Private Equity's Growing Interest in Accounting Firms Signals Shift in Professional Services Landscape

The professional services sector is witnessing a significant transformation as private equity (PE) firms increasingly invest in U.S. accounting firms. ¹ ² This trend reflects a strategic response to the need for substantial capital infusion to enhance technology, expand services, and attract talent amid a shrinking pool of certified public accountants (CPAs).¹ ² The influx of PE capital is reshaping business models within the accounting industry and has broader implications for private markets and the future of professional services.¹ ²

Recent Acquisitions Highlighting the Trend

In a series of notable transactions, several large U.S. accounting firms have attracted significant investments from private equity firms:

• PKF O'Connor Davies Acquisition¹

  • Investors: Bahrain-based Investcorp and Canadian pension fund PSP Investments.

  • Firm Rank: 25th largest U.S. accounting firm by revenue.

  • Objective: Utilize the capital to acquire smaller rivals and invest heavily in technology, including artificial intelligence tools.

• Carr, Riggs & Ingram (CRI) Stake Sale¹

  • Investor Group: Led by Centerbridge Partners, managing $40 billion in assets.

  • Firm Rank: 23rd largest U.S. accounting firm.

  • Purpose: Accelerate mergers and acquisitions, expand geographically, and introduce new services.

Other significant investments include:

• Baker Tilly²

  • Investors: Hellman & Friedman and Valeas Capital Partners.

  • Firm Rank: 10th largest U.S. accounting firm.

  • Transaction Details: Sold a controlling stake, reportedly for $1 billion covering just over 50% of the firm.

  • Strategic Goals: Invest in technology, pursue mergers, hire new talent, and aim to reach $5 billion in revenue within five years.

• Grant Thornton's U.S. Operations¹ ²

  • Investor: New Mountain Capital, with additional investments from CDPQ and OA Private Capital.

  • Firm Rank: 7th largest U.S. accounting firm.

  • Objective: Enhance technology and service offerings, leveraging PE capital for growth.

Drivers Behind PE Interest in Accounting Firms

The surge in PE investments is driven by several key factors:

Capital Needs for Technology and Growth

Accounting firms require substantial capital to invest in advanced technologies to remain competitive. Traditional partnership models often lack the financial resources necessary for:

• Technology Upgrades: Implementing digital software services and artificial intelligence tools to automate routine tasks.¹ ²

• Expansion Initiatives: Funding mergers and acquisitions to grow service offerings and geographic reach.¹

Talent Acquisition and Retention Challenges

The industry faces a shrinking talent pool due to:

• Declining CPA Candidates: An 18% drop in accounting degrees awarded and a 32% decline in CPA exam passers from 2016 to 2022.²

• Competitive Job Market: Younger professionals are attracted to careers in investment banking, data analytics, and cybersecurity.²

PE investments enable firms to:

• Restructure Compensation Models: Offering equity and faster vesting schedules to appeal to younger talent.²

• Provide Attractive Exit Strategies: For aging partners nearing retirement, PE capital offers liquidity and succession planning.²

Industry Consolidation Opportunities

• Fragmented Market: The accounting sector's fragmentation presents opportunities for consolidation and economies of scale.¹ ²

• Strategic Growth: PE firms can facilitate mergers and acquisitions, creating larger entities capable of competing more effectively.¹

Implications for Private Markets

The trend of PE investment in accounting firms has several implications:

Shift in Ownership and Financing Models

• Alternative Practice Structures: Firms are adopting new structures to allow outside investment while complying with regulatory requirements, especially for audit services.¹ ²

• From Partnerships to Corporations: Transitioning from traditional partnerships to corporate models enables access to external capital.²

Regulatory and Ethical Considerations

Concerns arise regarding:

• Auditor Independence: Potential conflicts of interest due to PE ownership could compromise the objectivity of audit practices.²

• Professional Standards Compliance: Ensuring that profit motives do not overshadow the commitment to ethical standards and public trust.²

Long-Term Investment Perspectives

• Stable Cash Flows: Accounting firms offer consistent revenue streams, attracting PE firms interested in long-term investments.¹ ²

• Expansion of Lucrative Services: PE backing can accelerate growth in advisory and tax services, enhancing profitability.²

Market Analysts' Perspectives

Opinions on PE investments in accounting firms are mixed:

Optimistic Views

• Jeff Ferro, CEO of Baker Tilly²

  • Asserts that PE will change the industry "for the good," providing necessary capital for competitiveness.

  • Emphasizes plans to reach $5 billion in revenue within five years through growth and acquisitions.

• Charles Weinstein, CEO of Eisner Advisory²

  • Notes that PE investment has led to increased skilled personnel and expanded services.

  • Highlights minimal day-to-day impact on partners, with 98% experiencing no significant changes.

Cautionary Opinions

• Paul Munter, SEC Chief Accountant²

  • Expresses concerns about auditor independence and adherence to professional standards in the context of PE ownership.

  • Warns firms to prioritize their "public watchdog role" over profit motives.

• Francine McKenna, CPA and Journalist²

  • Worries that focusing on lucrative advisory services could divert resources from essential audit practices.

  • Suggests that the quality of audits may suffer if firms prioritize profitability over professional responsibilities.

Challenges and Considerations

The industry must navigate several challenges as it adapts to PE investments:

Talent Shortage and Recruitment

The decline in interest among younger professionals in pursuing accounting careers poses a significant challenge. With fewer accounting graduates and CPA candidates, firms must innovate to attract talent.² Competitive compensation, faster career progression, and opportunities for equity ownership are strategies being employed to make the profession more appealing.

Technological Adaptation

• Investment Requirements: Adopting AI and automation technologies necessitates significant capital outlay.²

• Competitive Necessity: Staying technologically advanced is crucial for firms to remain relevant and efficient in a rapidly evolving market.¹ ²

• Operational Efficiency: Technology can automate mundane tasks, allowing professionals to focus on higher-value services.²

Cultural and Structural Shifts

The traditional partnership model is undergoing transformation. Younger professionals are less willing to wait decades for partnership benefits, prompting firms to restructure compensation and ownership models.² This cultural shift aligns with the expectations of a new generation seeking immediate rewards and growth opportunities within their careers.

Conclusion

The influx of private equity into the accounting sector signifies a transformative period for professional services. While PE investments provide essential capital for growth, technology upgrades, and talent acquisition, they also introduce complexities related to regulatory compliance and professional ethics. The accounting industry must balance the advantages of PE capital with the imperative to maintain auditor independence and uphold professional standards.

As accounting firms navigate these changes, the impact on private markets will be significant. The trend reflects a broader shift where PE firms are seeking stable, long-term investments with consistent cash flows and growth potential. The future of the accounting industry will depend on its ability to adapt to these investments while preserving the integrity and trust that are foundational to the profession.

Quick Hits:

• Fed’s Preferred Inflation Measure Remained Elevated in October

• U.S. Drugmakers Are Breaking Up With Their Chinese Supply-Chain Partners

• Musk, Ramaswamy Want Federal Workers in the Office Full Time
  

Follow Us:

𝕏: https://x.com/BuysideJournal

_{1. Financial Times, Private equity investors buy US accounting firms PKF O’Connor Davies and CRI, 2024.}

_{2. Forbes, Why Private Equity Is Rushing To Buy Up Accounting Firms, 2023.}

_{The content herein is solely for informational purposes and should not be viewed as investment or any other advice or a current or past recommendation, or an offer to sell or the solicitation to buy securities or adopt any investment strategy. Certain of this material has been generated by an artificial intelligence language model, ChatGPT, which has been prompted to provide topical finance-related articles. The articles herein may not reflect the most current news, events, or developments. While we strive for accuracy, there may be limitations, inaccuracies, or biases present, and The Buyside Journal (including, for the avoidance of doubt, its affiliates) assumes no liability for the content herein and does not guarantee the accuracy, adequacy or completeness of such information (and does not undertake any duty to correct or update such information). Readers are encouraged to independently verify the information herein and consult with professionals for specific advice or information. Predictions, opinions, and other information contained herein are subject to change continually and without notice of any kind and to the extent accurate initially may no longer be true after the date indicated. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements.}