Global M&A down 17 percent in Q1; Lovell Minnick Partners shares fintech strategy

Happy Friday, Hubsters. MK Flynn here to close out the week with today’s Wire.
Refinitiv is out this morning with a sobering report on Q1. The headline finds both the good and the bad: “Despite falling 17 percent, global M&A hits seventh consecutive US$1 trillion+ quarter.”

“It’s safe to say the deal making environment has changed dramatically over the last three to six months, as world conflict, volatile stock markets and economic indicators have clearly caused boardrooms to evaluate the new landscape,” writes Matt Toole, director, deals intelligence. “Despite the headlines, the fundamental drivers of deal making are still the same, with strong corporate balance sheets, historically low interest rates and the continual search for growth and expansion. While pitching the strategic rationale for a transaction to shareholders and regulators may be more challenging, we continue to see strength in certain areas of the market, particularly in technology, private equity buyouts and mega deals. And while deal volumes have declined across nearly every major category, the first quarter of 2022 marks the seventh consecutive quarter to surpass US$1 trillion in announced deal value, a first since our records began in 1980.”

Filling the gap. Let’s take a look at an interview I did with a prominent investor in the booming fintech sector. Lovell Minnick Partners has invested in the fintech and tech-enabled services markets for over 20 years. Last month, the Radnor, Pennsylvania-based private equity firm made a significant investment in STP Investment Services, a tech-enabled investment operations service provider. I asked LMP managing partner Steven Pierson to share his thoughts on the STP deal in particular and on investing in fintech companies in general. Pierson joined LMP in 2016, chairs the firm’s partner committee and serves as a member of the investment committee. He came to LMP from UBS, where he served as the head of FIG investment banking Americas and global head of financial technology and services.

Here are some excerpts from my Q&A with Pierson:

What’s driving private equity-backed deals in fintech?
If you look at the financial services market 20 years ago, you’ll see that it was centered around and controlled by banks delivering proprietary technology and services to the marketplace. Due to the financial crisis, followed by capital constraints and decreased tech spend, banks have struggled to make notable improvements to their tech and tech-enabled services. This inability to adapt, while other sectors have dramatically raised consumer expectations, has left the door open for innovative software developers and fintech platforms to fill the gap by providing a better solution to the end client, as well as complete internal tasks far more efficiently than in the past.

Alongside the rise of innovative technology and market participants outside the banks, there is a continued trend to outsource non-core functions to specialized service providers. This outsourcing trend can be attributed to incumbents wanting to focus on their core offering, stringent regulatory requirements requiring specialized (often quite expensive) knowledge, and internal efficiencies/margins that can be gained from outsourcing.

Today, financial services represents just 10 percent of US private equity investments, but players in the space are increasingly seeing this technological transformation occur across the entire fintech value chain and backing businesses sitting in the middle of these trends, while also benefiting from an extremely large total addressable market.

How does the recent acquisition of STP fit the investment thesis?
STP is an end-to-end, technology-enabled investment operations service provider that fits squarely within our fintech and business services investment thesis, focused on the adoption of outsourcing non-core functions for asset and wealth managers. Other investments that have fit this theme include AssetMark, ALPS, Deep Pool and Foreside.

Having invested in over 30 asset managers, wealth managers, and technology and outsourcing providers serving the investment product value chain, we have a deep appreciation for the operational challenges that investment managers face in today’s market environment. Fee pressures, compliance burdens, increasingly complex and competitive operating environments, and the rising penetration of outsourced solutions all represent tailwinds for further adoption of the technology-enabled services that STP provides.

What are the exit opportunities for fintech companies today?
Given the robust interest in the space, there are a number of exit strategies for fintech companies. Larger fintech strategics who are looking for new technology solutions to expand their product set or enhance their client roster may acquire a smaller fintech company. Banks are also becoming more aggressive acquirers of fintech companies given that the industry has traditionally underinvested in technology for the last 20 years.  Private equity funds, of course, are also highly focused on this area, and sponsor-to-sponsor trades are relatively common these days. Finally, there’s the IPO route, which we’ve seen used more in the last year and a half.

Read the full interview here.

On the move. Here are a couple of significant people moves we’ve learned about over the last couple of days:

Roman Krislav has joined lower middle-market Miami PE firm Boyne Capital as managing director, a spokesperson for the firm told PE Hub. Krislav is involved in all aspects of the investment process including sourcing, due diligence and execution of post-closing growth and operations initiatives. He brings over 19 years of investment experience. Most recently, he was a managing director at H.I.G. Capital, where he led investments in the business services, industrial and consumer sectors. Krislav began his career in Goldman Sachs’ equity capital markets division in New York and London.

Aaron Wolfe, a senior executive at Arsenal Capital who helped lead the firm’s specialty industrials team, left to start his own shop, two sources told Buyouts. Chris writes: “Wolfe will join the ranks of former private equity dealmakers who have left bigger firms to start the challenging journey of starting their own shops. New fund formation has been made more difficult as limited partners are being kept busy by their existing managers coming back quicker than ever with new, and larger, funds.”  spokesperson for Arsenal confirmed the departure. Wolfe, prior to joining Arsenal in July 2020, worked for 18 years at Sun Capital, most recently leading the firm’s New York office.

Recommend reading: Be sure to check out our annual package celebrating the best exits of 2021. Buyouts and PE Hub named Deals of the Year winners in six categories: Large Market, Small Market, Turnarounds, Secondaries, International and the overall Deal of the Year (falling under the Mid-Market category this year). Winners include Francisco Partners, EQT and more. Start here to read the full coverage.

On that happy note, I’ll sign off.

Wishing you a good weekend,