Private equity investors eye up accountancy
Private equity investment into the accountancy profession has become a parallel movement on both sides of the Atlantic. And it looks to be accelerating.
During the past year, private equity (PE) investors bought into three top 100 US Certified Public Accountant (CPA) firms: EisnerAmper, Citrin Cooperman and Schellman.
In many jurisdictions the laws require a majority (or, in Delaware, Hawaii, New York, Virgin Islands and Northern Mariana Islands, all) of the equity owners of firms undertaking audit work, to be certified public accountants. Dividing partnerships into two entities, one for audit and the other for advisory business, opened the doors to this influx of new money.
The three pioneering firms have all prospered under their new owners and revamped structures, according to industry insider Allan Koltin. As a result, he is anticipating a record year for CPA firm M&A: “Don’t be surprised if more mergers among the Top 500 firms take place in the next 12 months than any 12-month period in the history of the profession.”
The Covid pandemic is regularly identified as an accelerating factor for the rapid changes taking place within accountancy and the PE investment trend is no exception. Many older accountants struggled to help all their struggling clients and prepare support loan applications. And the technology transformation that took hold during 2020–21 increased pressure on practice owners to go digital.
Exit plans
At all levels of the profession, firm owners who could see these trends but couldn’t afford or didn’t want to accommodate them began to focus more clearly on their succession and exit plans. The result has been a visible increase in merger and acquisitions – ideal conditions for PE investors who see accountancy as a safe haven for their funds in difficult times.
“A lot of people have been approached, I expect,” commented Strategy& consultant Sam Edwards. “To some it’s intrusive and not the traditional way of doing business, but others might see value in having a viable exit route at the end of their career. A retiring partner looking to cash out may find that their natural successor has difficulties funding that, so private equity could be a way to help.”
Strategy& is a specialist UK subsidiary of PwC that has done a lot of due diligence work over the past two years for PE clients. SME accountancy is attractive to investors due to its high degree of client stickiness and repeatable revenues. “The investors see the opportunity to benefit from economies of scale and cross-selling adjacent services,” Edwards said.
UK track record
The UK is several years ahead of the American market on this front. Private equity group Hg Capital has been investing heavily in both accounting technology developers (Dext, IRIS etc) and their customers on the practice side for more than six years.
Hg set down its first marker in 2016 when it bought a chunk of the Cogital Group, which embarked on a spree of nearly 60 practice acquisitions. Now known as Azets, the consolidated group has moved into the top 10 on UK practice league tables.
Interest revives
After a relatively quiet period during the pandemic, the private equity sector itself has grown and more funds have come in on the heels of the first-wave investors, for example with PE house Tenzing getting in on the action at Jeffreys Henry.
“Over the past six months we’ve been inundated with enquiries and having conversations with PE houses that would like to get into the area. It’s not a case of activity dying down. There will continue to be a lot of investment,” said Edwards.
The prevailing investment model is what Edwards calls the “buy and build” platform, where investors look for an entity with reasonable scale and concentration in a specific region.
“Generally a private-equity investor getting into that space wants to acquire something with a bit of meat on it. Azets is an excellent example. Having built up £150m in EBITDA [earnings before interest, taxes, depreciation, and amortization], they have grown the organisation with lots of bolt-on acquisitions over time.”
There has also been a lot of activity at lower levels of the UK market, with the Xeinadin Group assembling a portfolio of around 120 smaller firms. Earlier this year, Xeinadin attracted a “significant” minority investment from Exponent, a private equity firm with experience in professional services.
Taylorcocks, meanwhile, restyled itself as the TC Group in 2018 and undertook a series of acquisitions with private backing to fuel its growth strategy. And private equity business Cow Corner bought into Sussex firm Galloways with a view to making it the “fastest-growing and largest accountancy firm in the country”.
“It wouldn’t surprise me if the UK is more developed than North America,” commented Edwards. “Both remain very fragmented markets with similar structural fundamental reasons why capital would be interested in investing and consolidating.”
UK accountancy market consolidation has been driven as much by the long-term HMRC drive to online tax-filing (aka Making Tax Digital). Without this additional stimulus, US private equity moves into the profession were more likely to focus on regional practices, Edwards suggested.
The digital imperative
There is another factor at work here that goes hand-in-hand with digital transformation and investment. Rosenberg Associates, whose annual survey highlighted increased PE-fuelled M&A activity in the US this year, pointed to the rise of advisory services as a key reason for private-equity interest in the profession.
In a blog setting out advice for firms looking to make themselves attractive to investors, the industry consultants listed the state of the seller’s technology and work processes among the criteria that buyers were likely to assess.
“If the seller’s quality is far below that of the buyer, the additional work required to perform client work that meets the buyer’s standards will render the seller’s profits undesirable,” the blog advised.
Back in the UK, Edwards also had some advice for prospective sellers: “There are a number of things you can do as a business to get ready and be an attractive investment opportunity. One is the quality of internal data and how you record revenues. PE houses want to understand revenue segmentation by service and we find quite often that can be a challenge, even in large practices. It’s interesting that accountants are seen as the most trusted business advisers, but they are not always the best business owners themselves.”
Edwards is speaking at the AccountingWEB Live Expo on 1 December on strategic planning techniques you can use to turn your vision into reality. “Our segment at AccountingWEB Live Expo will help demystify private equity’s ambitions and help attendees maximise their value if considering such an option,” he said.
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John Stokdyk sadly passed away in June 2023. He had been with the site since 1999, rising from news editor to editor in chief, global editor and head of insight. As a roving editor, he investigated the profession's use of technology around the world. He devoted his spare time to technology history and an oddball collection of stringed...
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Very interesting article. I wonder if Mr. Fink is involved in some way. Maybe it's the US way of getting more control of UK and European business to oust the Chinese and Russians or am I being paranoid?