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Will private equity set its sights on accounting firms after the Baker Tilly deal?

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Private equity firms are sitting on an estimated $2.6tn of investors’ cash that they need to spend on new deals. The question is: what on earth are they going to do with it all?

One possible answer came on 5 February, when US accounting firm Baker Tilly said it was selling a majority stake to PE firms Hellman & Friedman and Valeas Capital Partners. The investors are putting in around $1bn, making it the biggest PE deal in the accounting sector to date.

Three of the top 30 accounting firms in the US have sold stakes to PE firms over the past couple of years and more are said to be in talks. Last year, EY rejected an approach from TPG to invest in its consulting division, following its failed plan to split itself.

Yet these are a tiny proportion of the thousands of accountancy firms that are potential targets for PE. Some industry insiders believe the Baker Tilly deal will mark a step change in PE investment in accounting and in professional services more broadly.

Baker Tilly faces challenges common to many professional services firms. It has a steadily growing and profitable business, but is also capital-constrained. Most of its profits go back to partners and it has hefty long-term liabilities in terms of retirement obligations to former partners. This restricts its ability to make big investments in both technology and acquisitions.

The investment from the PE firms in Baker Tilly will enable it to buy out its obligations to former partners. The company will also have the firepower for deals as it seeks to join the mid-tier of large US accounting firms below the Big Four.

Many industry leaders think the traditional partnership model has lost some of its attractions for employees. These days, few new recruits expect to spend their entire career in the same firm or even the same industry. Changing the partnership model with its very long-term rewards and bringing in outside capital can give firms greater flexibility in the war for talent.

PE investors are attracted to accounting firms as they have the sort of ‘sticky’ revenue they like. The firms’ need for investment in technology and the scope for consolidation in a highly fragmented industry also raise the prospect of attractive medium‑term returns on capital.

These same dynamics apply in the UK. While there has been relatively less PE investment than in the US, bankers are now expecting a surge in deals.

There are a couple of dozen accounting firms in the UK that have PE backing. One of the largest is Azets where PE firm Hg has financed an acquisition spree over the last eight years. The deals, including Covent Garden-based Blick Rothenberg, have increased combined turnover to about £700m a year. That puts it in the top 10 of UK firms.

Dutch PE house Waterland has invested in two UK accounting firms: Moore Kingston Smith and Cooper Parry.

Meanwhile, London-based Tenzing has backed new firm Gravita, which aims to use technology to become a leader in accounting for SMEs.

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Gravita’s chair David Silver, who was formerly head of European investment banking at mid-market investment bank Baird, says Baker Tilly’s announcement means an increase in deals is inevitable.

“There are lots of rumours around some of the larger accounting firms and some PE firms are looking at the sector for the first time,” he adds.

There has also been PE investment in the legal sector, including last year’s £342m acquisition of Manchester-based DWF by Inflexion. DWF was one of the handful of law firms that went public after restrictions were lifted in 2012. In 2022, Mishcon de Reya pulled a planned flotation that would have made it the world’s biggest quoted law firm. The London IPO market is still becalmed, so PE may be more attractive to firms that want outside investment.

Some commentators question how easy it will be for PE investors to exit investments in professional services firms. But bankers suggest it will not be that different from other sectors even if the firms have retained some element of partnership.

One route would be to sell on to other PE firms. Hg did this in June, passing on half its stake in Azets to PAI Partners. Silver thinks many of the exits could come through consolidation between PE-backed firms, as has happened in fund administration.

How big could this get? Some sceptics in professional services firms reckon it will remain a bit of a niche. They argue that having outside investors is at odds with the longer-term, client-centred approach of top accountants and lawyers, most of whom make a very nice living from the existing model.

Perhaps. But then that’s what people said about the old merchant bank partnerships — and look what happened to them.

To contact the author of this story with feedback or news, email David Wighton

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