Financial services transactions driving UK private equity activity

In the UK the private equity market in particular continues to be buoyant. Analysis by Pinsent Masons, the law firm behind Out-Law, of data provided by Mergermarket shows that between 1 January and 7 October 2021 there were 423 private equity-backed transactions in the UK with an aggregate deal value of £88.2 billion.

Private equity deals accounted for 28% of all deal volume in the UK in that period, and 35% of deal value.

The financial services sector was one of the leading sectors for both volume and value, representing 10% of all UK deals and 12% of deals by value in the same period.

However, financial services were significantly more important for private equity-backed transactions, accounting for 22% of all private equity deals and 27% of their value.

The attraction of wealth management

Across all financial services deals, the wealth management sub-sector accounted for a proportionately high number of deals – 30% - but was significantly lower in importance when it came to deal value. Wealth management transactions accounted for just 9% of deals by value up to October 2021.

The fact that wealth management deals account for a high number of deals but a much lower proportion by deal value highlights the opportunities in this sector for the consolidation of smaller revenue businesses in what is a fragmented wealth management market.

For this reason the wealth management space is of significant interest to private equity. It presents clear opportunities to achieve economies of scale by combining these smaller businesses into larger platform businesses.

This strategy is one commonly followed by private equity investors, where strategic acquisitions allow the business to rapidly scale and consolidate market share. Strategic acquisitions are value accretive and often result in the consolidation of separate cost bases, having significant impact upon margins.

The attraction of private equity to business owners in the wealth management sector lies in the ongoing expertise, capital and the access to networks which the private equity investor is able to provide, enabling wealth management business owners seeking to take their business to the next step whilst retaining overall control of their day-to-day business.

Future trends

Private equity involvement in the wealth management sector is not a new phenomenon, and as a sector, wealth management has largely been unaffected by Brexit.

However, the long-rumoured alignment of capital gains tax rates with income tax rates in the autumn Budget tomorrow could prompt individual owners of wealth management firms in a proliferated market to hasten any sale in order that they can realise a return on their business before any tax rate changes.

With or without any tax change tomorrow, in the immediate future the opportunities for private equity investors within the wealth management sector should remain high, and activity levels are likely to keep on rising.