2022 set a record for North American financial services mergers and acquisitions, reaching $261.1B, just beating out the previous record of $260.6B set in 2018. Even though many other sectors saw a decline in deal investment and activity, Financial Services’ crucial part in the operations of companies large and small, kept this market strong.
Increased interest rates and the collapse of several banks early in 2023 have had an immediate impact as the resulting increased unease and higher cost of borrowing is putting some deals at the higher end of the market in jeopardy as investors weigh the risks.
Overall, M&A dealmaking in this sector has grown substantially over the past decade, and even though buyouts / LBOs (leveraged buyouts) increased as a total of overall deals, strategic transactions still made up the majority of transactions.
As interest rates continue to reset or possibly rise again, and as macroeconomic uncertainties persist, it is highly likely that we will see a shift to increased M&A activity in the lower middle market. Smaller deals have the benefit of providing strategic buyers with increased market opportunities and tempered risk profiles. We also anticipate that Private Equity activity will reflect this, with smaller ownership stakes or a greater number of lower EV buyouts and add-on transactions to existing platform firms. We will also see an increase in the number of smaller or earlier-stage companies choosing the M&A route as it becomes increasingly more difficult to raise growth equity.
For FinTech companies in the lower middle market that are well-positioned, timing to explore acquisition could be quite favourable: there is a tremendous appetite for growth firms in the sector that have achieved profitability and strong retention metrics. There are going to be numerous companies who have not been able to secure the funding they were relying on who will also be looking at M&A as a way to help them continue to operate and continue to grow, but many of these are likely to have weaker or no profitability and may still be wrestling with retention, acquisition costs, market fit, etc. Companies in the former category will standout to strategics and PE buyers, and can expect to see strong competition among potential buyers as a result.
To read our 2023 FinTech M&A forecast, click HERE
