Private equity's increasing interest in the accounting sector has sparked discussions about the long-term implications of such investments. Jason Berg, a partner at Lovell Minnick Partners, provided insights into this trend during an interview with Mergers & Acquisitions, highlighting several key reasons for the surge in private equity (PE) activity. He noted that the accounting industry, comprising around 45,000 firms that are predominantly founder-owned, represents a significant and fragmented market with a recurring revenue model. Berg stated, “It’s an industry that’s very large. It’s got a massive, addressable market... It’s mission-critical and it’s an industry going through some changes.” The current state of many accounting firms, characterised by outdated technology and offshored tasks, presents opportunities for PE firms to streamline operations and enhance profitability.
The allure of technology-driven efficiencies is prompting a shift from traditional labour reliance. Berg remarked that while offshore hiring has been a cost-saving measure, advances in technology are proving to be even more economical. He described the phenomenon succinctly: “Robots are taking the job of the Indians who took your job,” suggesting that automation is replacing roles that were once fulfilled by lower-cost offshore employees.
Despite the attractiveness of accounting investments, the endgame for PE firms remains a viable exit strategy. The current strategy involves making targeted acquisitions designed to enhance service offerings and diversify revenue streams. The estimated total global private equity exits amounted to approximately $460 billion in 2023, though the pace has encountered a slowdown in the first half of the year, with a reported decline of 26% compared to the previous year. This trend, as noted by Paul Aversano, a managing director at M&A advisory Alvarez & Marsal, indicates that "many of these firms are probably holding these investments, hoping to kick the can down the road for better days."
As the landscape of private equity continues to evolve, accounting firms backed by PE are also finding themselves in a challenging environment. Aversano observes that “the days of financial engineering — buy low, sell high — are long gone,” emphasising the necessity for these firms to adopt effective strategies to generate growth, especially amid economic stagnation. The average duration for which portfolio companies are held is now over five years, indicating a shift away from short-term gains towards more sustainable development agendas.
In a notable development, IK Partners announced its investment in Dains Accountants, a prominent firm in the UK, marking a significant collaboration with the management team, which is also reinvesting in the business. Richard McNeilly, CEO of Dains, expressed enthusiasm for the partnership, noting that IK’s experience in buy-and-build strategies would be crucial in leveraging the fragmented nature of the marketplace.
While the future remains uncertain, speculations arise around the actions of larger accounting firms, such as Grant Thornton, potentially seeking acquisitions in the wake of PE-driven consolidation efforts in the accounting sector. The ongoing trend of private equity firms increasingly owning various business sectors raises questions about the broader implications for the economy and society. The Guardian recently illustrated the pervasive influence of private equity, stating, "More and more people... may live almost their entire lives in systems owned by one or another private equity firm." As private equity’s reach expands, its impact on industries, including accounting, could reshape traditional practices significantly.
Source: Noah Wire Services