3bn in 2016.

Ultimately, financial services firms must diversify to secure new growth prospects. “The biggest and most developed countries are concentrated in the US and Western Europe; their financial industries are as developed as their economies and are continuing to grow constantly,” said the managing director of a US investment bank. “The financial institutions in these countries will seek to escape these competitive markets and shift their attention to other countries for growth and diversification prospects.”

Q7 In which of the following emerging countries or regions do you expect to see the biggest increase

in financial services M&A over the next 12 months?

The burgeoning middle-class populations of emerging countries represent an attractive source of growth for financial services companies – both for domestic and Western firms – and M&A can be the quickest route into these markets. More than two-thirds (68%) of respondents say financial services M&A growth will be most prolific in India over the next 12 months, while 32% each cite Southeast Asia and China. According to a study by consulting firm McKinsey & Company, 76% of China’s urban population will be middle class by 2022, while a UN report predicts that India’s population will be the largest in the world by 2022, overtaking China.

Asset management group Warburg Pincus’ decision to buy a 12.5% stake in ICICI Lombard General Insurance of India for US$383m is one example of Western businesses investing in the country this year. Recent deals in China include the sale of a 68% stake in JD Finance, an online finance specialist, to an undisclosed group of Chinese investors for US$5bn.

“The demand for financial services is very high in India – the progress of the country depends on the financial sector, and that is going to be the reason behind the attention it will get in the coming months,” said the managing director of a German investment bank.

Latin America 24%

India 68%

Southeast Asia32%

Central & Eastern Europe24%

China 32%

Middle East20%

Q7

68% OF RESPONDENTS BELIEVE THAT FINANCIAL SERVICES’ M&A GROWTH WILL BE HIGHEST IN INDIA IN 2018

VENUE® Market Spotlight: Financial Services

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Financial services

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USI

$4.3B

MARCH 17, 2017

FINANCIAL SERVICES DEALS IN THE ROOM

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Telecom, Financial services

ACORN GROWTH

COMPANIES

Acquires

TELECOMMUNICATION

SUPPORT SERVICES, INC.

JULY 28, 2017

Financial services, Internet/ecommerce

BC PARTNERS

Acquires

PLUSSERVER

$454M

JULY 18, 2017

Financial services; Banking

OCEANFIRST

Acquires

SUN BANCORP

$487M

JUNE 29, 2017

Computer software; Financial services

ELLIOTT

Acquires

GIGAMON

$1.6B

OCTOBER 27, 2017

Computer software; Financial services

VISTA

EQUITY PARTNERS

Acquires

DATTO

OCTOBER 27, 2017

Financial services; Internet/ecommerce

E*TRADE

Acquires

TRUST COMPANY OF

AMERICA

$275M

OCTOBER 20, 2017

Financial services

JP MORGAN

CHASE

Acquires

WEPAY

OCTOBER 17, 2017

Financial Services

LPL FINANCIAL

Acquires

NATIONAL PLANNING

HOLDINGS

$448M

AUGUST 15, 2017

11

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Mergermarket is an unparalleled, independent mergers & acquisitions (M&A) proprietary intelligence tool. Unlike any other service of its kind, Mergermarket provides a complete overview of the M&A market by offering both a forward-looking intelligence database and a historical deals database, achieving real revenues for Mergermarket clients.

For more information, please contact:

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