Recent deals suggest that private equity has its sights well and truly trained on the UK accounting sector for guaranteed growth in a slow market. While it has long been a successful player in the US small- and mid-tier accountancy market, conditions haven’t been so favourable in the UK - until now.

“The dynamics of the market have changed quite a bit lately,” says Steve Heathcote , Chief Executive Officer of Prime Global - a network association of advisory and accounting firms. There’s a greater appetite for investment - from both sides. He puts the hunger down to a range of factors: the greying of the industry, issues with recruitment and long-term loyalty, and the growing number of complex businesses needing more capable, sizeable accountants.

Market dynamics changing

“Partners are getting older,” he says, “and there isn’t a particularly large pool of people with the funds or the will to buy them out so they can retire.” In addition, “there is a real lack of accountants coming through ready for recruitment and people aren’t staying at firms as long as they used to. This means the sector is ripe for the implementation of technology, particularly automation, in some of the lower value work. That takes the pressure off headcount.” But, he points out, many of these smaller accounting firms don’t always have the money to invest in new technology, nor the knowledge to transform successfully. “Private equity has both in abundance,” says Heathcote.

So if accounting firms might need private equity, why might private equity want to reciprocate any overtures? It turns out accounting businesses are very appealing investments. Liza Robbins, CEO at Kreston Global, an accounting firm, explains why: “private equity has a lot of dry powder from the lower investment pandemic years and they are looking for businesses with consistent revenue streams, ‘sticky’ clients, and repeat business. Accountancy delivers all that.” It’s a sector with a lot of headroom to expand too, with smaller accountancy firms taking on more internal audit, advisory, and cyber security work. And it’s a sector where a fairly minimal application of technology can make a big difference. All of this has piqued private equity’s interest.

There’s also the opportunity for them to drive consolidation for even better returns. “Some private equity firms,” says Heathcote, “are looking to buy into these firms and then roll them up with other firms quite quickly - a few even have a mind to sell to some of the giant firms eventually.” The market is consolidating and the pressure on smaller firms to merge, acquire, or join forces with private equity is pretty powerful.

Keeping the good bits

But what about trying to hold onto the things that make smaller accountancy firms successful, such as excellent client care, local knowledge, long time horizons for relationships, and good work-life balance for staff? Won’t the traditional ‘slash and burn’ tactics of private equity put paid to all of that?

Not necessarily, thinks Heathcote. “First of all, some private equity firms are getting into the sector to do things differently.” He names a B-Corporation accountancy firm that private equity thought it could scale successfully - hardly a modus operandi it’s been known for before.

“There’s also evidence that maybe they’re learning some lessons - perhaps they moved too quickly to begin with and damaged a few of the things that make these firms successful. Then they slowed down because damaging those things would damage revenue.” He also reveals that some private equity firms are looking to preserve the benefits and capabilities of a local accountancy firm by using hub-and-spoke models, where smaller offices stay in the regions and are partly run from a central location.

“It’s a watching brief,” says Heathcote, “and I remain optimistic. If these private equity firms are making the necessary investment in technology then they won’t end up flogging staff and chasing targets - they won’t need to.” When asked about the mismatch between the timescales of the respective businesses - where private equity typically looks to get out within three to five years and accountancy firms operate with a much longer horizon - Heathcote says that “the horizons are now maybe a little bit closer than they used to be.” He thinks that this alignment is being driven by on the one hand, accountancy firms delivering strong year on year returns (thus reducing the need to exit the investment) and the shorter recruitment and work dynamics at the accountancy firms themselves.

Be clever about selling

Both Heathcote and Robbins suggest that the idea of private equity being a rapacious vulture is one that can be controlled or even banished during the sale process. Robbins says that “thorough due diligence” is key and that joining forces should depend on the firm’s goals, such as “expanding into new markets, weathering economic storms, or riding out particular business challenges.”

“Due diligence should cover values, what’s expected of partners, and whether the cultures are a good fit,” explains Robbins. Heathcote says that partners looking to sell should “ask themselves what they want their legacy to be, what their ethical red lines are, and what makes them different.” That way, he explains, they can make plans to preserve those elements as part of any deal. “Ultimately, private equity isn’t forcing anyone to sell, it’s up to individuals,” he says, “but if you do sell, be clever about it.”

This article originally featured in the March 2024 AB Magazine, published by ACCA.