Preparing for private equity

Unlike sectors such as insurance broking and wealth management, professional services firms have historically been pretty resistant to the attractions of private equity (PE) investment. But in the past few years, the number of mid-tier firms entertaining approaches from PE partners has been on the rise.

The latest rumblings in the press include interest from PE firms in Grant Thornton’s UK and Ireland businesses (as well as from its network partner across the pond, Grant Thornton US). And in the recent past, Cooper Parry received a reported £100m from Netherlands PE firm Waterland; Aberdeen-based Anderson, Anderson & Brown and Leeds-based Sagars received £46.5m from August Equity; and SKS Business Services received £48m from Kartesia, a European debt provider, to name but a few. According to the FT, private equity is tipped to own as many as 10 of the 30 largest US accounting firms and might soon be funding their international expansion.

Grant Thornton’s decision to explore private equity options is – for a well-established and apparently flourishing network firm – an interesting one. But the case is clearer for smaller firms, which might be attracted to PE investment for the opportunities it affords to expand service offerings, move into new markets and improve competitive positioning.

Managing partners might well consider this an opportune moment to consider the options available and the potential for growth through PE investment. Some of the issues they should consider are outlined below:

• Scalability: PE investors are looking for firms that can scale their operations efficiently. This means having the infrastructure and leadership in place to support growth.
• Leadership: Some investors believe that the partnership model can restrict growth and are more attracted to firms that have built a strong C-suite. It may be worth considering making this shift if you are seeking PE investment.
• Technology: PE investors value firms that have adopted tech solutions to streamline operations, improve client service and increase profitability.
• Culture: Firms should be prepared to have to integrate new management structures, practices and sometimes even values. It’s important to assess whether or not the culture of a potential investment partner would be a good fit.
• Value: It’s essential to understand your firm’s market value before entering into M&A discussions. There’s a tendency for firms to undervalue themselves, so it’s worth carrying out a professional valuation of your business as you might for a client.

This latest next phase of growth for the accountancy sector is an exciting opportunity for highly ambitious firms. Those who are proactive about preparing for M&A and PE investment will be well-positioned to grow and thrive. However, for those that remain passive, there is a risk of being left behind as the market consolidates around them.