Dealmaking in the financial services sector will accelerate significantly over the next 12 months, spurred by easing of regulations under Republican control of the federal government, according to Mergers & Acquisitions’ Mid-Market Pulse (MMP). The MMP is a forward-looking sentiment indicator, published in partnershipwith CT, a provider of business compliance and deal support services. It is based on a monthly survey of approximately 250 middle-market M&A professionals. (Read the full report).

The survey participants sampled in the days shortly after the election gave the financial services, insurance and real estate sector (FIRE) a composite score of 60.5 for the 12-month outlook, suggesting that M&A activity in the sector will expand considerably. Survey participants said they expect dealmaking to benefit from a wave of deregulation of the financial services industry under a Republican president and Congress.

While a repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act is unlikely (and would require bipartisan support to achieve the required 60 votes in the Senate), a roll-back of regulations enacted in the wake of the financial crisis is expected. Elements of the Consumer Financial Protection Bureau and the Volcker Rule may be targeted for amendment.

The regulations that followed the financial crisis of 2008 led to increased M&A activity, as banks divested non-core assets. Another wave of activity is expected when the regulatory pendulum swings back.

One potential regulatory change that could hamper M&A in the middle market is the tax rate for carried interest, currently taxed as capital gains. If carried interest is taxed as regular income, the move could affect smaller PE firms adversely, although an expected lower tax rate for all businesses may offset the impact.

In the short term as the regulatory issues get sorted out, dealmaking in the financial services sector is likely to decrease. Survey participants gave the sector a composite score of 43.7 for the three-month outlook, indicating contraction. Dealmakers responded to the survey November 10th through the 15th.

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