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Is private equity reshaping the profession?

Author: ICAEW Insights

Published: 27 Sep 2023

The partnership model has long been the standard for accountancy firms, but with far-reaching challenges such as AI and staff retention looming over the profession, could PE investment be an alternative solution?

Reports that US private equity (PE) group TPG Capital approached EY about buying a stake in its consulting arm has highlighted how new challenges could potentially reshape the traditional structure of accountancy firms. 

Although EY reportedly declined the PE advance to break up the Big Four firm, other accountancy firms of different sizes on both sides of the Atlantic are beginning to accept private equity investment in a radical change of tack.

In the UK, Azets Group has received a considerable amount of private equity investment, creating an interesting model among accountancy firms. In June, it secured another round of PE investment from PAI Partners. On completion of the deal, PAI will hold an equal and co-controlling stake in Azets alongside current owners Hg, a PE investor in European and transatlantic software and services businesses.

Azets was formed by Hg six years ago, in response to the growing digitalisation of financial compliance processes for SMEs. Since then, the group has grown significantly.

At the time, Group Chief Executive Officer Chris Horne said: “To gain backing from another world-class investor is testament to this evolution and will enable us to deliver on future opportunities that will help us scale and support our thousands of clients and colleagues globally.”

Hot on the heels of Azets securing another round of PE investment, top 10 accountancy firm Moore Kingston Smith (MKS) became the first in the UK to win PE investment backing and retain its partnership structure.

MKS will receive an undisclosed amount from the Dutch private equity group Waterland in a deal marking the first time a UK limited liability partnership has attracted backing from international investors, while maintaining its legal structure. Observers say the deal could pave the way for an influx of capital into the professional services sector.

Last year, Waterland also acquired a stake in top 20 UK firm Cooper Parry, but it didn’t retain its LLP status, instead becoming a corporation post-deal. This month, though, the PE-backed Cooper Parry acquired rival Haines Watts London, tripling its size over the past year. 

On the deal’s announcement, Cooper Parry’s CEO Ade Cheatham, said: “We now have genuine momentum and can demonstrate real strength and scale in London. What’s more, with more strategic hires, specialist team lifts and continued geographic expansion via M&A, we’ve created a platform for future growth.” 

This latest deal is due to complete at the end of 2023.

Changing shape

The traditional partnership business model is under pressure to evolve as firms struggle to invest and attract new recruits, and where thousands of partners can often delay decision-making.

However, the inflow of PE investment has underlined the possibility of UK accountancy firms becoming a growing target of private equity money while retaining the prized business model where partners share out profits between themselves.

PE investors will have to convince all partners that it is a good thing for them to be giving money to the firm and it would benefit them all. That includes partners who were maybe at the age of 50/55 and thinking about retiring soon, and partners who maybe are in their early 30s and have 25 years of work ahead of them. So, the work that is being done around PE and governance models is potentially quite pioneering.

Maureen Penfold, Managing Partner at MKS, said at the time of its deal: “This is an exciting development in Moore Kingston Smith’s ongoing growth strategy, which will allow us to invest further in our own business and M&A strategy and really take our ambitious growth plans to the next level, while maintaining our partnership ethos and firm culture.

“The professional services landscape is changing rapidly, and we want to be among the firms leading the way. The financing we receive from Waterland will allow us to expand our capabilities to clients by offering additional service lines as well as more comprehensive solutions, with new opportunities for our talented people and teams,” she said.

US accountancy market evolving fast

In the US, accountancy firms have long been a target of private equity cash. In August, BDO, the sixth-largest professional services firm in the US, ditched its traditional partnership structure to become a corporate model following the arrangement of a $1.3bn debt deal with private investors Apollo Global Management.

The US’s PE approach to investing in accountancy firms is, however, viewed by some as clunky, whereas more subtlety and flexibility is emerging in the European approach.

While in the UK, consolidation among smaller firms is beginning to attract more PE investment, there has been no change from the partnership structure among the large firms, so far.

But will that change in the near future as firms grapple with potential regulatory change, struggles to recruit and investment in advanced technologies?

Julie Corkish, Head of Practice, ICAEW, says there are very mixed views on the influx of PE investment in UK accountancy currently, with some firms curious while others are resistant – but they are all reviewing the potential because of the multifaceted structural pressures they face.

“Most firms say that it’s not off the agenda and they may be open to discussions, potentially,” Corkish says. “A lot of what's driving that is, for example, the challenges right now around retention and funding partners’ retirement, advances in technology and the need to advance net-zero goals. Firms need investment; where they get that funding from is open for debate.” 

Indeed, MHA partner Andrew Moyser says: “There’s certainly been a lot of activity over the past few years. And I think there are a lot of discussions probably still ongoing with firms that perhaps have not made the jump. A lot of people are waiting to see what happens with some of those PE investments. 

“Some of the more recent ones perhaps have the opportunity to do something a bit different in terms of pulling firms together, bringing in more acquisitions. If that goes well we might find other firms would reconsider the PE opportunity.”

Sustainability in all its forms is increasingly critical, too.

Graham Dale, Head of Public Affairs, ICAEW, says: “This debate is about leadership, thinking about the future, thinking about the place in the new marketplace, the challenges ahead, sustainability, net zero. For firms, they need a sustainable future and they need to be investing in a new business model.”

What is clear is that there is a real evolution in what firms’ business models and service lines look like and what skills and infrastructure are required to deliver that. Lots of factors are coalescing at the same time.

One of the reasons that some firms may be reluctant to go down this route isn’t just the loss of identity of a partnership model, but also because there's been a history of failure. We only have to look at what happened with Vantis, which went on a spending spree and then ultimately failed, to understand some partners’ reticence. 

Both sides, firms and PE investors, will have to move carefully in order to understand how negotiations can be mutually beneficial with a little innovative thinking and flexibility.

“Firms do need to be aware, though, that they should be speaking to ICAEW about potential changes to their firm structure as early as possible to ensure any changes do not put them on the wrong side of our regulations,” Corkish adds.

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