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2020 Financial Services Sector Update

As the world still faces the COVID-19 pandemic, businesses in the financial services sectors are preparing themselves for life after coronavirus. This includes the management of credit risk for borrowers, and turning to digital strategies to drive revenue growth.

Insurance and Innovation

The COVID-19 pandemic is forcing the entire insurance sector to implement and leverage digital platforms that enhance customer experiences as a key part of their business strategies in a transformed world in which people are working remotely and driving their vehicles less often. The pandemic has led insurance companies to implement premium relief efforts, offer payment deferral plans, and expand coverage, but these companies are also turning to more digital strategies, emphasizing online customer experiences at a time when more and more transactions occur online versus in person. Consumers are demanding new products such as cyber insurance, more modern life insurance options, and usage-based car insurance. Middle-market insurance companies have always been a bit technologically behind the big players, but they now must adopt new innovations in order to merely keep up with convenience, simplicity, mobility, and modern interfaces that customers have come to expect.

Banking and Lending

Financial institutions are in a position where they need to understand borrowers’ needs and current financial states more than ever. They must also find new ways to measure performance through the rest of 2020. They have already provided assistance to many small and mid-size businesses during the crisis, some of which will be forgiven. Loan modifications have been provided to help businesses survive, and there is likely to be some loan losses. As the economy begins to recover, banks will be able to get a better understanding of borrowers’ financial states, knowing that it will take some time for businesses to bounce back. Deciding whether to lend more credit will be a difficult decision for financial institutions, especially for harder hit sectors such as hospitality and retail. Understanding the recovery of these industries as a whole will be critical through the use of data and payment activity monitoring.

Family Offices

Family offices are private wealth management firms that serve high-net-worth individuals and their families by offering a total outsourced solution to managing finances and investments. There are nearly 2000 of these types of firms around the world, with more than half in the U.S.

These firms have typically relied on physical offices to conduct business. Now in the wake of COVID-19, a shift to virtual family offices has become a necessity during a time where remote work has become commonplace. This has been a challenge for many family offices because most simply do not have the appropriate technology and infrastructure to result in a seamless transition to a virtual office. These businesses will be forced to evolve technologically into the rest of 2020 and beyond. As outdated technology is replaced with better performing innovations, family offices will become more mobile and agile, as well as better equipped with more adequate cybersecurity. Connectivity is also a timely issue, as Millennials will be inheriting family wealth in the future and they demand immediate access to data without disruption and with more transparency. This digital transformation to virtual family offices will also allow for a leaner staff that can deploy resources more quickly.

Capital Markets

The events of 2020 have led capital markets to affect businesses in different ways. Underwriting slowed for high-yield borrowers. Mergers were put on hold. Stock markets have been up and down, and a record number of securities and their values have been exchanged. As financial conditions improve, confidence combined with cheap credit will have companies seeking liquidity to get through the rest of the crisis. Corporations have been tapping into the public debt markets at high rates. While this generated profits at the start of the recession, bonds are less likely to be issued as businesses restore their reserves and establish liquidity that will be needed into the future.

For the rest of 2020 and into 2021, investment banking associated with M&A activity will continue to be tied to the economic recovery amid a softer deal pipeline. When the economy finally bounces back, there will be opportunity for a backlog of deals, boosting advisory revenues.

Data and Private Equity

In the time of COVID-19, certain private equity trends have emerged and are expected to be here to stay. People are still paramount, but how they work has changed. Data continues to be more important to deal making to determine the areas for greatest earnings impact. Datasets will track strategic movements and metrics within companies to gauge their performance. Remote workforces will allow competitive PE firms to source key financial talent from entirely new geographic regions. Firms are also expected to outsource more of their back-office work functions and instead focus on front-office responsibilities.  

Ready to Sell?

If you are a business owner who is considering making a move, our M&A experts at Benchmark International would love to discuss how we can help with the sale, exit or growth of your company.  

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How COVID-19 Has Impacted Buyer Appetites In The Lower To Middle Market in South Africa

Benchmark International’s industry agnostic approach has proven to be informative during the Covid-19 epidemic. Interest in most of our client base has not declined and we are receiving queries from a wide range of parties.

Who are these interested parties and what is their investment approach? Analysing the data provides an interesting insight and some understanding of the shifting approach amongst these different categories of buyers.

• Listed Companies with their robust balance sheets are compelled to continue investing to meet forecast performance targets and stakeholder objectives. Generally, their acquisition mandates are governed by their investment committees where risk is a dominant factor. Turnaround and distressed assets are typically less attractive unless fulfilling a defined strategic need.

• Foreign Corporates from the Western to Eastern hemisphere still see South Africa as a stable foundation to expand through to Sub-Saharan Africa. South Africa’s well-developed IT and broadband infrastructure, advanced legal and banking sectors, safe aviation record, and access to a cost effective English-based labour pool facilitates business across the African continent. Themes of specific interest have emerged with a higher than normal volume of inbound enquiries for renewable energy, TMT, IT infrastructure and service as well as software businesses in particular.

• Private Equity in South Africa has grown and matured immensely over the last decade and remains one of the top acquirers/investee categories in the middle market for Benchmark international. Attached to the funds they raise are set acquisition criteria, investment limits and defined investment timelines where cash reserves must be spent. Similar to the listed segment, risk profiles are a key investment mandate consideration. During lockdown, Benchmark International has experienced a slight shift in the number of deals concluded towards those that have private equity components to them.

• Family Offices have shown resilience through the epidemic and continue to show interest in our opportunities. Their mandates are more flexible but are primarily based on where their strategic and financial input will maximise returns.

• Covid-19 has forced Large Private Companies to look at vertical integration of their supply chains. They also continue to seek to grow their market share through horizontal acquisitions and acquisitions of niche market opportunities.

• High Net Worth Individuals remain interested in growing their asset bases. They generally focus on opportunities in which they have existing investments and expertise and are able to achieve economies of scale.

 

Author
Anthony Monne
Transaction Senior Associate
Benchmark International

T: +27 (0) 21 300 2055
E: monne
@benchmarkintl.com

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