PE Strikes While the Financial Services Iron Is Hot

In an unpredictable market, private equity firms are focusing in on a sector primed for dealmaking: financial services. Katten’s 2023 Middle-Market Private Equity Report shows that even in a cooling economic environment, middle-market PE investors think the financial sector is red-hot for opportunistic acquisitions.

Layoffs at financial institutions made waves in the first quarter of 2023, with Bank of America, Credit Suisse, Goldman Sachs and Morgan Stanley among the larger firms announcing job cuts, according to the Financial Times. But many PE dealmakers see the layoffs, falling stock prices and lower valuations not as a warning sign, but as an opportunity—and hope to leverage this moment to invest in financial services at a bargain price.

Many PE dealmakers see financial services layoffs, falling stock prices and lower valuations not as a warning sign, but as an opportunity—and hope to leverage this moment to invest in financial services at a bargain price.

When Katten asked PE firm leaders which industries represent the greatest opportunity in 2023, financial services led the pack, with 54% of respondents flagging it as a fantastic prospect. And why do they find the sector so appealing? Many (31%) are attracted by the flagging valuations, while others note that the financial services industry offers transformational opportunities on which they can capitalize.

Another industry facing falling valuations that Katten respondents signal as a great opportunity for 2023 is technology. This makes the fintech space, the intersection of the two most appealing sectors, likely to see a good deal of activity this year as well. In 2021, global investment in fintech hit eye-watering heights, with $210 billion in funding and a record 5,684 deals across PE, M&A and venture capital, according to KPMG. With those numbers trending down this year, PE firms are likely to see this as a chance to buy into a sector that has previously come at a premium.

As PE firms pursue these targets, buyer-funded deals are the ticket to accelerating sales and increasing the likelihood of reaching the finish line. When Katten asked what factors will be key to successful deal completion this year, all-equity deals were the top response, followed closely by changes in fund terms and greater protections between signing and closing.

This bullishness on all-equity deals might be a reflection of previous positive experiences as well as a competitive market. When asked what percentage of their deals were all-equity in 2022, 41% of respondents said that 51-75% of their deals were all-equity. An additional 31% said that 25-50% of their deals were all-equity. In fact, 76% of respondents said that they expect all-equity deals to increase in 2023.

As we near the end of the third quarter of 2023, we’ll be able to see how these expectations shake out. But one thing is clear: Many middle-market PE leaders see financial services as an opportunity they don’t want to miss.

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