Financial services firms to see surge in PE investment, report says

The report, entitled "Where is the Smart Money Going in Financial Services?", also found that regulation has been cited as a primary barrier to potential investment.

Peter Allen, partner and head of financial services at Grant Thornton, said: "Our survey indicates that there is a renewed interest in PE houses investing in FS firms with 90% of respondents predicting increased private equity activity in this sector. This has been a long time coming since the banking crisis of 2008. While it is good news that there is this renewed interest in the FS sector, the appetite to invest is significantly lower than that shown in other sectors including media and support services."

Respondents to the survey highlighted the new banking standard Basel III and the new EU insurance measure Solvency II as challenges, with 58% of respondents rating regulation as a primary concern, while 93% said it would be important in shaping private equity buyers' appetite for FS businesses.

Mr Allen added: "While some PE houses see regulation as a deal breaker, regulation can be seen as providing some attractive buyout opportunities. And indeed while regulation increases the cost of running a business, those businesses that do survive are stronger for it.”

The UK's strong base of niche financial services companies is at the heart of PE's attraction to the sector. 62% of survey respondents cited it as the primary point of interest to invest in the FS sector.

"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. Going forward I think these will become very attractive services to be acquired,” Mr Allen added.

Another significant factor which has made PE houses reluctant to invest in financial services businesses is the premise that the value of a business is reliant on a few key people.

35% stated it was a deterrent to investment. The sector is also seen as "baffling" with 30% of our respondents citing the difficulty in understanding the sector as a major deterrent to investment.

60% of survey participants consider "excellent sector knowledge" the most important requirement when selecting a financial adviser, with a further 25% considering it very or somewhat important, Grant Thornton added.

"This study shows a renewed interest in the FS sector yet we will have to wait and see whether the forthcoming regulation will indeed act as a hurdle to investment or indeed make the FS sector far more robust and profitable," Mr Allen added.