Private Equity in Accounting: A Double-Edged Sword or Game-Changer?

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Hi everyone,

The talk around PE entering the accountancy sector isn’t all that new but has been gaining more and more traction lately.

Exciting and polarizing as it is, the impact of PE continues to grow, especially when you come to know that PE firms completed over 400 deals in the accounting and finance sector in 2022.

This Financial Times article highlights the shift by the Big Four and large mid-tier firms towards serving bigger clients that has created opportunities for smaller PE-backed firms to capture the lower mid-market and mid-market segments.

So, regardless of the side of the spectrum, all firms face the possibility of a PE buyout.

Firstly, let's talk about what this really means. Private equity firms are buying out accountancy practices, injecting much-needed capital, and driving changes that promise growth. But is it all positive? Let's dig a little deeper.

On the plus side, PE investment brings substantial resources. This influx of capital can help firms upgrade their technology, expand services, and even attract top talent.

A report by Deloitte reveals accounting firms backed by PE expanded their services by 35% within 3 years of investment. Just imagine transforming your practice with the latest software or hiring experts who can offer new, innovative services to your clients.

Sounds appealing, right?

Yet, there's more to the story. While PE can drive operational improvements, it often comes with a push for profitability. This pressure can lead to cost-cutting measures that may affect the quality of service.

Moreover, the cultural shift can be jarring. Traditional accountancy firms value their independence and unique culture. The corporate approach of PE firms might clash with this, leading to a potential identity crisis within the firm.

EY's failed attempt to split its audit and consulting business highlighted the tension between traditional partnership models and the potential for external investment to drive growth.

Then, client perception is also key. Trust runs through the rich vein of accounting business and clients might view PE-backed firms as being more focused on profits than their needs. Maintaining transparency and emphasizing continued commitment to client service is essential to mitigate this risk.

To this end, rollups can prove to be a sound acquisition strategy.

KPG’s successful expansion is a great case in point. By acquiring smaller firms and integrating them under a unified brand, KPG has more than doubled its revenue over five years, maintaining strong margins and strategic debt management.

And that brings us to the next challenge: Debt. PE deals often involve significant borrowing, increasing financial risk. During economic downturns, this debt can become a heavy burden, putting the firm’s stability at risk.

Despite these challenges, the opportunities are significant. PE investment can fuel growth, foster innovation, and enhance client offerings. Bain’s PE Outlook reported PE-backed accounting firms saw revenue rise by 20-30% in the first two years post-investment, but that’s down to successfully managing the risks.

So how can accountancy firms navigate successfully through this change?

My take is that accountancy firms should maintain a strong focus on their core values, communicate transparently with clients, and implement strategic financial planning to manage debt.

Ultimately, embracing innovation while safeguarding client trust and service quality will be key to leveraging PE investment effectively. The 2023 Edelman Trust Barometer revealed that 68% of clients are likelier to trust accounting firms that invest in innovative technologies and client services.

So, there is hope after all!

All in all, private equity in the accountancy sector is a double-edged sword with significant implications for the future. It offers tremendous potential but requires a careful, balanced approach. For firms considering this path, thorough due diligence and a clear strategy are vital.

Go in-depth on PE in accountancy in our blog, and get all the insights to help you future-proof your practice.

Visit our website here to learn how Samera Global can support your firm's growth and efficiency.

Until next time,

Arun

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