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Wealth management space of significant interest to private equity – Barry McCaig

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Although merger and acquisition deal volume and value declined in the first half of 2020 due to the coronavirus pandemic, activity levels rebounded in the second half of last year and have continued into 2021.

© Barry McCaig, Partner and Head of Corporate in Scotland at Pinsent Masons

In the UK, the private equity market in particular continues to be buoyant. Analysis by Pinsent Masons of data provided by Mergermarket shows that between January 1 and November 19 there were 451 private equity-backed transactions in the UK with an aggregate deal value of £95.1 billion. Private equity deals in that period accounted for 28 per cent of all deal volume in the UK, and 35 per cent of deal value.

© Private equity deals were worth £95 billion.

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

However, financial services were significantly more important for private equity-backed transactions, accounting for 23 per cent of all private equity deals and 26 per cent of their value.

Across all financial services deals, the wealth management sub-sector accounted for a proportionately high number of deals – 28 per cent – but was significantly lower in importance when it came to deal value. Wealth management transactions accounted for just 9 per cent of deals by value up to November 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.

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.

The long-rumoured alignment of capital gains and income tax rates failed to transpire in the autumn Budget in October. Despite this, the suggestions from the Office of Tax Simplification in May 2021 remain relevant, meaning a future simplification of the two regimes cannot be ruled out. This tax risk facing individual owners, coupled with the proliferation of the market, means that the opportunities for private equity investors within this sector should remain high, with activity levels continuing to rise.

Barry McCaig, Partner and Head of Corporate in Scotland at Pinsent Masons