James Fieldhouse
Deal Advisory Partner - M&A
Although not a new phenomenon, the headlines of private equity firms investing into the accountancy sector in recent weeks has generated much interest, debate and commentary within the industry. We explore why private equity is attracted to the accountancy sector and what their involvement might mean for the wider Professional Services industry.
The accountancy sector has shown remarkable resilience, even during economic downturns. Businesses and individuals have typically demonstrated that, even during recessionary periods, there will always be an underlying demand for accounting services, whether for tax support, auditing, or financial planning. This reliable stream of income provides private equity firms and investors with confidence regarding future financial trading performance due to high levels of recurring, re-occurring or repeatable revenues.
There are several positive market factors which continue to support underlying growth within the accountancy sector. With the increasing complexity of financial regulations and further globalisation of business, there is a rising demand for specialised services. Private equity firms see this growth potential and are keen to invest in firms that can capitalise on these opportunities. The sector's growth is further fuelled by the increasing need for advisory services, such as M&A, due diligence, and value creation services. As businesses expand and navigate complex financial landscapes, the demand for expert accounting services continues to rise.
Linked to the above, significant growth potential exists within accountancy firms to drive further revenues and profitability from their existing operations. Value creation strategies tend to range from client growth through share of wallet enhancement, creating better alignment in pricing within and across regions, and cross-selling broader services such as corporate advisory.
Technology is transforming the sector. From cloud-based accounting software to artificial intelligence, new technologies are making accounting services more efficient and effective. The capital provided by private equity should allow these firms to further adopt technology & automation to improve operational efficiency and create opportunities for growth.
The accountancy sector is highly fragmented, with many small and medium-sized firms. This fragmentation presents opportunities for consolidation in order to allow firms to enhance their market share and overall scale. Consolidation through ‘buy & build’ strategies has been at the forefront of private equity deals concluded in recent years, with acquisitions helping to drive scale and growth for investment platforms.
With ‘dry powder’ (i.e. funds raised by private equity firms which remains unspent) still at record high levels, it’s unsurprising that we continue to have discussions with private equity firms regarding other investment opportunities within the wider Professional Services market. Indeed, other Professional Services firms exhibiting similar characteristics to accountancy firms are of the most interest. For example, firms with large levels of recurring or repeatable client income operating in growing verticals or end markets with the potential for consolidation or disruption through service capability or technology.
With ‘buy & build’ firmly on the agenda for a number of the private equity backed accountancy firms, we anticipate that this will lead to consolidation both within the ‘core’ market but also within other advisory services as accountancy firms continue to diversify their service proposition in order to provide a ‘one-stop-shop’ solution offering to their clients.
Whether accountancy, legal or other services we’ve started to see variations to the traditional Partnership model. This is particularly prevalent within the private equity backed providers where the introduction of significant external investment has disrupted the long-established Partnership Agreements and capital distribution methods, with private equity firms often acquiring a significant proportion of the share capital resulting in a re-structure to the traditional reward and incentive mechanism for the Partner group post investment.
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