Global M&A Trends in Financial Services

Many financial services (FS) dealmakers entered 2024 with a greater sense of optimism, reflecting on 2023 as a low point in which uncertainty created by macroeconomic factors such as high inflation, rising interest rates and lower economic growth projections dampened M&A activity. While macroeconomic conditions and geopolitical tensions remain challenging, recent gains in the financial markets and positive signals about interest rates from central banks are slowly inspiring the return of investor confidence.

Current market conditions—combined with necessary ongoing initiatives such as digitalisation, sustainability and workforce challenges—put pressure on FS players to accelerate their transformation to remain relevant and profitable. Besides internal measures, M&A continues to be an essential part of the transformation journey, especially as organic growth faces severe challenges in the current macroeconomic environment. M&A-related transformation steps may include acquisitions to enhance capabilities and drive future growth through economies of scale and scope. Alternatively, divestitures may help to improve operations and recalibrate business models.

The FS industry comes with its own set of additional challenges, due in part to its highly regulated and risk-averse nature, which makes it more difficult to successfully execute transformational measures. The challenging market environment creates a strong headwind for market participants to consider M&A transactions. We expect to see dealmakers favouring smaller transactions, rather than megadeals, to facilitate transformational steps. We also expect deal processes to last longer, with analyses becoming more complex.

The commercial insurance brokerage market is an attractive sector for potential investors due to its non-cyclical nature, resilient demand and strong prospects for consolidation in what remains a highly fragmented market in many countries. The large number of small and midsize companies in the market creates opportunities for synergies and economies of scale and makes the commercial insurance brokerage an attractive market for investors looking for long-term investment opportunities with high margins and stable returns.

Private equity is a natural driver of consolidation efforts and has accounted for a significant share of insurance brokerage deals. While the trend toward insurance brokerage consolidation started around 20 years ago in the United States and United Kingdom, it shows no signs of slowing down. Many other countries are in the beginning stages of this market consolidation, and those in more mature domestic markets are looking internationally to grow.

In many countries in Europe, the Middle East and Africa (EMEA), acquisitions of brokerage firms by rivals and the growth of consolidators backed by private equity have led to significant M&A activity. In Germany, for example, Gossler, Gobert & Wolters (GGW), one of Europe’s leading brokerage platforms for small and medium-size enterprises, recently secured investment from Permira to support its acquisitive growth strategy in the highly fragmented German and European insurance brokerage industry. US insurance brokers have also continued along their consolidation journey, with domestic acquisitions such as Farmers Group’s announced acquisition of three US insurance brokers in November 2023 and Aon Plc’s proposed US$13.4bn acquisition of NFP, a leading middle-market provider of risk, benefits, wealth and retirement plan advisory solutions. Aon also announced plans to acquire an Indian insurance brokerage company, which will give it a presence in cities where it does not currently operate.

We expect the following areas to be hot spots for M&A activity in 2024:

• Asset and wealth management: Asset and wealth managers facing decelerating organic revenue growth and shrinking margins will continue to use or intensify M&A to achieve scale or to acquire new capabilities, especially around sustainability, alternative assets and unique asset management specialists.

• Insurance: Ongoing deal activity is expected in the insurance sector, with companies looking to divest complex legacy insurance portfolios with the aim of cutting costs and improving capital efficiency. The separation of the risk carrier and the asset management units of insurance companies continues to be under review by market participants. Furthermore, as noted in our sector spotlight on insurance brokerage, the ongoing consolidation of this highly fragmented market is underway and will continue to attract private equity investors.

• Private equity: Investors with increasing specialisation in FS, dedicated FS teams and increasing fund volumes are focusing on FS and FS-related topics such as insurance brokerage, payments, platforms, fintech, insurtech and regtech. Hence, we expect to see further M&A activity in these areas. However, with PE investors facing greater pressure on returns due to the higher cost of capital and limitations regarding leverage, a focus on value creation will be more important than ever.

• Payments: Despite the ongoing macroeconomic challenges and their implications on the M&A market, the payments sector remains highly attractive for many investors. Both private equity firms and banking and payments corporates view the payments business as scalable, less regulated and more profitable than other parts of the FS industry. Buy-and-build strategies are a popular way for PE firms to grow payments businesses.

• Fintech: We see FS companies entering strategic partnerships with fintechs, new distribution partners and others to build ecosystems and further develop their business models. However, new capital and liquidity are increasingly difficult for many fintechs to access. Consequently, we expect some fintechs to be attractive takeover candidates and some to become the subject of distressed M&A. Others may simply fail and disappear.

Global M&A volumes and values in financial services decreased between 2022 and 2023 by 12% and 40%, respectively. The strong increase in FS deals activities in 2021 and 2022, combined with rising interest rates and a number of related bank failures in early 2023 fuelling market uncertainty, not only in the banking sector but also across the FS sector and more broadly,  consequently led to a dampening effect on M&A in 2023. Deal volumes returned to the level of 2019 and 2020, but deal values were below prior years in 2023. The decline in deal values in 2023 reflects to some extent a trend of dealmakers using smaller transactions to achieve transformational steps instead of megadeals—considered here as transactions with a value in excess of US$5bn. The number of megadeals plummeted from 21 in 2021, to seven in 2022 and just three in 2023.

Despite a challenging market environment with a slowdown in deal activities throughout the financial services sector last year, we see potential for an uptick in M&A with an improved deal flow in the course of 2024. FS players remain under significant pressure to further transform their business models to meet current and future challenges and create sustained outcomes. M&A can serve as a catalyst for required transformational steps, either by acquiring businesses to drive future growth or by divesting less profitable or non-core businesses to sharpen the organisation’s operational focus.

Explore our local M&A Trends in Financial Services from the following countries or regions: