In recent years, the accounting industry has witnessed a significant influx of private equity (PE) investment, reshaping the landscape and dynamics of firms across the globe. This trend marks a profound shift in how accounting practices are managed, funded, and expanded. In fact, in 2022, private equity investments in professional services firms, including those in the accounting sector, reached an unprecedented $20 billion [1].
Traditionally, accounting firms operated as partnerships, with ownership and decision-making concentrated among the founding partners. However, as the demand for specialized services grew and competition intensified, firms began exploring alternative structures to fuel growth and innovation. This paved the way for private equity firms to enter the scene, offering capital injections, strategic guidance, and operational expertise to fuel expansion and maximize profitability.
Current Scenario
Did you know, private equity firms have acquired ownership interests in 5 out of the top 26 accounting firms in the United States in under three years?
In the current landscape, PE investment in the accounting industry continues to gain momentum, driven by factors such as market consolidation, technological innovation, and increasing client demands for specialized services.
Very recent examples of prominent PE-backed accounting firms include Grant Thornton, 7th largest firm on the Inside Public Accounting Rankings, which received significant investment from New Mountain Capital [2], a leading global investment firm. Similarly, in February Hellman & Friedman and Valeas Capital Partners bought a major stake in Baker Tilly, underscoring the growing interest of PE investors in the industry [3].
5 Things to Know Before Considering PE Investment
Pitchbook reports, in 2022, PE firms completed over 400 deals in the accounting and finance sector, showing a notable rise from previous years [4].
With the increased action of PE firms to invest in accounting businesses, accounting leaders and firm owners are under pressure to adapt to rapid changes, optimize operational efficiency, and differentiate themselves in a crowded marketplace. Against this backdrop, understanding the key implications of PE investment is essential for accounting leaders and firm owners to navigate successfully.
Here are 5 key starters to know before taking this path:
Capital Infusion for Growth and Expansion
PE investment provides accounting firms with access to substantial capital resources, enabling them to pursue growth opportunities, expand service offerings, and enter new markets. This infusion of funds can fuel organic growth initiatives, such as hiring additional talent, investing in technology infrastructure, or digital marketing efforts to attract new clients.
Action Points: To leverage capital infusion effectively, accounting leaders should prioritize strategic planning and identify areas where additional investment can drive sustainable growth. This may involve conducting a comprehensive assessment of market trends, client needs, and competitive dynamics to inform investment decisions and maximize ROI.
Strategic Guidance and Operational Expertise
Beyond financial resources, PE investors bring strategic guidance and operational expertise to the table, leveraging their industry experience and networks to support firms in optimizing performance and enhancing value. This may involve implementing best practices in areas such as business development, talent management, technology adoption, and operational efficiency.
Action Points: Firm owners should actively engage with PE partners to capitalize on their strategic insights and operational know-how. This could entail fostering open communication channels, soliciting feedback on key business initiatives, and collaborating closely to execute growth strategies effectively.
Focus on Profitability and Value Creation
PE investors are inherently focused on driving profitability and maximizing shareholder value, often through rigorous performance metrics and financial targets. This emphasis on financial discipline can help accounting firms streamline operations, improve cost efficiency, and enhance overall profitability, ultimately benefiting stakeholders and investors alike.
Action Points: Accounting leaders should prioritize profitability and value creation initiatives, aligning business objectives with the expectations of PE investors. This may involve implementing performance management systems, monitoring key financial metrics, and proactively identifying opportunities to enhance operational efficiency and drive bottom-line growth.
Potential Changes in Ownership Structure and Governance
PE investment may lead to changes in the ownership structure and governance of accounting firms, as new stakeholders and investors join the fray. This shift can introduce complexities in decision-making processes, organizational dynamics, and long-term strategic planning, requiring firm owners to navigate carefully to preserve culture, autonomy, and client relationships.
Action Points: Firm owners should proactively address concerns related to changes in ownership structure and governance, fostering transparency, trust, and alignment among all stakeholders. This may involve defining clear roles and responsibilities, establishing effective communication channels, and maintaining a strong focus on client-centricity amidst organizational changes.
Did You Know?
PE Investment Surge: In 2021, private equity firms invested over $30 billion in accounting and financial services globally, reflecting a 20% increase from the previous year. (Source: Financial Times – Private Equity Investment Trends)
Global Influence: North America accounts for approximately 60% of all private equity investments in accounting firms. (Source: PwC – Global PE Market)
Job Growth: Firms receiving PE investment often see a 15-25% increase in employment within the first three years. (Source: Harvard Business Review – Impact of PE on Employment)
Technology Integration: 70% of PE-backed accounting firms prioritize advanced technology adoption, including AI and blockchain. (Source: Forbes – Technology in PE-Backed Firms)
Profit Margins: Private equity involvement can boost profit margins of accounting firms by up to 15% due to enhanced operational efficiencies.(Source: McKinsey & Company – Profit Margins in PE Firms)
Balancing Growth Objectives with Client Service Excellence
While PE investment can fuel growth and expansion initiatives, accounting firms must strike a delicate balance between pursuing strategic objectives and delivering exceptional client service. Maintaining a client-centric focus is paramount, as satisfied clients are the lifeblood of any successful accounting practice. Firm owners must ensure that growth initiatives do not compromise service quality or dilute the firm’s reputation.
Action Points: Accounting leaders should prioritize client service excellence as a core tenet of their growth strategy, embedding a client-centric culture across all aspects of the firm’s operations. This may involve investing in training and development programs, soliciting client feedback, and continuously refining service delivery processes to exceed client expectations and foster long-term loyalty.
Conclusion
As the landscape continues to evolve, accounting leaders should reflect on the broader implications of PE investment. How can they leverage the influx of capital to not only expand but also innovate and lead the industry in new directions? What strategies can be implemented to ensure that growth initiatives enhance, rather than compromise, client service excellence? And ultimately, how can accounting firms maintain their unique identity and values amidst the pressures and opportunities presented by private equity?
Looking ahead, the influence of private equity in the accounting sector is likely to intensify. However, it’s crucial for firm owners to remain vigilant and not lose sight of their core values and client relationships. The challenge will be to balance the drive for profitability and growth with maintaining the integrity, trust, and quality that clients expect from their accounting partners.
Bibliography
- https://pitchbook.com/news/reports/2022-annual-us-pe-breakdown
- https://www.businesswire.com/news/home/20240315681674/en/Grant-Thornton-to-accelerate-business-strategy-with-investment-from-New-Mountain-Capital
- https://www.pehub.com/inside-the-deal-why-hf-and-valeas-invested-in-baker-tilly/
- https://pitchbook.com/news/articles/private-equity-trends-us-2022
Reviewed By:
Arun Mehra
Samera CEO
Arun, CEO of Samera, is an experienced accountant and dental practice owner. He specialises in accountancy, financial directorship, squat practices and practice management.
