Regulatory Driven Change: Consultancy Opportunities in the Financial Services Market
In the wake of the global financial crisis, financial services markets have undergone an extended period of dramatic transformation, as complex regulatory and compliance requirements continue to come into force. Further, a prolonged period of modest economic growth, persistently low and volatile interest rates and enhanced transparency and reporting requirements has squeezed margins and put significant pressure on longstanding business models, expensive legacy assets and balance sheet management.
Unfortunately, the challenges facing large financial institutions do not stop there. The wave of new burdensome regulation in the pipeline, including MiFID II, Ring Fencing requirements and EU GDPR, pale in comparison to the largest regulatory and organisational challenge our banks have ever faced: Brexit.
It is no surprise that large financial institutions are not able to face these challenges alone, and the Financial Services (FS) market contributes around one-third to the UK's total management consulting turnover (source: Consultancy.uk). Some US banks are estimated to spend $7 billion a year on professional services, with $4 billion being spent on regulatory compliance. Both the financial cost and reputational damage of falling foul of regulatory demands means the subject remains top of the agenda.
In the face of these challenges and ongoing pressure to reduce headcount, banks are left with no choice but to turn to third parties to provide not only additional resource, but deep subject matter expertise across a broad range of compliance, technology and organisational change initiatives.
M&A Activity
M&A across the FS consultancy market has accelerated in line with the regulatory burden, and large global consultants have recognised the potential growth this market offers and the need to acquire specialist domain expertise or technological capabilities to full exploit this.
KPMG's relatively modest acquisition of Makinson Cowell in April 2013 signalled their first move into building a leading financial advisory capability. Others have followed suit, the most notable acquisition in the pure-play consultancy space was the German group GFT's acquisition of Rule Financial, the UK's leading specialist consultancy at the time with over 800 employees and attractive nearshore capabilities in Costa Rica and Poland.
The acquisition of Rule is indicative of a wider trend of technology and IT focused players moving into the consultancy space, looking to leverage upstream relationships and advisory capabilities to cross sell their technology offerings. New York headquartered tech-enabled outsourcer Synechron soon followed suit, acquiring Crossbridge LLP in September 2015, to enhance its specialist FS consultancy capabilities in London. In May 2016, it went on to acquire Hatstand, a global capital markets specialist, as it sought to build the financial services industry's premier digital consulting and technology organisation.
A similar trend is prevailing across the pond, with IBM's 2016 acquisition of Promontory, a market-leading risk management and regulatory compliance consulting firm, to accelerate the development of its solutions for risk and compliance across financial market clients.
Nevertheless, pure-play consulting powerhouses still look to M&A as a means of enhancing their expertise and extending their client proposition further. For example Accenture's recent acquisition of Formicary has allowed it to offer its current FS clients specialist consulting and systems integration services for trading platforms. Interest in consultancy's acquiring FinTech firms to bridge the gap between this sector and FS client has also accelerated, with KPMG's recent acquisition of matching platform Matchi in May 2017 following Boston Consulting Group's similar investment in Opportunity Network a year earlier.
It is not only strategic buyers that have looked to capitalise on this fast-growing sector. Sovereign Capital's successful buy and build project across the UK compliance market with Cordium Consulting culminated in a successful exit to European Capital in 2014 for an estimated £100m and a 4x money return. Subsequently, Dunedin Capital invested around £80m in Alpha Financial Market Consulting, a buy-side consultancy focused on the asset and wealth management sector, and has since gone on to invest in Forensic Risk Alliance, an international consultancy business that provides forensic accounting, data analytics and e-discovery.
Lonsdale capital has also ventured into this space through its December 2016 investment in P2 Consulting, a project and programme management consultancy with a focus on the FS market, which has since completed its first bolt-on acquisition of financial crime specialist FS101 in April 2017.
More recently in mainland Europe, US PE firm Clayton, Dubilier and Rice agreed to acquire a 60% stake in CAPCO for £367m in May 2017 to drive its next phase of growth and leverage the significant transformation the European FS sector is poised to experience.
Investment Rationale
The financial services industry is dominated by a number of leading global investments banks with Master Service Agreements in place with long standing, trusted consultancy providers.There is therefore considerable inertia across the market and consultants struggle to penetrate new institutions without an 'in' , be it a highly differentiated, 'must-have' technology or an existing relationship with a senior decision maker. This is therefore fundamentally the driving force behind ambitious strategic acquirers looking accelerate their growth in this market through acquisitions.
Whether it be a financial sponsor looking to consolidate the market to build a provider of specialist domain expertise at scale, or a global consulting firm embarking on an ambitious acquisition strategy to augment its consultant base with genuine expertise and differentiated capabilities, the financial services consultancy market is poised for a wave of investment.
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