PE execs eye specialty finance, regs in financial service dealmaking

  • Interest around potential IPO for Lending Club fuels specialty finance talk
  • Deals expected in insurance brokerage, mortgages, lending
  • Big banks stymied by regulatory environment

That was a key conclusion of the “Investing in Financial Services” panel at the Financial Services M&A Symposium held at the University Club in New York City on Nov. 20. The symposium was sponsored by Deloitte, Schulte Roth & Zebel, and iDeals Solutions.

Panel executives cited LendingClub, a San Francisco-based peer-to-peer lender that’s expected to go public in 2014, as an example of the current interest in specialty finance firms.

Aaron Goldman, vice president, General Atlantic, said he’s noticed interest among dealmakers in non-prime consumer lending ventures aimed at “large pools of borrowers not being served” by traditional banks. Another hot area is financial technology, he said.

General Atlantic remains “somewhat skeptical” about the mobile payments business, partly because only a handful of winners will emerge from the large number of players currently in the space.

Goldman is also keeping an eye out for fresh moves by European banks to shed assets to bolster their capital levels.

The executive expects specialty lenders to create innovations in student loans, sub-prime loans and other businesses, partly because large, traditional banks have pared back efforts to launch new business lines in the face of new capital requirement and other rules.

“They’re very, very scared of doing different things,” he said. “Innovation at the [big] banks has really stalled.” 

Meanwhile, it’s a “wild west” in the specialty finance game with loan rates as high as 400 percent in some cases.

General Atlantic won’t make any investment “that has reputational risk”, he said. His firm’s growth equity commitments must be with companies that are doing “the right thing” for consumers.

“Make sure you’re not going to get beat over the head [by regulations] when you don’t see it coming,” he said.

Looking to 2014 and beyond, Goldman said the big question is whether larger banks will start moving more aggressively to buy up those specialty finance companies that are portfolio companies of private equity firms.

“There won’t be a lot of exits until banks move more on the regulatory side,” he said.

Mitchell Leidner, partner, Aquiline Capital Partners LLC, said his firm sees opportunity for deals in the mortgage sector, but that the overall pace remains a bit more sluggish than some would expect. Valuations of financial technology firms and newer companies in the crowdfunding space have gotten richer.

“Pricing is up, generally speaking,” Leidner said. “Some new models are getting higher valuations. Some look like social networks.”

In 2014, he expects interest rates to start to edge up, while dealmaking and regulation will remain about flat.

“Rates will go up – it’s not a question of if, but when,” he said. “Regulations will increase…but no dramatic changes” will take place.  

“Regulation is here to stay and you have to learn to understand it,” Leidner said. “It creates winners and losers.”

Nicholas Pike, vice president, Advent International Corp, said he expects more consolidation for insurance brokerages since the business remains “very fragmented.”

Overall, dealmakers need to tackle a very challenging regulatory environment, he said.

“You have to speak to as many people as you can on the regulatory side to understand where the pressure points are and make a judgment call,” Pike said.

High public equity multiples for some financial firms have been feeding price expectations in private markets, Pike said.