Financial institutions M&A sector trends: specialty finance/marketplace lending — H1 2019 and outlook for H2 2019

CURRENT MARKET

Upward, marginal

WE ARE SEEING

• Market consolidation across product lines
• Foreign inbound M&A (particularly from US buyers)
• Trade consolidators scooping up competitors

KEY DRIVERS

• Expanding universe of potential investors:
  • Trade consolidators—seeking scale (e.g., Factris's acquisition of Debifo), vertical integration (e.g., Paylate's acquisition of AmmoPay) and opportunities to conquer their own niches (e.g., Morses Club's acquisition of Hays Credit)
  • Banks—lower cost of capital associated with specialty finance businesses
  • Foreign investors—expanding into new geographies and tapping into new customers (e.g., Brightlane Corp.'s acquisition of VATBRIDGE)
  • Financial sponsors—opportunity to capture an under-serviced market
  • Investment managers—attractiveness of captive platforms (e.g., Downing's acquisition of Funding Empire)
• Pressure from rising default rates encouraging market players to pullulate organically or acquire superior credit assessment technology

TRENDS TO WATCH

• Differing regulatory prerogatives:
  • Consumers—safeguarding over market freedom (e.g., UK FCA's imposition of financial limits for UK investors' investment in P2P platforms)
  • SMEs—market freedom over safeguarding (e.g., UK Government's rejection of Treasury Select Committee's proposal to regulate SME wholesale lending market)

OUR M&A FORECAST

Specialty finance providers are likely to continue to attract buyer interest, particularly from trade consolidators, financial sponsors and US buyers.

Other financial services—Publicly reported deals & situations

Market consolidation

47 specialty finance M&A deals announced in H2 2018*

• Bank Frick: Acquisition of majority equity holding of Tradico (June 2019)
• Brightlane Corp.: Acquisition of VATBRIDGE (April 2019)
• Downing: Acquisition of Funding Empire (March 2019)
• Morses Club: Acquisition of Hays Credit (February 2019)
• Duke Royalty: Acquisition of Capital Step (February 2019)
• Praetura Asset Finance: Acquisition of Kingsway Asset Finance (January 2019)
• Factris: Acquisition of Debifo (January 2019)
• Barclays: Minority equity investment in MarketInvoice (January 2019)

New entrants

• Propio: Successful £375,000 equity crowdfunding raise (April 2019)

Growing pressure on P2Ps

• Funding Circle: 55% revenue increase in FY2018, amidst 3.00%–3.8% expected loan default rate (January 2019)

Government/ Regulatory approach

Concern:

• UK FCA: Imposition of financial limits for UK investors' investment in P2P platforms, with effect from December 2019 (June 2019)

Support:

• UK Government: Rejection of Treasury Select Committee's proposal to regulate SME wholesale lending market (January 2019)

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