M&A in the Trust and Fiduciary Market
Mergers and acquisitions are becoming increasingly common in the trust and fiduciary market as companies look to expand their reach and improve their service offerings. In this article, we discuss some of the current drivers of M&A in the trust and fiduciary space and identify potential opportunities for value creation.
Factors driving M&A in the Trust and Fiduciary Market:
The Need for Scale: The industry is consolidating with larger firms acquiring smaller firms in order to gain market share and increase their offerings. The trend is driven by the need for scale and efficiency, as well as the desire to provide a broader range of services to clients. In recent years, there have been several high-profile acquisitions in the trust and fiduciary space, including several take-private transactions.
A notable take-private transaction was the acquisition of Intertrust by CSC in November 2022, which expanded the reach of the US-based firm into over 140 jurisdictions. Such acquisitions have enabled the acquiring firms to broaden their service offerings, improve their technology platforms and, in particular, gain access to new markets where the barriers to entry are high due to the technical and regulated nature of the services provided.
Regulatory Changes: Regulatory changes are a primary driver of M&A activity in the trust and fiduciary space as companies seek to comply with new regulations and adapt to changes occurring in the regulatory environment. For example, global tax cooperation measures continue to grow in scope and complexity (such as the OECD agreeing a statement on profit shifting between jurisdictions (BEPS) in December 2022). Such regulatory changes create opportunities for M&A by making it more difficult for smaller firms to operate independently as the burden of increased compliance costs falls more heavily on smaller firms.
Changes in the relative attractiveness of different jurisdictions due to regulatory consequences also have the power to shift the economic value of the service. An example of this shift was demonstrated in 2022 when the Cayman Islands (a popular jurisdiction for US alternative investment managers) were briefly included on the EU’s list of non-cooperative tax jurisdictions due to implementation delays related to tax reforms. These sanctions lead to significant institutional investors, such as the £100bn+ Danish pension fund ATP, announcing they were no longer investing in the jurisdiction.
Technology: As in many industries, technology is playing an increasingly important role in the trust and fiduciary space and companies are seeking to acquire, or partner with technology firms, to improve their service offering. This trend is driven by the need to meet client expectations for digital solutions, as well as a desire to improve efficiency and reduce costs.
Technology can also help firms enhance their compliance and risk management capabilities, which is critical in the highly regulated trust and fiduciary space. A recent survey by leading technology provider TrustQuay highlighted that 81% of firms needed technological innovation to accelerate, driven both by client expectations and again, a changing and complex regulatory environment.
Opportunities for Value Creation in the Trust and Fiduciary Market
Synergies: The combination of two or more companies can create synergies that improve operational efficiency and reduce costs. For example, the merging of two companies' back-office operations can result in significant cost savings due to the elimination of duplicate roles and, importantly, the adoption of best practice.
An example of the adoption of best practice can be found with recognised acquisition driven firm JTC and its strategic rationale for the acquisition of Segue for £8.4m in September 2021. JTC emphasised the opportunity for value creation through the combination of Segue’s focus on world class technology and JTC’s global scale across jurisdictions, despite the small scale of the business at under 1% of JTC’s revenues.
Diversification: M&A transactions are an opportunity for companies to diversify their revenue streams and client base. This can help reduce their reliance on a single product or service offering, which can make them more resilient to changes in the market. For example, a trust and fiduciary company that primarily serves high net worth individuals may seek to enter the fund administration space.
Fund administration trades at a premium not only due to the high value, relatively lower risk institutional client base (as opposed to private individuals) but also the tail wind of expected market growth in alternative asset classes of 12% to 2027. The competition for fund administration businesses is high, therefore careful planning and analysis is required to identify fit and successfully integrate such businesses.
Access to Growth: Despite the importance of technological and regulatory factors, the trust and fiduciary market is also driven by relationships. M&A can provide a means for companies to acquire talent, not only acquiring the skills required to improve operational efficiency and profitability but also, as a means of accessing the trusted relationships and networks of individuals which have been built and maintained over the life of legal fiduciary structures which can extend into decades.
Trust in the track record of delivery through key individuals can be the driving factor behind client decisions. Research conducted by Bain, showed that new clients are often captured through strong relationships with intermediaries and then most likely lost through a breakdown in client relationships. Ultimately, fiduciary businesses are entrusted with material assets and trust in the team delivering the service itself is a key element. Finding appropriate cultural fit in an acquisition is also crucial, in order to manage communication effectively and achieve a smooth client transition.
M&A is a Powerful Value Lever for Trust and Fiduciary Businesses
To conclude, mergers and acquisitions are a powerful tool to accelerate the growth of trust and fiduciary businesses. M&A can help address factors shaping the market such as the need for scale, technology and regulation and can also put firms in a strong position to capitalise on the opportunities for synergies, diversification and growth. However, the market for high quality acquisitions is highly competitive and in order to create value, careful alignment must be considered in what are ultimately people businesses.
If you would like to speak to one of our experts about this topic, please don’t hesitate to get in touch:
Dr. Daniel Baade
Mobile: +44 7471 077086
Email: daniel.baade@dyerbaade.com
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About Dyer Baade & Company
Dyer Baade & Company (DBC) is an independent corporate finance boutique that specialises in Mergers & Acquisitions and related services. We are sector agnostic, but with a particular focus on Wealth Management, Independent Financial Advisers, Asset Management, FinTech, General Insurance, Trusts & Fiduciaries, Startups, and Art and Auction Houses. The firm advises Private Equity & Financial Investors, Trade Buyers & Strategic Investors, Entrepreneurs, and Business Owners. For more information, go to dyerbaade.com.