The financial services sector has proven to be a cornerstone of the UK economy for many decades now. It not only influences the nation’s economic stability, but also strengthens its position as a renowned global financial hub. The sector includes a diverse range of businesses, from banking and insurance to investment management and fintech innovation. 

This week, we look at the latest regulations, forecasts, and developments that have become into play, and their relevance to the prevailing situation of insolvencies in the UK. What potential do they present for investors with a strategic interest in revitalising distressed businesses? 

Financial Services – Industry Overview 

Thousands of financial services firms in the UK have experienced a decline in the recent months. This is because Brexit has severed many connections between the UK’s financial sector, responsible for about 12% of the nation’s economic output, and the European Union. When it comes to company listings numbers, London continues to face stiff competition from New York. Singapore is currently at par with London in global financial centre rankings. This indicates the need for strategic investments to maintain the city’s financial position. Investments into distressed businesses and struggling companies is definitely worth considering. 

Just yesterday, the United Kingdom unveiled plans to relax key regulations governing banking and insurance. This is part of its ongoing efforts to bolster its crucial financial sector in a post Brexit economy. The proposed changes include adjustments to the ring-fencing threshold for banks. They aim to make the rule more flexible and reduce unintended consequences. This could make it easier to restructure struggling banks and enhance their viability.

The government has also unveiled plans to introduce secondary legislation to enact these reforms in early 2024. Simultaneously, the Bank of England is reforming Solvency II insurance capital rules, seen as a “Brexit dividend”. This will potentially release up to £100 billion for investment. However, the EU is also reforming Solvency II in a similar fashion, and it will be interesting to see how both of these pan out parallelly. 

Furthermore, rising inflation rates are causing challenges for many small and medium-sized financial businesses in the UK. It’s expected that holding onto cash will be more popular than using credit in the coming months. The phrase “higher for longer” is gaining market relevance as interest rates stay high. 

Initially, central banks, including the Bank of England, were slow to react to increasing inflation, and experts predict that this trend will continue. Market forecasts suggest that interest rates will stay elevated for some time, providing attractive returns on cash investments. The yield curve currently shows that short-term investments offer better returns, reducing the need for long-term commitments. This environment may encourage more businesses, especially those in distress to seek capital infusion and restructuring support.

While cash seems promising, investors should remain cautious about liquidity and the quality of credit, especially with economic uncertainty. If you seek income, now is the best time to prioritise high-quality investments as they can offer higher returns than bank deposits. 

Foster Denvo’s Acquisition of Wade Financial 

Foster Denovo, a national advisory firm, has acquired Newcastle based Wade Financial. The amount of the deal remains undisclosed. This acquisition includes assets under advice totaling £220 million, along with six advisers and ten support staff. 

Roger Brosch, CEO of Foster Denovo, emphasised their shared client-focused approach and aligned vision for the future as key factors in the decision. This acquisition strengthens Foster Denovo’s presence in the North East and supports their expansion plans. The firm currently operates eight offices across the UK, offering specialised financial advice, financial services, and investment solutions. 

Last February, Foster Denovo secured £100 million in funding from Crestline Investors to support their acquisition and growth strategy. Crestline holds a minority stake while the founding leadership team retains control of the business. As part of their ambitious five-year growth plan, Foster Denovo has completed ten internal practice buyouts (PBOs) for 18 advisers, leading to a threefold increase in their EBITDA.

There are a few core lessons in dealmaking that this acquisition highlights. First, ensuring a shared vision and cultural fit during acquisitions directly impacts the acquirer. Second, a strong alignment of values with the target company makes for a smoother integration process and long-term success. And last but not least, it’s important to integrate new teams effectively and leverage their expertise to maintain a culture of continuous improvement. Incorporating these lessons into your investment approach can enhance your ability to identify, acquire, and turn around distressed businesses successfully. 

Corebridge Financial’s Life Insurance Business Sold to Aviva plc

Corebridge Financial, Inc. has announced a definitive agreement to sell its UK life insurance business, known as AIG Life Limited, to Aviva plc. The deal was finalised in an all-cash transaction valued at £460 million. 

Since its acquisition in 2014, AIG Life Limited has become a well-established provider of life insurance, critical illness, and financial services protection products all across the UK. 

AIG Life’s strengths, such as its innovative solutions and strong distribution partnerships, align well with Aviva’s approach. The combination of the protection businesses will leverage AIG Life UK’s successful offerings for SMEs and high net worth clients. This will also expand its reach through relationships with regional and corporate IFAs and other key partners. This merger will establish a more efficient platform to serve both existing and new customers.

The transaction, financed using internal resources, is expected to yield robust financial returns, with an anticipated low-teens IRR. As part of this deal, Aviva will regain control over the economics of the business that AIG Life UK currently reinsures within the broader AIG Group. 

The completion of this sale, including regulatory approvals, is anticipated in the first half of 2024. J.P. Morgan Securities LLC served as the financial advisor, and Skadden, Arps, Slate, Meagher & Flom LLP provided legal counsel to Corebridge in this transaction.

For more timely insights like this, stay tuned to Administration List.