Regulatory technology—or RegTech—is likely to be a popular sector for dealmakers, according to Irina Krasik, managing director at private equity firm Stellex Capital Management.

So far in 2023, there have been 116 global RegTech deals, per data from Dealogic. The total deal value was more than $13.5 billion. Among the companies that were sold include Finellix, to Stellex Capital, and Adenza, to Nasdaq Inc.

Last year, there was a total of 201 RegTech M&A transactions.

“We believe there will be more M&A in the space as the existing players will need to continuously expand their portfolios to stay in front of the constant evolution and change that is present in the RegTech industry,” Krasik tells Global Finance.

The Competitive Enterprise Institute, a Washington, D.C. nonprofit, recently reported that compliance costs for large global banks and brokers currently exceed $200 million annually.

Financial software can help mitigate those costs, and so companies are seeking targets that specialize in developing these tools. That way, they remain compliant with dynamic laws. That’s what Stellex Capital did earlier this year when it acquired Bangalore, India-based Fintellix—along with G2 Web Services and Lundquist Consulting—from TransUnion for a total of $176 million.

And earlier this month, Nasdaq spent $10.5 billion to takeover Adenza from private equity firm Thoma Bravo. Like Fintellix, Adenza specializes in risk management and regulatory compliance solutions.

“Companies within the sector need to navigate ever increasing regulations and complexity that is varied and nuanced by end region and country,” Krasik adds. “Stellex has interest in investment opportunities in the space because we like the stability of a mission critical service and a dynamic service that helps to address evolving and complex pain points for clients.”

Other players in the RegTech space include Singapore-based Artius Global and London-based FundApps. Whether these shops will get shopped to big-name buyers remains to be seen. After all, M&A—across all sectors—has been slow since the start of the year.

In fact, global M&A volume totaled just $582 billion, down 48% year on year, for the first quarter of 2023 and 27% lower than the fourth quarter of 2022.

“Extended due diligence periods are being experienced now rather than a rush to get to the finish line,” says private equity investor David Acharya. “[But] a good dealmaker will always search for new investment opportunities even during challenging times.”

For Nasdaq president Tal Cohen, the time was right to buy Adenza. Banks, he explained, have increased their compliance costs by more than $50 billion per year ever since Dodd-Frank was implemented.

Since 2010, strict regulatory measures have threatened to either split up banks, curb bankers’ bonuses and limit trading activities. Today, regulations continue to threaten even the largest of companies, whether they’re involved directly in finance or not.

Banks and brokerages use software like Adenza’s, which Cohen claims can “make managing risks and complying with regulations simpler and more efficient for our clients.”

Thoma Bravo, which had only acquired Adenza in June 2021 for $3.7 billion, will receive $5.75 billion in cash and 85.6 million shares as part of the sale to Nasdaq.

The agreement gives the Chicago-based firm a 14.9% stake in Nasdaq which, in recent years, has been trying to diversify its portfolio offerings. Recall in 2020 when Nasdaq spent $2.75 billion to buy Verafin—another software firm used by banks. Before that, it bought International Securities Exchange, which offers equity and index options, for $1.1 billion.

Fintellix, meanwhile, will likely explore—and benefit—from increased M&A in the form of “add-on acquisitions,” Krasik explains.

“We are working on the next version of the Fintellix platform that will embed artificial intelligence capabilities for greater automation and enhanced usability, and we are working to build new products to cover even more regions outside of the U.S.,” Krasik adds. “We believe that the RegTech players aiming for the strongest outcomes will need to be ahead of the curve to address ongoing evolution and M&A is an important strategy to facilitate this.”