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Financial buyers make their presence felt

Financial buyers make their presence felt

Financial services companies that have relied on acquisitions for growth must now compete against a new breed of buyers that are willing to accept lower returns.

The extended period of ultra-low interest rates and US$13trn of central bank quantitative easing have affected virtually every asset class. Yields have collapsed across the board as investors scour the globe for returns. The financial services industry is no exception. It is in the sights of buyers that wouldn’t normally be interested in such specialised or highly regulated entities.

Financial services companies looking to grow market share or capabilities through acquisition must now compete against a new breed of buyers. Lining up alongside the natural long-term owners or ‘strategic buyers’ of financial services organisations and infrastructure are ‘financial buyers’. These companies are looking to leverage a company’s existing structure, client base and infrastructure before selling for a considerable profit. Consider the three Australian examples below:

1. GE’s Australian and New Zealand consumer finance operations

The $8.2bn sale of GE Money’s Australian and New Zealand unit was completed in November 2015. The winning consortium consisted of private equity firm KKR, global investment firm Varde Partners and Deutsche Bank. Now rebranded as Latitude Financial Services, its TV advertising campaign features Hollywood actor Alec Baldwin. 

Preparations are underway to list Latitude on the Australian Securities Exchange (ASX). It is expected to be one of Australia’s largest floats in the coming 12 months as the consortium exits its investment with a sizeable profit within three years.

2. Online conveyancing company PEXA

PEXA is expected to list by the end of 2018. The original entity, National E-Conveyancing Development Limited, was formed in 2010 from a state government initiative to provide Australia’s property industry with a national electronic exchange and settlement solution. It is owned by Macquarie Capital, the four major Australian banks and four state governments, plus registry group Link Group that became a stakeholder in February 2013, and prominent businessman Paul Little who became a shareholder in June 2013.

PEXA’s appeal is that the land registries in NSW, Victoria and Western Australia have set dates when settlements must be conducted electronically. The use of paper for property transfers, which represent 60% of transactions, will end by 2019.

3. NSW Land and Property Information Office

In April 2017 a consortium of financial buyers won the hotly contested battle to operate the NSW Land and Property Information Office for 35 years. First State Super, the Royal Bank of Scotland Group’s pension fund and investment funds from Hastings Funds Management paid $2.6 billion for the lease.

The registry is attractive for several reasons. It provides essential, monopoly services, is exposed to NSW’ growing population and associated growth in housing stock and pricing of its services is linked to movements in inflation. Furthermore, there is scope to cut costs through automation and further improve the business by investing in technology. The new operators are also well placed as other state governments follow NSW on privatising land registries.

The theme is also playing out in the US

In April 2017, an investor group led by Stone Point Capital and KKR agreed to buy a majority stake in Focus Financial Partners, an independent wealth management firm. The acquisition values the organisation at US$2bn.

Competition likely to further intensify

It will be interesting to see how lucrative the listings of Latitude and PEXA are for the current owners. Success is likely to encourage more financial buyers who are willing to pay higher earnings multiples and accept lower returns.

Traditional market players that have previously relied on acquisitions of smaller competitors and ancillary service providers may have to revisit their growth strategy.

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