A proven pandemic story
Government restrictions and lockdown measures brought on by Covid-19 have accelerated digital transformation for many financial services businesses, and thus provided a growth opportunity for the information services space. As the ‘working from home’ climate has driven a fundamental review of working practices and the digital tools required – it’s likely that a reliance on flexible / digital information is here to stay. Subsequently, investment and M&A activity could follow.
Over the past decade, information services businesses have digitalised their products, processes and services – preparing them effectively for a pivot to new working conditions. These service providers have subsequently flourished throughout the pandemic – being able to operate successfully, fulfil contracts with minimal disruption, and positioning themselves as stable and resilient investments.
The ‘reliable business model’ - one capable of surviving (and thriving), irrespective of continued uncertainty – is not a new trend, however. The information services sector has consistently outperformed the broader market over the past five years, and the continuing trend for high valuations, evidenced by assets trading at EBITDA multiples 23.4x compared to S&P 500 at EBITDA 14.8x during peak post recovery in July 2020,1 suggests this is a strong area for investment and should be a key focus for M&A activity.
Like most sectors, the initial shock waves of the pandemic were felt by information services (see graph below), but sector recovery was relatively swift, before climbing into a new period of growth. This growth is reflected in M&A activity too - with many Information Services companies continuing to outperform – comparatively, 170 transactions that occurred in FY’20 vs. 67 transactions in Q1’21 alone.
It is clear that there is a significant amount of activity in this sector but equally, assets are continuing to be traded at high values in comparison to the rest of the market, with Information Services outperforming the S&P 500 by an average annual return of 9.7% over the past five years.1
Share Price Performance over last five years
(Graph source: Footnote 1)
In short, there remains the potential for high value returns in the financial data sector, which have been seen even over the course of the on-going pandemic, and with continued proven pandemic story, set in the wider context of the increasing global demand for data and businesses digital transformation, looks set to continue the deal flow momentum in this space.
The ironic storm of consolidation & diversification
Over the past decade, the reliance and value of financial data as a commodity in the global market has increased significantly - the growth of data and information available in the market is predicted to have increased by 36% from 2010 to 2024 (as illustrated in the graph below).3
Explosive growth in data and information (in zettabytes)
(Graph source: Footnote 3)
This consumer demand for reliable access to real-time financial data and information - now a part of day-to-day operations and processes for most financial services businesses – has driven consolidation in the information services space. Strategic information services players saw the opportunity for a ‘one stop shop’ platform, and have since acquired and/or grown their offering to deliver macro data sources to help customers match and create insights and gain market share - for example, Thomson Reuters sale of Refinitiv to London Stock Exchange Group,4 and DC Advisory’s recent involvement in CreditSights’ sale to Fitch Group.5 Coming out of a downturn, companies should be looking to reduce risk and make informed, data-driven decisions, increasing the importance for more unique data aggregations and outputs incorporated into business models.
Continued interest from private equity and venture capital firms in information services assets has also driven consolidation in the sector. In our experience, private equity has looked to acquire more traditionally structured information services businesses with the view of streamlining the asset and improving efficiency to then sell to a larger player – further driving M&A activity in the space. And comparatively, we have seen venture capital firms look for unique datasets and ‘frontier tech’ analytics platforms that exhibit clear competitive advantages and high growth characteristics.
Ironically, it is likely that this consolidation trend will lead the sector into a parallel period of diversification – with new specialisms emerging as competitors accommodate the continued market expansion and drive innovation for data provision, particularly in the mid-market. This predicted market diversification, alongside larger strategic players’ sustained focus on consolidation to gain market share, could offer a perfect storm from an M&A perspective.
Repeat customers & their post-pandemic significance
As mentioned above, the pandemic has demonstrated the business-critical role information services providers increasingly play for their financial services customers. With the development of platforms and data consistently modified to suit the unique and changeable demands of their clients, customers are often retained more than lost – putting a new lens on the ‘subscription model’ value and the potential returns of investing in the space.
Now, contract lengths are increasing – driven by financial services customer demand, with contracts of up to three years not being out of the ordinary. The constant provision of information services ensures minimal disruption to workflows for customers – a far cry from the once ‘nice to have spend’ that information services occupied for company spend. This has been a significant contributor to the stabilisation of investment within the sector and adds weight to the ‘pandemic story’ for assets in the space
The power of ownership
As information services providers look to maintain and advance their competitive edge, owning the financial data provided to customers and being responsible for its primary forms of collection, management and distribution, is an increasing trend driving investment – another catalyst for the consolidation trend mentioned above
To achieve this total ownership, information services players have used two M&A routes: (1) the roll-up of smaller data providers or service add-ons in the space - larger companies have looked to acquire smaller, more niche data providers, or other service add-ons responsible for primary data collection, in order to avoid having to pay for the data separately - for example, Twilio’s acquisition of customer data infrastructure company Segment for $3.2 billion.6 This provides Information Services companies with the ability to offer an end-to-end client experience and maintain their competitive edge; (2) the acquiring of artificial intelligence (AI) and machine-learning businesses.
In order to maintain a high quality of financial data analysis, there has been an increase in automation utilising AI and machine-learning. This also allows businesses to reduce headcounts and overheads as well as increase their credentials for providing technologically advanced solutions to clients. Further developments of this trend have seen some of the largest players in this space, such as Bloomberg, incorporating new AI tools to support professional service offerings.7
In as a competitive market such as this, with clear established businesses and high revenue targets, those that are able to produce the most accurate data at the most reliable speeds will be able to take advantage of the thirst for investment and appear the most attractive on the market. These two M&A trends are therefore likely to continue in the coming year.
Over the past 12 months the information services space has proven a resilient and profitable investment opportunity. There are clear interconnected factors that have contributed to the extended period of growth as well as recent rapid increase in interest. With the sector looking to further streamline and continue to grow, and organisations embedding the services they provide into the workflows of their clients – particularly helpful with new flexible working practices - to create a reliant and reliable customer base, we believe these businesses could provide a clear source of reliable revenue for the investment community – and driving M&A activity volumes significantly for years to come.
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Information Services Composite: ERM, FDS, INFO, MCO, MORN, MSCI, SPGI, TRI, VRSK; Source S&P Capital IQ; Market Data as of 3/1/2021
Pitchbook: Announced and completed ‘Database Software’ M&A and LBO transactions under $3 billion in deal value as of 6/17/2021
International Data Corporation; Seagate; Statista estimates: “Volume of data/information created worldwide from 2010 to 2024”
Thomson Reuters: ‘Thomson Reuters Announces Closing of Sale of Refinitiv to London Stock Exchange Group’ accessed via https://www.thomsonreuters.com/en/press-releases/2021/january/thomson-reuters-announces-closing-of-sale-of-refinitiv-to-london-stock-exchange-group.html
DC Advisory: ‘DC Advisory advised CreditSights on its sale to Fitch Group’ https://www.dcadvisory.com/news-deals-insights/deal-announcements/dc-advisory-advised-creditsights-on-its-sale-to-fitch-group/
Forbes: ‘Twilio Set To Acquire CloudCustomer Data Startup Segment For $3.2 Billion’ accessed via: https://www.forbes.com/sites/alexkonrad/2020/10/09/twilio-to-acquire-cloud-startup-segment-for-3-billion/?sh=709d81672020
Bloomberg: ‘Tech decoded: Bloomberg Professional Services’ accessed via: https://www.bloomberg.com/professional/tech-decoded/?utm_medium=Adwords&utm_campaign=Tech&utm_source=pdsrch&utm_content=TechDecoded&tactic=435238&gclid=CjwKCAjwxuuCBhATEiwAIIIz0cbhoQzDy_73fTe4Ri1ioDV1hTJD7J2K4MgoQJpPZAZOKyI7eFh7ZxoCt4oQAvD_BwE