Since the recession, companies in the financial services, insurance and real estate (FIRE) industry have been targets of M&A, as buyers look to take advantage of lower valuations, and the stronger strategic players in the sector look to gain market share. This trend is expected to continue in 2014.
"Given the continued low interest rate environment, we are expecting activity in 2014 to focus on cash flow businesses within the financial services sector, supported by robust leverage markets and a continuing stable-but-modest growth environment," says Clifford Brokaw (pictured), a managing director with New York-based Corsair Capital, a private equity firm that invests in financial services companies.
A few trends stand out, and PE firms and corporate buyers have been trolling the middle market. In April, New York-based Duff & Phelps Corp. was acquired by a consortium of buyers that included the Carlyle Group (NYSE: CG) and Stone Point Capital LLC in an all-cash transaction valued at about $665.5 million. Then in July, with hopes of expanding its mid-market M&A business and reach to private equity clients, Piper Jaffray Cos. (NYSE: PJC), purchased Edgeview Partners LP, a middle-market advisory firm specializing in M&A. Founded in 2001 and based in Charlotte, N.C., Edgeview Partners was formed by former employees of Bowles Hollowell Conner.
The insurance industry has been bustling with activity. In the largest takeover of a U.S. insurance broker on record, private equity firm Hellman & Friedman agreed in August to pay $4.4 billion for Hub International Inc., Canada's largest insurance brokerage. New York-based Apax Partners was the seller. Then in November, Hellman joined with private equity firm JMI Equity in acquiring insurance software developer Applied Systems from Bain Capital LLC in a $1.8 billion buyout.
Others were also active. In October, Aurora Capital Group, a Los Angeles-based private equity firm, completed the sale of Mitchell International, a provider of technology, connectivity and information solutions to the property and casualty claims and collision repair industries, to Kohlberg Kravis Roberts & Co. (NYSE: KKR).These deals underscore private equity's continued interest in the insurance industry. In 2012, KKR completed a $1.8 billion takeover of Alliant Insurance Services Inc. from Blackstone.
Real estate deals continue to attract attention as well. One of the more noteworthy deals was closed in May when the Blackstone Group LP (NYSE: BX) purchased Apple REIT Six Inc., a real estate investment trust focused on hotels, in a $1.2 billion deal. New York-based Blackstone has been buying lodging properties from lower-priced chains to luxury hotels since 2012. Apple REIT Six, which focuses on upscale, extended-stay and select-service hotels, owns 66 hotels with 7,658 guest rooms across 18 states. The properties operate under brands including Courtyard by Marriott, Fairfield Inn and Hilton Garden Inn. Other private equity firms are likely to follow suit.
The quick pace of dealmaking in the sector expected to continue in 2014. "Activity may be driven by divestitures from large financial institutions as well as sponsors selling businesses they bought in 2005 through 2007," says Corsair's Brokaw.