Private equity to invest in financial services

More than two thirds of private equity houses plan to invest in the UK financial services market in the coming year, despite citing regulation as a hindrance to investment.

Some 93 per cent of the 40 private equity investors surveyed by accountancy firm Grant Thornton say that regulation will be important in shaping private equity buyers’ appetite for financial services businesses, while 58 per cent rate regulation as a primary challenge.

‘Our survey indicates that there is a renewed interest in PE houses investing in FS firms, with 90 per cent of respondents predicting increased private equity activity in this sector,’ explains Peter Allen, partner and head of financial services at Grant Thornton.

The report, called “Where is the Smart Money Going in Financial Services?”, reveals that the new global banking standard Basel III and the EU insurance measure Solvency II are the main concerns for PE houses.

Allen adds, ‘While some PE houses see regulation as a deal breaker, regulation can be seen as providing some attractive buyout opportunities.’

The prevalence of niche financial services companies is the main reason why private equity buyers are choosing to invest in the industry, according to 62 per cent of survey respondents.

Allen says that the affordability of niche businesses in the sector is part of the attraction.

‘Niche companies within the FS sector are the right size and are mainly priced in the range of tens of millions of pounds rather than hundreds. This means that the average private equity fund will be able to afford one as part of a mixed portfolio.’

Factors deterring investment in the sector include the belief that the value of a business in financial services is dependent on a few key people, while 30 per cent of participants deem the sector ‘baffling’.

Allen comments that ‘we will have to wait and see whether the forthcoming regulation will indeed act as a hurdle to investment or make the FS sector far more robust and profitable’.

Todd Cardy

Todd Cardy

Todd was Editor of between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital.

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