Wealth management companies and insurance brokerages in continental Europe “have all the hallmarks for a very attractive buy-and-build strategy”, Raja Hadji-Touma, a partner at private equity firm Corsair Capital, told PE Hub Europe.
Corsair, which has offices in New York City and London, targets companies with enterprise values of $150 million-$750 million under its buyouts strategy. It focuses on three sub-sectors of financial services: business services, including insurance, wealth management and fund administration; software; and payments.
The firm has a few deals in the pipeline, said Hadji-Touma, after about six months of quiet in Europe following the sale of the UK ATM and TestLink divisions of its portfolio company NoteMachine.
Wealth management and insurance brokerages are likely to be among those. Attractions include plenty of owner operators ready for succession, growing regulation, compliance and operation burdens, and a long tail of companies that are not at scale and ripe for consolidation, said Hadji-Touma.
“We’re at the right inflection point for flows to accelerate.”
They are also in a market where independents provide a better service than incumbent financial institutions, he added. “Independence is the way to go.”
Corsair is particularly interested in the DACH region, although the UK is out of play. “The US is 15 years ahead of the UK and the UK is 15 years ahead of Europe” when it comes to consolidation in the sector, said Hadji-Touma.
Cashflow
The UK, along with the rest of Europe, is an attractive area for corporate cashflow management, however, another sector in which Corsair has several targets.
“A lot of CFOs are focused on how to automate reconciliation and cash management,” said Hadji-Touma, particularly given the prevailing environment of high funding costs and less debt capacity. Business to business was particularly attractive, with the business to consumer sector having been “played out”, he added.
Corsair is also excited about the trust and administration business, with Hadji-Touma using as an example its 2019 investment in Geneva-headquartered Zedra, which provides services to high-net-worth individuals and families, companies, asset managers and their investors.
“It’s great for buy-and-build, has very recurring revenues, it’s a global business with very attractive cashflow conversion and great margins,” he said.
As well as recurring cashflow, Corsair also looks for fragmented markets that offer buy-and-build opportunities, often taking “local leaders” and raising them to pan-European level, where possible.
That latter tactic means that as well as the underlying technology and management needing to be worth investing in, these businesses must be able to travel.
Corsair bought IDnow, a Munich-headquartered cybersecurity and digital verification firm, in 2019, before expanding it across Europe organically. That Germany has the “highest standard of regulation”, via its financial authority BaFin, played into the decision to make IDnow the anchor company. “We started at the high end,” said Hadji-Touma. “It makes it easier to move into those countries with less stringent regulatory requirements.”
Some companies can even go further afield. Corsair bought Xceptor, a data automation software provider based in London, last year, along with fellow private equity firm Astorg. Corsair is looking to the US for expansion.
Headwinds
All of these expansion and investment plans are of course tempered by wider conditions, of which Hadji-Touma thinks the market is “not quite out of the woods yet”.
Costlier debt, valuation differentials between buyers and sellers, and recession concerns are among the headwinds, with Hadji-Touma expecting deals at lower valuations as a result. Worries over the banking system, after the collapse of Silicon Valley Bank and First Republic Bank, and the takeover of Credit Suisse by UBS, could also dampen optimism.
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