Financial Services

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The Financial Services sector is in transition. In the aftermath of the credit crunch and the recession, financial services businesses of all kinds are either opting or being forced to reconsider their business models. The resulting process of merger and de-merger will create new businesses in search of capital and productive business partnerships.

The forces that are driving change in the Financial Services sector include:

  • the need to rebuild balance sheets by disposing of non-core assets;
  • decisions by regulators to enforce the de-merger of business lines, as the price of government support;
  • mergers by businesses seeking 'critical mass' in order to attract capital;
  • changing consumer behaviour, spurred by risk-aversion, low rates of return and a desire to repay loans instead of saving;
  • disposals resulting from a more selective approach to globalisation;
  • in the capital markets, the drying up of wholesale funding and the effective closure of certain markets; and
  • at some point in the future, the end of government support for the banking industry.
Selected Investments
Holmwoods
Insurance broking, UK
Partnership Assurance
Retirement solutions provider, UK
Sabre
Specialty motor insurance, UK

Financial Services sector experts
Caspar Berendsen and Peter Catterall

Cinven confidently expects investment opportunities to emerge and is tracking a number of sub-sectors closely.

There is little consensus as to what the shape of the industry will be in five years' time, but Cinven confidently expects investment opportunities to emerge and is tracking a number of sub-sectors closely.

We prefer to invest in market-leaders operating in attractive markets, with cash-generative business models and strong management teams. We are interested in growth businesses as well as 'yield plays', and are open to acquisitions that involve relatively low debt to equity ratios. We develop and execute investment strategies by working with corporate partners, industry advisers and former executives.

Case study: Partnership Assurance
'In Cinven, we found a shareholder that could work with us to expand our business rapidly. Cinven had the experience, intellectual ability and access to capital to help us accelerate and manage our growth. They took time to understand the complexities of our business and have assisted us with operational best practice. Partnership has a defensive and differentiated proposition that is difficult to replicate. UK population demographics mean that the structural market growth prospects for our retirement and care propositions should remain strong for the foreseeable future.'

Steve Groves, CEO of Partnership Assurance

Partnership Assurance, the UK's leading provider of financial products for people whose health or lifestyle affects their life expectancy, grew strongly in 2009. In the year to 31 December 2009, sales were up 27.5% on the previous year at £421 million (€475 million) and profits (EBITA*) increased by 125.4% to £28 million (€32 million). Other indicators of success were equally positive: the company's share of the specialist annuities market rose from 18% in 2008 to 20% last year and the company now has 22,000 policyholders, up from 12,000 in 2008.

Partnership is the UK leader in the market for impaired and enhanced annuities, risk-based products that offer higher incomes than standard annuities to people with health conditions. Eligible retirees are increasingly opting for annuities of this type instead of the standard product offered by mainstream life assurers. Partnership's proprietary database of medical history for health conditions means it can price risk accurately, enabling it to offer more attractive rates to people whose life expectancy may be shorter than average.

Cinven acquired the business for £138 million (€200 million) in an equity-funded transaction in August 2008. As part of the acquisition, we invested a further £10 million in Partnership to accelerate its development and allow the company to take full advantage of favourable trends in its core markets.

2009 was a year of significant operational progress for Partnership. Three new board members were recruited: a CFO, Managing Director of Retirement and Managing Director of Care. Partnership concluded new strategic distribution and sponsorship agreements and launched a number of strategic partnerships with life assurers. The company launched a new Long Term Care plan and a lifestyle annuity retirement product, increasing the number of conditions it covers. It took a majority stake in Eldercare Group, a specialist Independent Financial Adviser, revised and updated its management reporting systems, reviewed its asset investment function and outsourced its policy administration.

These operational improvements leave Partnership well placed to capitalise on the long-term trend in the UK towards risk-based annuity products that is working in its favour. Cinven and the management team are anticipating another successful year in 2010.

* EBITDA: earnings before interest, taxes, depreciation and amortisation