M&A activity in the financial services space is booming these days. Banks were spurred by regulators to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Volcker rule, which prohibits depository banks from making investments that are deemed more risky and may not benefit their customers, and they started to sell non-core assets and assets that would make them non-compliant with the rule. Today, in addition to the compliance issues banks are facing, there is a confluence of factors playing a role in the increased M&A activity in the space, such as favorable valuations, a healthier economy overall and a strong financing market.

"There's no single theme that explains why financial services deals are hot these days, but many deals are taking place and we expect that to continue in 2014," says Matt Dailey, a partner with the Riverside Co.

Private equity firms in particular have been showing strong interest in financial services assets-firms like Aquiline Capital Partners, Genstar Capital, the Riverside Co. and TRG Management LP (also known as the Rohatyn Group) have all been buyers of financial services companies recently.

"Private equity firms have realized it's a good time to exit and realize value. For buyers, the pricing to buy these companies is still reasonable," says Rick Childs, director of transaction services for financial services companies at Crowe Horwath LLP. "Overall, we're seeing a broad spectrum of financial services companies coming up for sale all with different motivations. Banks want to divest non-core businesses that put them at odds with regulations and have pressure to do so, and others are just selling to simplify their business model. There is optimism around financial services transactions now."

At the end of 2013, the Cleveland-based Riverside Co., in partnership with the management team of Paradigm Tax Group, acquired Paradigm for an undisclosed amount. Jones Day advised Riverside on the investment and William Blair & Co. was the selling bank on the transaction.

With 31 offices across the U.S., Paradigm provides tax consulting services for commercial property owners. Paradigm works with clients to review valuations that taxing authorities use to assess property tax bills. If a client then chooses to challenge its tax bill, Paradigm will appeal the bill on its behalf. Paradigm's customer base includes real estate investment trust (REIT) owners, financial institutions, such as private equity firms, and industrial property owners.

"Paradigm's national footprint, focus on property taxes, large and growing portfolio of properties under management, and talented employee base made it an exciting opportunity for us," says Dailey, a partner with Riverside.

Riverside bought Paradigm from Cambridge, Mass.-based private equity firm Monitor Clipper Partners, which had owned the business for just a short time after purchasing it from KPMG in 2011, after the Sarbanes-Oxley Act made owning a tax appeal business difficult for KPMG.

Although Monitor Clipper's hold time was relatively short, Scott Patterson, managing director and co-head of business services investment banking at William Blair, says the sale came at the right time for Monitor Clipper.

"The company had outperformed Monitor Clipper's expectations and it was a good time for a transaction," says Patterson, who was the banker on the deal. "There's a lot of demand for high quality businesses with strong management teams right now. Not to mention the debt markets are strong for financial sponsors and the economy is getting better, which increases both financial sponsors' and strategic buyers' confidence. Paradigm is a clear leader, operating in highly fragmented markets, and has strong growth opportunities, which made it an attractive asset."

There are three top tax-appeal consulting firms in the space, and the combined three have conquered only 20 percent of the market, leaving lots of room for growth. There are many one- to three-person consultant shops doing tax appeals in their local markets.

One of Riverside's key growth initiatives is to expand Paradigm's geographic footprint and services through acquisitions of local or regional competitors.

"It's a very fragmented industry," says Riverside's Dailey. "Paradigm is in advanced discussions with several acquisition candidates and there's a sizeable pipeline of additional opportunities being managed by the company's executive vice president of corporate development."

"Paradigm's knowledge of local markets and competitors is a very valuable resource as we look to accelerate the company's acquisition program," he says.

Conditions favorable for exits and buying aren't the only reasons for the increased M&A activity in the sector. M&A activity is also driven by corporate divestitures and the implementation of the Volker rule in early December 2013. The Volcker rule was the centerpiece of the Dodd-Frank financial reform law, designed to keep banks from speculative trading while making it practically impossible for banks to continue managing merchant banking funds as they had before.

While most banks have already divested assets that might not comply with the Volcker rule, there are still deals coming down the pike with larger financial institutions pressured to divest certain assets so they can operate under the radar without coming close to being found non- compliant.

"There have always been regulations and regulatory burdens and like any regulation it feels worse in the beginning," says Childs. "That said, the new regulations will be a reason for banks to sell, which will create more M&A opportunities."

For example, in December 2013, TRG, an investment firm focused on emerging markets, completed an acquisition of Citi Venture Capital International (CVCI), a $4.3 billion emerging market global private equity firm that was spun out of Citigroup. Citigroup has sold more than $6 billion in private equity and hedge fund assets in December 2013 to comply with new regulations that limit such investments, according to The Wall Street Journal.

"As banks become more heavily regulated, they will continue to shed assets and business lines, which means we will see increased M&A activity in the financial services sector," says Juan Alva, partner and head of strategy and corporate development at Fifth Street Management LLC. "The regulatory environment definitely will have an effect on financial services M&A."

"As regulations take effect and shape over the next couple of years you will continue to see activity and some of the leading alternative asset managers will probably get larger as a result," Alva says.

Investment banking firms have also interested buyers-both strategic and private equity. "With overall deal flow down, it was a good time to be a buyer of investment banks, additionally because deal flow was down it was a good time for strategics to buy to bolster own their deal flow," says Childs.

In April 2013, New York-based Duff & Phelps Corp. was acquired by a consortium of buyers comprising of private equity firms the Carlyle Group (NYSE: CG), Stone Point Capital LLC and others in an all-cash transaction valued at approximately $665.5 million. In June 2013, Regions Financial sold its investment banking division RMK Timberland to Brazilian investment bank BTG Pactual Group in an effort to shed non-core assets. Then, in July 2013, with hopes of expanding its mid-market M&A business and reach to private equity clients, Piper Jaffray Companies (NYSE: PJC), purchased Edgeview Partners, L.P., a middle-market advisory firm specializing in mergers and acquisitions. Founded in 2001 and based in Charlotte, N.C., Edgeview Partners was a group that was formed by former employees of Bowles Hollowell Conner.

It seems all types of financial services business are up for grabs these days. Lending companies are also attractive assets to own.

In December 2013, Prospect Capital Corp. (Nasdaq: PSEC) agreed to take Nicholas Financial Inc. (Nasdaq: NICK) private for about $326 million. The deal is expected to close in April 2014. In late December 2013, KKR & Co. (NYSE: KRR) agreed to purchase KFN Financial Holdings (NYSE: KFN) in a deal that will take KFN private for $2.6 billion. KKR had founded the company nine years ago and took it public in 2005. One of the first to pick up on their trend was Fifth Street Management. In June 2013, Fifth Street Finance Corp. bought Healthcare Finance Group for $114 million.

In the beginning phases of integration, Fifth Street expects the strategic acquisition to bolster its presence in the middle-market health care lending space. Greenhill Capital, Morgan Stanley and LLR Partners were the sellers.

"Financial services companies, like ours, are looking to expand assets under management, offer more products to our customers and expand areas of expertise," says Alva.

Some companies want to focus on their core businesses and are shedding extraneous businesses. In December 2013, New York-based Aquiline Capital Partners and San Francisco-based Genstar Capital LLC made a deal to acquire Genworth Wealth Management from Genworth Financial, Inc. (NYSE: GNW) in a $412.5 million deal. Aquiline and Genstar were advised by Deutsche Bank. The transaction is expected to close in the second half of 2014.

The purchase includes Genworth Wealth Management's businesses: Genworth Financial Wealth Management, an investment management and consulting platform, and Altegris, a provider of alternative investments.

Genstar identified financial services as an attractive area for investment a few years ago, says Tony Salewski, a principal at Genstar Capital.

"Investment management is an area we have been developing for five years; we identified the players in the space and met with all of them. This business was non-core to Genworth and we decided to pursue it actively when it went up for sale," says Salewski, who completed the deal.

Genworth's wealth management division primarily provides a growing universe of independent financial advisors with support across every phase of their practice, helping them to meet clients' wealth management and investment needs. Products include customer relationship management technology and research information.

"Brokers are leaving big firms like Morgan Stanley to be independent broker dealers or registered advisors. The division we bought gives these broker dealers and advisors the tools and services they need to feel like they have all the resources they had behind them at Morgan Stanley or Merrill Lynch," says Salewski.

Altegris offers a suite of liquid alternative mutual funds, a wide platform of hedge funds and separately managed accounts backed by research. Altegris seeks to find the best alternative investment managers and products for clients seeking alternative investments.

Genstar and others expect to continue to look for financial services deals well into 2014.

"Sectors go through ebbs and flows and right now we are seeing companies focus on what they do at their core," Salewski says. "As private equity investors, we see an opportunity to help create really nimble financial services companies that can grow and be attractive assets to buyers in the future."