This week has seen a raft of financial services-focused fund closes, with Cinven, Stone Point Capital and fintech-focused Motive Partners raising roughly $13 billion between them to back deals in the sector.
Cinven, Europe’s fourth-biggest private equity firm according to the PEI 300, gathered €1.5 billion for its debut Strategic Financials Fund, one of the largest dedicated financial services funds focused on Europe. Connecticut-based Stone Point amassed more than $9 billion for its ninth private equity fund focused on financial services and related industries – $2 billion more than its 2019-vintage predecessor. Motive, meanwhile, raised $2.5 billion for its second fund focused on technology-enabled financial and business services industries.
There’s clear demand from institutional investors for fin services: GIC and British Columbia Investment Management Corporation are co-investors in deals SFF has backed, and Motive Capital Fund 2 was oversubscribed with nearly half of commitments from sovereign wealth funds.
The value of private equity transactions in Europe’s financial services have been on an upward trend since 2016, PitchBook data shows. Deals reached €51 billion in 2021, 47 percent larger than in 2020, with the insurance subsector accounting for the bulk of activity. Meanwhile, the first quarter of 2022 has already seen €12.5 billion worth of transactions in the sector.
Amid persistently high inflation and rising interest rates, is now a good time to have capital to deploy for a financial services-focused fund? Some investors believe financial services is a great strategy to deploy in a rising interest rate environment. Chris Flowers, founder of JC Flowers & Co and one of the most experienced financial services investors in this industry, told us in March that rising rates provide “a big macro tailwind” for his firm’s investments, which include insurance groups and banks. Essentially, when rates rise, the lenders in JC Flowers’ portfolio make more money.
Motive founding partner Scott Kauffman appears to share the same sentiment. Rapid rate increases by the US Federal Reserve – which may potentially raise rates by a full percentage point this month – creates “interesting dynamics” and investment opportunities, which include technology-based marketplace models that drive democratisation of finance for the consumer, he told us this week.
In general, a rising rate environment can be quite healthy for financial services firms, Kauffman noted. As the net spreads increase – the difference between the rate firms lend and borrow at – the economics tend to be a bit better for those firms. Many fintech firms are also set to benefit in today’s markets, where there’s a refocus on efficiency and technology to manage the cost base, he added.
Financial services companies can also take advantage of secular demands, such as baby boomers coming to retirement and driving demand for financial advice and planning. Carveouts from big financial services firms and the growing wealth management sub-sector are also attractive targets.
Financial services specialists appear to be well placed to capitalise on such opportunities, yet there’s no denying that private equity firms face a dual threat from the cost of borrowing and inflation. What’s certain is that GPs that are deep in the sub-verticals of core sectors will have a unique lens in picking the best assets amid the volatile market environment.