NEW YORK 535 Madison Avenue, 19th Floor New York, NY 10022 +1 212 207 1000 SAN FRANCISCO One Market Street, Spear Tower, Suite 3600 San Francisco, CA 94105 +1 415 293 8426 DENVER 999 Eighteenth Street, Suite 3000 Denver, CO 80202 +1 303 893 2899 MEMBER, FINRA / SIPC SYDNEY Level 18, 1 Castlereagh Street Sydney, NSW, 2000 +61 283 200 841 BERKSHIRE CAPITAL SECURITIES LLC (ARBN 146 206 859) IS A LIMITED LIABILITY COMPANY INCORPORATED IN THE UNITED STATES AND REGISTERED AS A FOREIGN COMPANY IN AUSTRALIA UNDER THE CORPORATIONS ACT 2001. BERKSHIRE CAPITAL IS EXEMPT FROM THE REQUIREMENTS TO HOLD AN AUSTRALIAN FINANCIAL SERVICES LICENCE UNDER THE AUSTRALIAN CORPORATIONS ACT IN RESPECT OF THE FINANCIAL SERVICES IT PROVIDES. BERKSHIRE CAPITAL IS REGULATED BY THE SEC UNDER US LAWS, WHICH DIFFER FROM AUSTRALIAN LAWS. LONDON 11 Haymarket, 2nd Floor London, SW1Y 4BP United Kingdom +44 20 7828 2828 BERKSHIRE CAPITAL SECURITIES LIMITED IS AUTHORISED AND REGULATED BY THE FINANCIAL CONDUCT AUTHORITY (REGISTRATION NUMBER 188637). 2018 FINANCIAL SERVICES INDUSTRY REVIEW www.berkcap.com CONTENTS ABOUT BERKSHIRE CAPITAL 1. Introduction: 2017 Market Overview Berkshire Capital is an independent employee-owned investment bank specializing in M&A in the financial services sector. With more completed transactions in the asset management 2. Investment Management and securities space than any other investment bank, we help clients find successful, long- a. Traditional Investment Management lasting partnerships. b. Wealth Management Founded in 1983, Berkshire Capital is headquartered in New York with partners located in London, Sydney, San Francisco, Denver and Philadelphia. Our partners have been with the c. Real Assets firm an average of 14 years. We are recognized as a leading expert in the asset management, wealth management, alternatives, real estate and broker/dealer industries. We believe d. Credit our success as a firm is determined by the success of our clients and the durability of the e. Hedge Funds / Private Equity partnership we help them to structure. 3. Securities Industry & Market Structure NEW YORK | LONDON | SYDNEY | SAN FRANCISCO | DENVER www.berkcap.com billion, representing a 41% increase from 2016. Almost 70% of THE BEAT GOES ON AND ON AND ON all high-yield proceeds raised were used for refinancing, with spreads decreasing almost 70 basis points on average. The financial and economic stabilization that has emerged The overarching health of the financial services industry over the 10 years since the start of the global financial crisis continues to improve as seen through the prism of the global (GFC) has been built on a foundation of trillions of dollars banking sector, which we view as the central nervous system of stimulus by central banks. If not previously obvious, 2017 of the global financial sector. The issuance of credit as reflected underlined the strength of the global economy as the beat by overall lending volumes is robust and credit quality of economic recovery continued to go on and on ... and on. remains solid. Regulatory handcuffs in the U.S. have loosened, In the U.S., the post-crisis economic expansion quickened as GDP growth topped 3% in both the second and third quarters while corporate earnings hit records. EUROPEAN VALUE CLIMBS, U.S. DIPS In Europe, economic sentiment is close to a 17-year high with MERGERS & ACQUISITIONS WORLDWIDE the possibility of solid GDP growth in excess of 2% now more a reality than a myth, although structural challenges continue Number of Announced Deals 2017 (vs. 2016+/-) to impact the region and contribute to valuation discounts in Worldwide 49,448 (-2.5%) many asset classes. Seven consecutive quarters of GDP growth U.S. 13,024 (+13.5%) along with strong exports and corporate earnings have revived Europe 14,804 (-10.4%) Japan’s long-dormant economy. Following suit, emerging Asia-Pacific (ex-Japan) 13,762 (+2.2%) market earnings, currencies and optimism have improved, Value of Announced Deals ($B) 2017 (vs. 2016+/-) with Chinese stabilization and an appetite to invest abroad Worldwide $3,601 (+0.2%) playing a material role (with the latter tempered somewhat by U.S. 1,420 (-15.6%) government controls). Global M&A surpassed $3 trillion for Europe 868 (+16.9%) the fourth consecutive year, according to Dealogic, reflecting Asia-Pacific (ex-Japan) 954 (+14.1%) continued optimism in the global economy. Of Which (by $value 2016, worldwide) In U.S. markets bolstered by liquidity and the improving Acquisition by Private Equity 18% macroeconomic picture, confidence and low volatility Cross Border 36% reigned, with, each of the three major equity indices posting Financials 9% double-digit gains to reach new highs in 2017. The Dow Real Estate 15% Jones, S&P 500 and Nasdaq indices were up 24%, 18% and 27%, respectively. At the same time, the CBOE VIX index, Source: Thomson Reuters which measures implied volatility, averaged 11 for the year, its lowest-ever level. Trading volumes in U.S. equities remained stimulating record levels of bank consolidation. In the 10 depressed, negatively impacting the earnings of capital years since the start of the GFC, U.S. banks have emerged in markets firms, including the largest investment banks. While remarkably good shape, with the 34 banks participating in the driven by improved fundamentals, market activity also Federal Reserve’s stress tests adding more than $750 billion reflected investor confidence that the Trump administration’s in common equity capital since 2009 to buttress capital ratios focus on tax reform and regulatory relief would benefit and enjoying solid profit growth last year. businesses in a material way. Last June, the Fed gave passing grades to all 34 banks during Equity capital markets activity rebounded from a couple of soft the latest round of tests, as well as the green light for the years, with U.S. IPOs returning to six-year average volume lev- pent-up dividend hikes and share buybacks the banks had els and outperforming overall equity market indices. Activity in their capital plans. In aggregate, Bank of America (NYSE: was also considerably more widespread across a broader range BAC), Citigroup (NYSE: C) and JPMorgan Chase & Co. of industries than was evident in the two prior years. In 2017, 26 financial sector IPOs INVESTMENT MANAGEMENT TRANSACTIONS raised almost $4.7 billion, a solid increase from 2016 (13 IPOs and $4.1 billion). 2013 2014 2015 2016 2017 A rush to refinance ahead of anticipated Majority Equity 129 126 139 160 176 Federal Reserve rate increases along with Minority Equity 20 14 21 22 32 strong demand from yield-hungry inves- Management Buyout 10 3 6 9 12 tors spurred corporate high-yield debt Total 159 143 166 191 220 issuance. The most active year since 2014 Total Transaction Value ($B) $14.8 $26.4 $21.2 $24.0 $28.9 for U.S. corporate high-yield issuance, 2017 Total AUM Changing Hands ($B) $1,636 $1,980 $1,839 $2,443 $2,086 featured 511 offerings that raised $277 Source: Berkshire Capital Securities LLC 1 Bank index was up 24.9% in 2017. How- SECURITIES INDUSTRY & MARKET STRUCTURE TRANSACTIONS ever, there is great variability in future prospects for individual participants. 2013 2014 2015 2016 2017 Well-discussed pressures facing active Majority Equity 67 90 67 63 54 traditional managers relating to fee levels Minority Equity 8 20 12 6 15 and performance have driven assets in Total 75 110 79 69 69 exchange trade funds and products from Total Transaction Value ($B) $6.1 $14.2 $13.2 $14.2 $10.4 $807 billion to $4.4 trillion worldwide Source: Berkshire Capital Securities LLC between 2007 and 2017, with the U.S. accounting for three-quarters, according (NYSE: JPM) pledged to buy back $52 billion in shares in the to ETFGI. Moody’s projected last year that 12 months after the stress tests. Banks are also more comfort- ETFs and their passive cousins, index funds, could achieve able pursuing larger transactions — while remaining leery of a 50%-plus share of AUM in the U.S. within four to seven “transformative” mega-mergers for fear of ruffling regulatory years “irrespective of market environments,” up from the feathers — and increasingly focused on calibrating their current 29%. On the other hand, alternative managers have non-bank business portfolios. benefitted immensely from investor demand for private investments and yield. In Europe, where banks were slower than their American counterparts to respond to the crisis, the picture is improved These trends have impacted M&A activity in the traditional but mixed. Within the European Union as a whole, nonper- space in two main ways: by generating multiple transactions forming loans (NPL) totaled 4.5% of all loans as of June 2017, for ETF firms for a fourth consecutive year in 2017 (including and while that’s high from a historical perspective the trend several large deals), as well as a number of mid-size to has been positive: The number stood at 5.4% in June 2016 large transactions between active managers seeking to and 6.5% in December 2014, according to the European rationalize costs and diversify product capabilities in order Banking Authority. Balance sheets have also improved, with to maintain profit margins and better serve changing client the average common equity tier one ratio for European needs. Reflecting both themes, transactions in 2017 in the banks at 14.3% as of June 2017. At the same time, the aggre- traditional investment management sector increased in gate numbers mask wide disparities, with one-third of EU jurisdictions having NPL ratios in the double-digits, including Italy, Ireland and Portugal. INVESTMENT MANAGEMENT State disposals of shareholdings assumed during the financial WHO’S SELLING crisis also continued. In the UK, the government sold off the Number of Transactions by Sector as % of Total remaining slice of its original 43% stake in Lloyds Banking 1% Group (NYSE: LYG), in the process making a tidy profit.