How has Covid 19 affected M&A in the financial services space?

Firstly, our sincere sympathy for anyone whose family has been directly impacted by Covid. I am reminded that during difficult times we do gain a renewed sense of perspective and a better understanding what really matters.

From a business perspective, we have never been busier. From March 2020 to date, we have seen a 500% increase in new mandates to help buyers, sellers or those looking to recapitalise their businesses. During this period the question we get asked more than any other, is how has the virus impacted the M&A market ?

To fully examine this, we need to look at seller motivation during the pandemic which is broadly as follows:

1) Businesses directly impacted by Covid, for example, in the Insurance market those businesses whose income is contingent on the mobility (car sales) or travel sectors have been badly hit. Owners of businesses in these segments have looked to join forces with larger more diversified businesses and we have complete a number of successful transactions in this space.

2) Businesses / sellers who have been generally unaffected by Covid, but who have been considering 'monetising' their asset for some time. The general market uncertainty has led to many business owners 'taking stock' and looking to 'cash in their chips'. We take a look at valuations and earn out a little later.

3) Businesses looking for a minority sale. A number of owners have looked to sell a small proportion of their equity. There are a number of factors driving these transactions but generally a minority partner that can bring strategic assets such as additional market distribution and commercial nous is warmly welcomed. Minority investors can also bring additional business to further protect and diversify their investment.

Paradoxically, in an uncertain market, valuations for businesses has held up well. We are still seeing Editda multiples of 8x or more and revenue multiples between 1.5 and 2x. What has changed dramatically however, is the earn out profile that sellers can expect. Historically sellers would expect circa 70% of the consideration for their business to be paid up front, with the remainder being paid over 2 years. In the 'new normal' the upfront consideration can be as low as 40% with buyers 'hedging' somewhat on market out-turn.

Despite the changed earn out profile the market remains extremely busy, with many sellers confident that they can realise good value over the duration of earn out. Whilst the future remains uncertain we can still be confident that the 'piles of capital' that were looking for a good 'home' pre covid are still there !!

Glenn Hirchfield is CEO and Founder of ALJ Consulting, who specialise in discreet off market transactions in the European FIG markets.