C- Suite Thought Leadership
Why interest in private equity investment is growing
The past couple of years have seen an influx of private equity (PE) investment into the accounting sector, and it’s a trend that shows no signs of slowing down. Liza Robbins, Chief Executive at Kreston Global explains.
In the UK, the recent acquisition of Moore Kingston Smith by a Dutch PE house has led to speculation that more such deals may follow. Meanwhile in the US, three Top 100 CPA firms received private equity investment last year, with reports circulating that six of the largest US firms are currently in talks with PE players.
However, this kind of activity is not limited just to the big brands, nor solely to these locations – firms of all sizes in many parts of the world are taking the plunge. So, why is this happening now, what does it mean for accountancy firms and what are the key considerations involved in such a step?
Appetite is strong on both sides
Globally, private equity investors are sitting on record amounts of ‘dry powder’ (uninvested capital ready to be deployed) ‐ as much as $2.49 trillion according to S&P Global Market Intelligence. So they are on the lookout for good investment opportunities.
Accountancy is an attractive industry due to its high degree of client ‘stickiness’, which investors like to see because it underpins consistent revenue streams and delivers repeat business. Moreover, the profession’s client base is expanding as it ventures into advisory services, cybersecurity, internal audit, and other related activities, while demand for accountancy services continues to increase as businesses become more complex. These factors give the sector the growth potential that many investors are looking for to add value over time. The accountancy sector also offers numerous opportunities for mergers and acquisitions, enabling private equity investors to establish substantial platforms quickly.
The benefits go both ways. Many accountancy firms find the prospect equally appealing, given that the traditional ownership model, where new partners buy out equity, is facing challenges. Younger professionals are often reluctant to take on significant debt, particularly when they are uncertain about committing to a single firm for decades. At the same time, senior partners are seeking retirement options. These circumstances mean that the door is increasingly open to alternative ways of funding the firm’s future, such as private equity.
Weighing up the pros…
It can be an excellent choice. Accountancy firms need to continue to invest in their people and services if they are to remain competitive. So, they need a solid financial base on which to acquire top talent, deploy cutting‐edge technologies, develop new services, or implement robust environmental, social and governance (ESG) policies, all of which can be capital‐intensive.
For staff, new opportunities can be opened by, for example, creating a more corporate structure, giving them the chance to belong to a larger group and work for a well‐funded firm. For firm leaders, the business can gain access to private equity houses’ extensive strategic and operational expertise.
As all this happens, there can be a positive ripple effect across the entire industry, potentially raising standards, expediting innovation and driving further investment.
Several member firms in the Kreston Global network have recently taken this route. In February, AZ Next Generation Advisory (AZ NGA) purchased a stake in Melbourne‐based member firm McLean Delmo Bentleys, as part of its strategy to create a major accounting and advisory brand in Australia.
UK‐based member firm Duncan & Toplis has just secured private equity investment to turbo‐charge its growth plans, while PE funding has also allowed another UK firm, Mitchell Charlesworth, to consolidate its market presence with other group companies owned by the same investor.
Get it right and the benefits can be substantial. However, it’s worth noting that there are also several significant challenges to navigate.
As with any acquisition, it can be very difficult for existing owners (i.e. partners) to give up control of the firm they have been used to running independently for so long. This can sometimes lead to clashes between the old and new management teams. Other staff may be resistant to the cultural changes that often accompany the transition.
There are also major questions around private equity investors’ exit strategies. Sooner or later they will want to realise their investment but it can be unclear what their endgame looks like. More broadly, this trend could create pressure on smaller firms that don’t have the same access to capital. They may either need to consider selling out or face falling behind the rest of the market. All in all, the possible consequences of widespread consolidation within the industry remain uncertain.
There’s much to think about, and it pays to be prepared. For example:
Assess the firm’s situation and needs
Taking on private equity investment can make sense in a variety of situations. It can provide the financial firepower for modernisation as the impetus to digitise accountancy services and evolve business offerings increases. It can support those who are going for growth via M&A or by entering new markets. It can help those who require support to weather specific business challenges or macro‐economic turbulence. And it can deliver a suitable strategy when it comes to succession planning, giving partners an exit route when the time comes.
However, it’s important to go into such an arrangement with eyes firmly open. Is this the best way to finance business needs, considering the other options that may be out there? How might this kind of investment impact the underlying business model, everyday operations, and firm structure? How much control will partners have to cede and what impact (positive or negative) might that have on the way the firm is run?
Conduct due diligence
To answer all these questions (and more), it’s essential accountancy firms carry out thorough due diligence on prospective investors, in much the same way as they will be doing on the firm. This means looking beyond purely the financial aspects of the deal itself, and thinking about what else the investor can bring to the table, and how the relationship might work in practice. For example, do their values align with the firm’s? Will they respect partners’ knowledge and expertise? How much of a say will they want in decision‐making, and can they offer helpful, complementary skills and guidance? Are they a good cultural fit? Do they ‘speak the same language’ and support business goals?
Those who decide private equity investment is for them will also need to get themselves investment ready to go to the market. This will look different depending on the firm, but it may include re-evaluating pricing models to ensure premium services are being properly charged, that clients are getting value for money and that the right margins are being maintained. It could involve shifting the firm’s emphasis towards higher‐value or more profitable work. Or it may mean seeking out efficiency gains, so that staff can focus on delivering the business plan or spend more time on those higher‐value activities that will boost profitability, generate growth or deliver other strategic goals.
Taking on private equity investment is a big decision, and there can often be strong feelings about it. Objectively, there’s no right or wrong choice – only what makes sense for the firm concerned. However, as this trend develops, it’s a good idea to keep an open mind and stay abreast of what’s happening in the marketplace, who the main players are and what deals have been done. That way, firms will know what their competitors are doing, and what the best approach might be, should an opportunity arise. Forewarned is forearmed, as they say.
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Main image: Liza Robbins, CEO, Kreston Global.