You are what you eat

Multiple arbitrage is a well-trodden path to PE success. Once a buyout fund has established a platform portfolio position, smaller businesses can be acquired for lower multiples, and docked onto the ‘mothership’. The earnings acquired for a more modest multiple, by dint of the target’s size, are then absorbed into the acquirer’s EBITDA and valued at the acquirer’s higher multiple. Financial alchemy in action.

In the last MarktoMarket Mid Cap Index, the mean EV/EBITDA multiple, which tracks prices paid in M&A transactions valued at £50m–£250m, was 10.0x. The equivalent multiple in our Nano Cap Index (deals under £2.5m) was 3.9x; in very broad-brush terms that’s a substantial 61% discount for smaller companies.

Unsurprisingly, multiples show a consistently positive correlation with deal size as you move through our Micro Cap (£2.5m-£10m) and Small Cap (£10m-£50m) indices. Larger businesses, for the most part, are changing hands at bigger multiples. Market maestro Harry Markowitz would be interested to know that diversification might not be the only free lunch in finance.

Is awareness of this fact pushing the popularity of buy-and-build PE strategies? In 2015, for every PE platform investment in the UK there were 1.2 bolt-on acquisitions made. In 2025, that ratio doubled to 2.4.

Little and often

By deploying capital into fewer platforms and more portfolio M&A, PE can take advantage of more choice and better pricing further down the size spectrum. They can focus attention and resources on a smaller number of ‘bets’. This has brought small owner-managed businesses – previously deemed unsuitable for PE – firmly into their crosshairs, albeit via portfolio companies.

To put this into context, 19% of UK businesses that were acquired in 2025 were bought by PE-backed businesses. And, to reinforce the point, the top 10 most active acquirers of UK businesses last year were all backed by buyout funds. Rather than transacting on an opportunistic basis, these platforms had defined M&A strategies. They are staffed with corporate finance professionals tasked with building engines to originate and execute multiple transactions.

This is good news for vendors of small businesses. It enhances liquidity in the SME market, by populating it with well-oiled acquisition machines, and increases competition for smaller assets. Sellers may also be able to roll consideration into the topco, piggybacking on the journey to increased scale and higher multiples.

But logic says it must lead to price inflation for acquirers. This is especially acute in sectors with the usual checklist of PE target characteristics – namely fragmented markets ripe for consolidation, structural growth drivers, recurring (or, at least, repeat) revenues, and perceived ability to enhance margins through digital transformation.

Free lunches

Of the 10 most active PE-backed acquirers in 2025, three are vehicles in wealth management, two are in accountancy, and two operate in testing, inspection, certification and compliance. One in each of insurance broking, nurseries, and pubs complete the list.

Our data suggests that PE first tested out buy-and-build-led multiple expansion within the wealth management industry. Fragmented – with sticky income streams and an increasingly taxing regulatory burden – these independent firms presented an ideal set of circumstances for consolidation. Huge numbers of M&A projects have since been executed by groups like Perspective (85 deals), Fairstone (77) and Evelyn Partners (25), backed by PE from the UK, the US, and western Europe.

The M&A market in wealth management is now so mature that consolidators are being consolidated. This provides further efficiencies and the scale required to be on the radar of foreign (especially US) acquirers.

Our analysis of multiples paid for wealth management and independent financial advisory firms clearly illustrates that the strategy has worked. While nano cap business (under £2.5m EV) average just over 6x EBITDA, £50m-£250m mid-cap businesses average 10.6x.

To understand which SME multiples may start to rise, as well as where M&A activity will likely be hot, you could do worse than look at those sectors where large cheques have been deployed by the buyout groups. That capital will find its way, via these platforms, into smaller owner-managed businesses.