By Chairman and Chief Executive Officer Marc S. Cooper
Following Solomon’s Financial Institutions Leadership Forum this month, I spoke with Arik Rashkes who joined Solomon Partners less than two years ago to establish our Financial Institutions Group. We discussed the outlook for M&A in the financial services sector, how higher rates are influencing transaction activity, the growing role of technology in valuation and the opportunities emerging across the industry.
Arik, what’s your outlook for dealmaking in the Financial Institutions sector, particularly in light of the Federal Reserve’s September rate increase?
Higher borrowing costs and tighter financing conditions do not stop activity, but they do influence demand, valuation and how carefully buyers assess earnings durability.
The higher cost of capital is likely to have the greatest impact on rate-sensitive sectors, including mortgage-related services, title, consumer lending, specialty finance and life and annuity businesses.
At the same time, uncertainty has become a permanent feature of the market. Sellers are adjusting expectations, buyers are underwriting opportunities based on today’s realities, and private equity firms continue to face pressure to exit long-held investments. Strategic acquirers are also pursuing transactions that strengthen capabilities, enhance competitiveness and accelerate growth.
Taken together, those dynamics are supporting continued deal activity. Outside the most rate-sensitive sectors, insurance services remains particularly active, including distribution, claims, adjusting and other businesses that help carriers operate more efficiently. We also continue to see opportunities across property and casualty insurance, asset management, wealth management and regional banking.
Have you seen a change in buyer-seller alignment?
Absolutely, Marc. The bid-ask spread has narrowed because both sides have become more realistic.
Sellers understand that companies are being valued differently than they were several years ago, while buyers have become more comfortable underwriting interest rates, earnings durability and execution risk. As a result, conversations are becoming more productive and transactions are increasingly getting done.
Technology is clearly part of every industry conversation. How is it influencing transactions in your sector?
Artificial intelligence has evolved from a future-growth narrative into a present-day valuation consideration.
Investors are rewarding tangible implementation rather than aspiration. If a company can demonstrate that AI is improving efficiency, underwriting, data analysis, decision-making or speed to market, that can have a meaningful impact on how the business is perceived and valued.
That is particularly important in financial services, where businesses are fundamentally driven by data, analytics and information advantages.
As a result, many companies are pursuing acquisitions that enhance capabilities and improve operating performance. These do not need to be transformative technology transactions. In many cases, targeted functionality can create meaningful competitive advantages.
What are founders, sponsors and management teams thinking about in this market?
The dominant themes are timing and preparation.
Sponsors have held some portfolio companies longer than expected, while founders are evaluating whether now is the right time to raise capital, pursue a strategic partnership or explore a sale. Strategic acquirers are assessing how transactions can strengthen long-term positioning.
For management teams, the key question is readiness. Our work often begins well before a company enters a formal process. We help clients understand how buyers are likely to evaluate the business, which metrics matter most, where potential challenges exist and how best to position their growth story.
What do you think the market may be underestimating?
The market may not fully appreciate how much activity is developing beneath the headlines.
We continue to see a healthy pipeline, with transactions moving forward and new opportunities emerging across multiple subsectors.
Some of that activity is being driven by private equity, some by strategic repositioning and some by the reality that financial institutions must continue evolving. Technology, regulation, capital requirements and competitive pressures are all changing simultaneously, forcing companies to make strategic decisions.
In that environment, the value of trusted advice becomes even more important.
Not every process unfolds exactly as planned. Sometimes valuation expectations need to be recalibrated, sometimes the buyer universe changes and sometimes companies benefit from incorporating market feedback before returning to the market.
A trusted advisor helps clients navigate those situations, identify creative strategic and capital solutions and ultimately achieve the right outcome. That remains one of the most rewarding aspects of our business and one reason I am optimistic about the opportunities ahead.
You quickly scaled Solomon’s FIG practice. How do you think about the team’s growth and opportunities ahead?
When I joined Solomon after co-heading the Financial Services Group at Houlihan Lokey, the goal was to build a differentiated financial institutions franchise with deep sector expertise and broad advisory capabilities.
Today, we cover insurance companies, asset managers, wealth managers, financial services distribution, specialty finance, consumer lending, mortgage and title businesses and related sectors.
FIG is both broad and highly specialized. Clients increasingly want advisors who understand the nuances of individual subsectors while also bringing a broader perspective across M&A, capital advisory, financial sponsors, fintech and professional services.
That combination of sector expertise and integrated advisory capabilities continues to resonate with clients.
We have built strong momentum across the practice and remain constructive on the outlook for financial institutions M&A despite the higher-rate environment.