UK's financial sector buyout slump persists

Private-equity-backed buyout investments in the financial sector dropped off considerably in 2018, marking the fifth consecutive year in which it accounted for a reduced proportion of UK dealflow. The industry accounted for 5.1% of all UK buyouts in 2018, according to Unquote Data, compared with 7.8% in 2017, 8.1% in 2016, 9.2% in 2015 and 9.5% in 2014.

A similar trend is apparent when focusing on aggregate value, which saw the fourth consecutive year of decline; the sector accounted for 2.4% of the overall figure, compared with 9.7% in 2017, 13.5% in 2016 and 14% in 2015.

UK financial service providers would potentially gain only restricted market access in limited areas, which could be revoked at a moment's notice" – Henning Berger and Charles Balmain, White & Case

Ongoing Brexit-related uncertainty is having an impact on the space, as recent analysis by White & Case partners Henning Berger and Charles Balmain highlights. Berger and Balmain examined the implications for the sector in the event that Theresa May were to secure parliamentary approval for her EU withdrawal deal and in the case of a no-deal outcome. In the first of these scenarios, the country would lose automatic passporting rights following a transition period and instead become subject to a regime of equivalence. "UK financial service providers would potentially gain only restricted market access in limited areas, which could be revoked at a moment's notice," Berger and Balmain say.

As unattractive as this might appear, it pales in comparison to any potential no-deal outcome. In such a scenario, the UK would lose its passporting rights overnight and its firms would be required to apply for authorisation in each EU member state in which they wanted to operate. Given that this option remains in play, it is not surprising that investors appear reluctant to back businesses in the space.

However, it is important to examine UK deal activity within a wider pan-European landscape. The country still accounted for 24.4% of all European buyouts in the financial sector in 2018, according to Unquote Data. This marks a considerable drop on the 38.3% share in 2017 and 40.5% share in 2016, but still constitutes the second highest percentage among all European countries. France appears to be benefiting the most from private equity investment in the sector, increasing its share from 12.8% in 2017 to 37.8% in 2018.

Sure thing
One area of the UK financial sector that has remained relatively resolute through the past five years is insurance. The segment saw nine buyout and growth capital deals in 2018. Though this is a decrease on the 14 recorded in 2017, it remains the second highest level of activity in the sector since the financial crisis.

"When it comes to insurance brokers, there continues to be significant private equity interest in acquiring these businesses, and it is clear to see why," says Duncan Buck, executive vice chair at boutique M&A advisory firm Fenchurch Advisory. "They tend to be highly cash generative, so investors can get more leverage into them, and right now debt is relatively cheap, and covenant-lite terms are readily available. While organic growth may be lower than in certain other financial services sub-sectors, at the smaller end the broking sector remains highly fragmented. This provides private equity investors with attractive buy-and-build opportunities. Generally bolt-on broking acquisitions can be done at relatively low multiples, which can lead to positive multiple arbitrage when consolidated into a larger platform."

Indeed, the highest profile deals in the space throughout the course of 2018 included ECI's acquisition of The Clear Group, which Unquote understands valued the business at more than £50m, and Livingbridge's buyout of Coversure Insurance Services Group. The first of these deals was for a brokerage firm, while the second was for a group that includes a broker franchise, in addition to other divisions. Both companies are pursuing acquisitive growth strategies under their new owners, according to statements released at the time of the deals.

At the other end of the investment lifecycle, Hg recently completed the refinancing of insurance brokerage A-Plan, which has also served as a consolidation platform. The transaction brought the total proceeds generated from the asset to around £200m or 1.3x original cost, with no sell-down in the firm's equity stake.

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