Interest from private equity firms in the professional services sector has surged considerably, driven by multifaceted factors ranging from stable revenue streams to potential technological advancements. In recent weeks, significant transactions illustrate this trend, culminating in high-profile deals such as the £700 million acquisition of Evelyn Partners' accounting arm by British private equity firm Apax. This latest development follows the mid-November announcement by Bahrain-based Investcorp and Canadian pension fund PSP Investments regarding their takeover of PKF O’Connor Davies, ranked as the 25th largest accountancy firm in the United States by revenue.
This momentum continues with Alabama’s Carr, Riggs & Ingram, which has confirmed the sale of a majority stake to a consortium led by Centerbridge Partners. There are indications that the UK arm of Grant Thornton may also pursue private equity funding, with CVC Capital Partners reportedly interested in acquiring a stake.
The professional services sector, which constitutes 12 percent of the UK’s economic output with a turnover of £277 billion, has become a focal point for private equity investment. James Paton-Philip, a partner at Hill Dickinson, remarked, “The sector is attractive because they are stable, non-cyclical businesses providing reliable workflows and revenue streams.” The sector's established brands and long-term client relationships further bolster its appeal, according to James O’Dowd, managing partner at Patrick Morgan, who added that this structure provides a robust foundation for growth and value creation.
Significantly, the convergence of professional services and technology is stirring interest, particularly in the realm of artificial intelligence (AI). Fiona Czerniawska, CEO of Source Global, explained, “Private equity firms are keen to invest in professional services firms that have a big potential to be transformed by investment in technology,” highlighting AI’s transformative potential in key areas including audit, tax, and consulting.
Despite the prevailing enthusiasm, challenges lurk on the horizon. O’Dowd pointed out potential cultural and operational conflicts between private equity’s profit-driven approaches and the traditional, client-centric ethos of professional services firms. Additionally, the business structures of many professional service firms—primarily limited liability partnerships (LLPs)—pose regulatory hurdles for private equity investment, necessitating conversion into more suitable business models for such investments, as outlined by Sean Lightfoot from Hill Dickinson.
Quality of service, particularly in auditing, is another concern. Czerniawska warned that as private equity seeks to enhance profitability, there may be risks to audit quality, despite a Source Global Research study revealing that 90 percent of audit clients hold positive perceptions of private equity’s role in the industry. Nonetheless, a staggering 98 percent indicated they would consider changing auditors if their existing firm was acquired by a private equity group.
The implications of private equity investments are being closely monitored by regulators. Richard Moriarty, chief executive of the audit watchdog, noted that while the Financial Reporting Council does not oppose private equity involvement, it emphasises the necessity of maintaining and enhancing audit quality amid ownership changes. “Audit isn’t just like any other service market; it has a keen public interest dimension,” he stated, underscoring the importance of collaboration between firms and potential investors.
Looking forward, industry experts anticipate that this trend of private equity encroachment on professional services will not only persist but also escalate. O’Dowd speculated that funders are increasingly targeting firms with substantial growth potential and attractive returns. Czerniawska echoed this sentiment, suggesting that continued opportunities will arise as the cost of capital declines and the benefits of investing in emerging technologies become more apparent.
As private equity continues to infiltrate the sector, it is poised to reshape professional services, leading to the emergence of more agile firms that might provide enhanced compensation and greater influence for both partners and employees.
Source: Noah Wire Services