Although the exact start date of the financial crash will differ depending on who you talk to, August 2017 was widely acknowledged as the 10-year anniversary of the first signs of the global financial crisis. In the two years that followed, 2008 and 2009 saw the shockwaves of the crash hit the M&A industry, with global M&A volumes falling over 40%, and reported deal values by nearly 55%.

The results of the crash changed the market significantly. Companies now implement increased geographical diversification and investment strategies in secondary markets. In the UK alone, Chinese investment has tripled and US activity has grown 40% since 2014.

Ten years on from the crash, volumes are 5% higher than the 2008 peak, disclosed aggregate values are 12% higher, and the proportion of transactions with undisclosed values is higher than ever, at nearly 60%*. So what happened to the M&A market over the last decade?

Looking back: global transaction volumes

 In the year to the 31st July 2008, overall global transaction volumes fell 7.5% to 9,425 global reported deals. In the following year, they fell another 37%, to a trough of only 60% of their 2008 level (5,962 deals) as companies and investors chose to hold tight and wait out the storm. The drop resulted from lower deal values in sinking equity markets, access to financing for larger transactions and general uncertainty on the economic outlook.

The effects hit some regions harder than others in 2009. The DAX region (Germany, Austria, Switzerland) saw a 24% fall, The Iberian Peninsula (Spain and Portugal) dropped dramatically by 34% and the Nordic region was hit harder, with an abrupt 7% decline in 2008 and a further 39% decline in 2009, pushing transaction volumes 43% below their peak.  The Indochinese market followed a similar pattern with a gentler decline, with volumes growing 1.6% in 2008 (from 368 to 374), then falling by a further 22.5% in 2009.

The UK and North America, the traditional engines of transaction volume, which together accounted for around 75% of deals in 2008, saw the fastest declines. UK volumes fell 7.5% and US volumes by nearly 9%. In 2009, it was the UK market which saw the most severe contraction, as volumes fell by half, pushing transaction numbers down to 817 from 1,762 in 2007. This decline in volumes over the two-year period was significantly greater than the decline anywhere else.

The peak and the trough: Disclosed values  

Disclosed values tell a more nuanced story. The headlines looked worse, with a decline in global disclosed value of 55%. This makes sense, because smaller deals are less likely to have valuations disclosed. This is usually due to private shareholders not wanting the financial terms to be disclosed and no regulatory pressure to disclose deals below a certain threshold.

This varied by region far more than the slowdown in volumes did. For example, the US had the most abrupt decline in 2008 (down 48%) and a gentler decline in 2009 (down a further 17%, for an overall 57% reduction in reported transaction values). In contrast, the DAX region actually increased deal values in 2008, albeit by less than 1%, then saw a 44% slowdown in 2009.

The UK’s decline mirrored the DAX, but more starkly, with values declining by less than 1% in 2008 then dropping 52% in 2009. The Nordics suffered even more in value terms, as reported aggregate values dropped by nearly a quarter (24%) in 2008 and a further 72% in 2009, closing nearly 80% down on the peak.

In the year to 2007, the UK and North America accounted for 82% of global reported transaction value; in the year to 2009, despite their precipitous declines, they still accounted for 80% of global reported value.

Overall, aggregate reported deal values fell faster than transaction volumes, as larger deals which tend to be higher-risk were cancelled or delayed and, wherever possible, sellers sought to avoid disclosing the terms of transactions which may well have been concluded at lower valuations than they would have been 12 or 18 months earlier.

10 years on: a market snapshot

Ten years after these significant declines in volume and reported value, what does the landscape look like?

The North American market has increased volumes 80% from the 2009 trough, to 6,067 deals in the 12 months to 31 July 2017, while reported transaction value has surged at more than double that rate, increasing 170% from 2009 to 2017 and is now 16% above the 2007 peak. The business services and media and technology sectors remain key to US growth, together accounting for half of all inbound acquisitions, with the world’s best-developed funding environment for start-up and high-growth companies.

The DAX region shows a similar profile, with transaction volumes up 58% and values nearly doubling to 130% of their 2009 level. The Iberian Peninsula has shown gentler growth and remains below its 2007 peak. With volumes increasing 40% from 2009 to 2017, aggregate values remain 30% down on their 2007 levels while volumes. However, as the Spanish economy turns a corner, Chinese interest in the market rose markedly this year.

Indochinese volumes are up the most compared to 2007, now at 30% above their peak, while values have nearly tripled - with aggregate reported transaction values topping £100bn compared to £26bn in 2007. Transaction flow between China and Europe is expected to grow even stronger.

The Nordic region has shown the greatest growth, as volumes more than doubled from 2009 to 2017 and are now 24% above their 2007 peak, while aggregate valuations more than tripled from £14bn to £55bn, although this is still 15% down on the 2007 peak of £65bn. Chinese interest remains important in this market and American acquisitions increased quickly in the second half of 2016.

Volumes in the UK market have nearly doubled from 2009 to 2017, but remain 8% down on their 2007 peak, while reported values grew 61% from 2009 and remain 23% down.

 To infinity and beyond

 Despite the effects of the crash still reverberating through the political sphere, the market as a whole has shown itself remarkably sanguine about what would previously have been considered major macro-political uncertainty. Political change and economic uncertainty in Europe, the unpredictable statements and actions of President Trump, and the self-imposed uncertainty caused by the Brexit vote and subsequent approach to negotiations have all had relatively little effect on the markets.

This remains a strong sellers’ market. The drive for growth from strategic acquirers has seen volumes rise steadily since the trough, and accelerate since 2011, albeit with a few bumps in the road causing short-term and temporary slowdowns.

The wall of private equity money in search of high-quality investment opportunities, combined with the influx of new investors such as debt and pension funds that are willing to make direct private equity-style investments for bond-like yields, have driven values for differentiated, market-leading businesses to compelling levels not seen for over 10 years.

The ready availability of super-cheap debt has helped fuel and finance these valuations. Owners of well-performing businesses considering their exit options may be well-advised to take advantage of these conditions, which have now surpassed the previous highs of the 2007 peak in most markets.

*  Livingstone Global Acquirer report H2 2016 http://livingstonepartners.com/wp-content/uploads/2017/03/Global-Acquirer-Trends.Digital.pdf

D: +44 (0)20 7484 4731  l  M: +44 (0)7903 161330

15 Adam Street, London WC2N 6RJ

http://livingstonepartners.com/uk/

Pini Yakuel, founder and CEO of customer engagement specialists Optimove, talks about the coming changes in the financial services sector.

Ten years ago, UK bank Northern Rock collapsed, marking the beginning of a global financial crisis whose effects on financial services are still being felt today. Consumer mistrust in traditional banks does still linger from the fallout of the last decade. With new regulations looming on the way, financial services organisations use customer account data, more established financial providers need to update their marketing strategies to build strong relationships with their customers, before they are led away by new online challengers.

In a survey last year on confidence in banking, only 39% of consumers reported having complete confidence in banks with branches, as compared to 44% for internet-only banks. [1]  Customer loyalty is still low, with online challengers pulling into the (admittedly narrow) lead. As these competitors grow, banks need to reach out to their customers and build a more personalised relationship with them.

Consumers tend to not change banks once they have chosen one, even if they are dissatisfied, and this inertia in the industry has meant that banks haven’t focused on sustaining close customer relationships. But this is changing, with a record number of customers switching to a different provider last April. [2]

The change has been in part enabled by the variety of digital and app-based financial providers that have emerged in the last few years as competitors to the more traditional banks. By offering services tailored to each user, such as retail discounts and financial advice on how customers can use their money more efficiently, these challengers are taking business away from established providers. Research by Kasasa has found that eight out of ten millennials would switch banks if a competitor offered better rewards.[3]  These challengers are making the most of this new generation of brand-agnostic customers by offering more individualised rewards to their customers.

After the implementation of the Open Banking Initiative and the Payment Services Directive 2 (PSD2), which comes into force in January 2018, the spur for customers to compare the services and rewards of different financial services providers is set to increase. Banks will have to share customer account data with third parties (with the customer’s consent). They will be required to open up the back end of their systems to other payment providers. This means that customers will be able to easily compare the services of different providers on an equal playing field, giving FinTech companies a great opportunity to win customers, as transparency may overcome inertia.

To respond to this, banks will need to make the most of the customer data available to them. Using data analytics to divide customers into separate groups based on what kind of account-holders they are, they can develop specific, individualised marketing schemes. By trialling a variety of marketing strategies, such as individualised retail discounts or reductions on charges, banking marketers can use AI programmes to make smart observations on which strategies bring in the most revenue, for each type of consumer, leaving no customer behind. From this, banks can forge strong customer relationships that provide ongoing value in both directions.

The way that established financial services firms respond with their marketing and customer engagement will be key to survival. Fintech companies have focused on the value they demonstrably add to customers. Traditional players must get better at articulating their proposition to customers – personally, emotionally, and intelligently. With the large amounts of customer data available to them, traditional banks have the resources to do this too. By applying AI and data analytics to their marketing strategies, banks can gain deep insight into what is most useful to their customers. They need to develop their own personalised services for their users, using this insight to create meaningful relationships with their customers.

Website: http://www.optimove.com/

[1]  EY, “Trust: Without it you’re just another bank”, http://www.ey.com/gl/en/industries/financial-services/banking---capital-markets/ey-trust-without-it-youre-just-another-bank

[2] The Telegraph, “Record number of customers switch their bank account”. http://www.telegraph.co.uk/business/2016/04/19/record-number-of-customers-switch-their-bank-account/

[3] https://kasasa.com/landing-pages/switching-millennials.html?utm_source=the%20financial%20brand&utm_medium=guest%20post&utm_campaign=2017-Partner-Marketing&utm_content=switching%20motivator%20for%20millennials&utm_term=millennials

By Mihir Kapadia – CEO and Founder of Sun Global Investments

10^th anniversary since the financial crash and the things that have changed as a result of the crash

The ten years since the financial crisis of 2007-08 has passed quickly and perhaps in a better way than anyone could have expected at that time. As a matter of fact, I remember exactly where I stood trying to be brave in the face of market turbulence, and began to set up a wealth management firm at a time when all the markets and investor confidence was heading down.

I decided to focus on the emerging markets where the underlying economic growth was resilient and where investment opportunities offered a good prospect of promising results.  This was my motivation as I set up Sun Global Investments, a wealth and investment management firm, within six months of the onset of the subprime mortgage crisis. Now, as we have clocked 10 years since the crash, a lot has changed in the world – from an increase in regulations, a long period of low interest rates and easy monetary policy and new competitive threats.

The period of reformation

From the collapse of Lehman brothers in 2008 to the arrests of Irish bankers in 2016, the 2008 Great crisis led to a wider understanding of the fragile western economy ecosystems. The crash was a serious wakeup call for governments across the world, thus paving way for new regulatory responses for banking practices and financial services in general. This period also saw the expansion of the relevant regulatory bodies.  New Capital Adequacy liquidity and leverage norms came into place.  We also saw increased scrutiny of lending   practices and tougher stress tests.  The regulators were strongly motivated to avoid a future banking crisis in which taxpayers would be called on to bail-out failed banking institutions.

Today, we can be reasonably assured the global banking system is much safer due to the increased regulatory effort in the interim period.  The major problem that we faced going into 2007-08 can be summarized under four headings - excessive borrowing, flawed compensation structures, weak regulation, and moral hazard.   The regulators have sought to address all these areas.   Time will tell whether these measures are enough to avoid another crisis and another taxpayer funded bailout.     The long period of low interest rates and easy monetary policy have encouraged huge asset bubbles and higher levels of borrowing – these trends indicate that the limits of the resilience of the global economy is being tested greatly.

Testing the limits

In Europe, the banking crisis led to a severe sovereign debt crisis which affected Ireland, Spain, Portugal, Italy and Greece.  After a long period of adjustment, the first three countries have recovered to varying degrees but the latter two still remain greatly constrained by their high debt levels and negative or very low rates of economic growth.  Greece was the worst affected and continues to suffer greatly from the very negative consequences of the economic crisis ten years ago. The problem of high debt levels was compounded by any other problems such as the mismanagement of public funds by the government.   The country plunged into a massive recession as GDP contracted by 25% and the country was forced into seeking an IMF bailout.  The Greek debt crisis continues to weigh on the priorities of the European Union and IMF.   Much of the political and electoral uncertainty of the last two or three years have been a direct result of the prolonged economic slowdown which has followed the global financial crisis.

Looking into next decade

When Barack Obama assumed office, it was on a wave of optimism that he could fix the American economy which was reeling under the depression of 2008.  In the eight years of the Obama Presidency, employment and asset markets grew strongly.  However, income inequality grew over this period and many former industrial areas did not benefit greatly from the increased growth and higher asset prices. Eight years later, the American public responded to the tones of protectionism, the closing of borders and the economic nationalism of the Trump campaign.  In the UK, the referendum decision to leave the EU was a global political earthquake driven by nationalism and populism. The rise in nationalism reflected a population that had grown poorer and disillusioned in the years after the Great Financial Crisis and used the opportunity provided by the Referendum to express their unhappiness.

After the Brexit result and Trump victory, the threat of the advancement of right wing populism had faded in Europe by the end of 2016, with the election results in Netherlands and France. However, the next decade ahead will remain in difficult and uncertain due to the economic and political difficulties which are the lasting legacies of the Global Financial Crisis which started ten years ago.

In the UK, the uncertainty caused by Brexit is being further compounded by rising consumer, corporate and government debt, and increasing inflation which are squeezing living standards.  As the former Chancellor of the UK, Lord Darling recently warned, we are once again seeing sharply rising risks and increasing complacency as the memories of the crisis fades.  It is perhaps particularly grave for the UK as it in the midst of a serious period of Brexit negotiations that could have a negative effect on Businesses and households, and perhaps depress economic growth.

The financial crash of 2008 provided us a learning opportunity to set things right, and our economic and financial mechanisms have been strengthened but many dangers remain particularly the high level of debt which has emerged during a decade of very low interest rates and easy monetary conditions.  If the crash has taught us anything, it is that complacency can be catastrophic.

The Brightside is east

It is not all dark in the global economy. The US economy is proving to be resilient and is some way down on the path to monetary policy normalisation. China is also defying the forecasts of a sharp slowdown in its rate of economic growth.  China and other Emerging markets remain a bright spot in the global economies as many of them are growing at 4.5% to 6.5% a year.  Their markets offer promising and stable opportunities for investment. This is a viable and exciting option for global investors seeking to make progress in the 21^st century – an alternative to near stagnant or slower growing western economies.   There are likely to be Exciting times ahead!

In 2008 the global financial crisis hit business worldwide and recovery has been slow ever since. At the centre of this recovery banks have played a vital role, but attitudes have shifted over the years. Here Marina Cheal, CMO at Reevoo, answers the question: have banks earned our trust back?

When is a bank not a bank?

In 2008 the major financial institutions managed to comprehensively dismantle consumer trust. Since then, they’ve tried almost everything to win that trust back – but the main change is what’s happening around the big banks, not within them.

The Big Six survived the 2008 crash (some by the skin of their teeth) but nearly ten years on they’ve still to rebuild consumer trust. Their customers remain – mostly out of necessity or inertia. But changing attitudes, expectations and regulations mean a raft of challenger banks are ready to snap them up.

And those big banks have no one to blame but themselves.

Pre-2008, banking customers were supposed to look out for stability, tradition, heritage above everything, even customer service. Customers would put up with inconvenient branch opening hours and computer-says-no failed mortgage applications because at the time, legacy was a good thing.

Today’s banking customer has done a complete U-turn – influenced not just by the failings of the big financial institutions, but innovation in almost every other industry. Compared to how easy it is to set up a Gmail or Uber account, banking is in the dark ages. Challenger banks’ USP is helpfulness not heritage, speed not solidity - and it’s blowing a wind of change through the industry.

This has led to the birth of a clutch of new smartphone-only banks that are focused on making banking a more user-friendly experience. Understanding that banking isn’t just about holding onto and shelling out the customer’s cash when required, these ‘neo-banks’ put money management back into customers’ lifestyles. What, if anything, is the bedrock of people’s modern lives more than money?

So instead of lining up deposits and debits and administrating standing orders, these banks review the customer’s spending patterns, established commitments to help customers better understand how much cash they really have in hand. Oh, and making the experience enjoyable while they’re at it.

Tom Blomfield, founder and CEO of one of the most popular smartphone banks, Monzo, doesn’t believe that the incumbent banks are under immediate threat. He does, however, insist that they will have to change.

He told the People Tell Richard Stuff podcast: “Big banks don’t need to fail for startups to succeed. We’re still fractions of a percent of the market. But retail banks will look dramatically different in five years. They may not have to fail, but that’s not to say that some won’t,” he warns.

Mark Mullen is chief executive of Atom Bank and the former CEO of First Direct. His view is that the market is changing in response to customer needs and it really is time to move with the times.

“When regulation changes, banks change in response. The question is really what drives regulation. A lot of what we see today has been driven by the crisis but also a broader range of influences like advances in technology. The great majority of innovation in banking didn’t start anywhere near banking and so it’s had to respond.”

There can be no doubt that the Big Six have been slow to respond to the changes in the retail banking sector. Barclays only launched a mobile app in 2012 and the majority of mobile banking apps are simply a pared down version of online banking - in many cases, so pared down that the app still can’t perform simple tasks such as pay someone new without referring to the online portal.

Open banking looks set to be the real spanner in the works for banks. PSD2, the second Payment Services Directive will open up customer banking data (with consent under data protection legislation) to anyone the customer is happy to share it with.

This can include but isn’t limited to: online retailers, utilities, insurers... in fact, anyone who can provide the customer with great user experience and simple financial management under a trusted brand.

Being side-by-side, and in some cases having to cooperate with more nimble companies will be an unfavourable comparison – and may shepherd customers toward banks that can offer a more tech-forward solution.

Mullen explains the challenge ahead, for challenger banks as well as incumbents: “Open banking and PSD2 paved the way for an API economy in financial services. The acid test of whether it succeeds is less to do with technology or regulation. What will motivate customers to engage in a different banking model and fundamentally - what’s in it for them?

“We’ve lived with the universal banking model and the one stop shop. The open banking model has to be as convenient. I wouldn’t underestimate that. You can have a great reputation and tick the boxes you think are important and still struggle because the trade-off of effort versus return isn’t transparent.”

This still won’t necessarily drive the big banks into obsolescence but it will strip away the brand and service elements until our hallowed institutions are nothing but white label providers of banking functions. The account management, the ancillary services and the relationship will be with whoever can deliver consumer trust, 2018-style.

Mullen concludes: “This is a very big banking market and there are lots of opportunities for us to develop over the next five years. When PSD2 enacts in January, the world won’t be different but there will be a competition for customers and products over the year.”

August 9^th marked precisely a decade since the start of the financial crisis. On that date in 2007, BNP Paribas was the first major bank to acknowledge the risk of exposure to the sub-prime mortgage market when it announced that it was terminating activity in three hedge funds that specialised in US mortgage debt. Inevitably, the regulatory progress as a result has evolved and became extremely rigorous.

Looking back, we can attribute the financial crisis in part to model complexity and systemic obfuscation in the derivatives and credit markets. Banks have been placed under a microscope and scrutinised for their resilience to a wide range of risks. This is hardly surprising, given the post-Global Financial Crisis (GFC) realisation of interconnectedness of systemic risk and the financial services industry, particularly for so-called globally Systemically Important Financial Institutions (SIFIs).

To maintain the industry’s public good of wealth creation, liquidity provision and sound money management, financial services must address deficiencies in model governance by learning from practices implemented by “high integrity” aerospace, medical, and automotive industries. While model and data governance have been elevated in regulations such as TRIM, BCBS 239, Solvency II and the PRA Stress Test guidance, regulators and all industry participants on sell- and buy-sides must work harder to drive thorough model governance standards.

Now, the financial services industry is complex and rightly thrives on complexity – that’s how it fosters wealth creation in the real economy. The industry can manage complexity in risk better, but not by patching together systems with additional spreadsheets and tools of often unknown origin. It can work towards a harmonised architecture/platform which manages, models and reports risk whatever the department and job role, whether a chief risk officer, risk modeller, developer or front office representative. It should be able to deal, too, with the uncoordinated barrage from regulators and supervisors.

In software terms, this is achievable. It has been realised in non-financial organisations. Look at the automotive industry: building an automated safety-first model to production process, with validation and verification, has increased vehicle reliability, assurance and environmental protection, as well as unleashing the vehicle design creativity resulting in multiple new features at reduced cost, and significantly improving the driver experience. This process has enabled the development of safety-first assisted or fully-automated driving delivery of capabilities to the market.

Financial services can and should strive to do the same. It is quite possible for risk, projection and valuation models to be built, customised and improved, rapidly, consistently and in coordination. It is also possible to implement while minimising technical debt, applying good development processes that in turn foster continuous system improvement. Those models can be made available to whoever needs them, whether ardent researcher, FATCA-liable executive or prospective customer.

However, this requires cultural change. Established bureaucracies need to be at worst crushed, at best, reformed. Cries of “we’ve always done it this way” should be challenged. Financial institutions must seek to reduce complexity where complexity adds nothing, both in communication and in model development.

That said, we are seeing an increase in the development of new financial models. After the crash, experts highlighted the importance of model review, or as some presenters termed it, challenger modelling. Regulations are more baked here, with CCAR promoting “benchmark or challenger models”, and SR11-7 favouring “benchmarking”. The Bank of England PRA, has previously pinpointed model review and challenge as processes needing improvement.

Some suggested challenger models could incorporate machine learning, perhaps too black box for current frontline regulatory calculations, but this could prove interesting for validation and potentially improving accuracy.

In comparison to other industries, the financial services industry lacks a certain degree of understanding of software verification – that the software, as opposed to the model, delivers true output. The aerospace industry boasts regulations such as DO178C, which go far beyond anything in the financial services.

But, new financial models have greater predictive capacity and have far superior accuracy overall than previously obtained with linear models. Using an effective mathematical modelling tool, it may be possible to predict another financial crisis before it arrives.

With all this in mind, to succeed in addressing good model governance, financial institutions should aspire to a unified system with reduced operational, model and legal risks, servicing multiple disconnected supervisory regimes, in turn improving productivity through risk-aware development.

A decade on, regulators and banks have tackled the problems of model complexity and systemic obfuscation in the derivatives and credit markets, but the industry now heads into a new bubble of artificial intelligence, even bigger data, crypto-currencies, robo-advisors and a proliferating patchwork of confusing, unsourced and often poorly-supported computer languages, putting the international population at risk of experiencing new global financial and economic crises.

With the wave of new technology, cybersecurity is another factor that must be considered when calculating financial risk. Details of measuring it and bank mitigation are still vague but it’s importance should not overshadow the ongoing problem of human errors, which have the potential to cause an equal amount of damage.

Given that we are still feeling the ramifications of the previous financial crisis, it is imperative that good model governance standards are agreed upon. In this regard, financial risk managers can and should lead the industry in developing sound model governance practices.

About Stuart Kozola

 Stuart Kozola is Product Manager Computational Finance and FinTech at MathWorks. He is interested in the adoption of model-led technology in financial services, working with quants, modellers, developers and business stakeholders on understanding and changing their research to production workflows on the buy-side, sell-side, front office, middle office, insurance, and more.

Website: https://uk.mathworks.com/