Private Equity Groups Placed to Own One in Three Top US Accounting Firms
Private equity firms renowned for investing in fast-growth sectors such as technology, healthcare and consumer goods are now targeting
accounting. Leading accounting, planning and advisory services (CPA) firms are receiving investments from PE firms since 2021; two notable deals — Baker Tilly’s billion dollar deal with Hellman & Friedman and Valea Capital Partners as well as Grant Thornton’s stake in New Mountain Capital — have sent shockwaves through the industry.
Regulation bodies have taken notice of private investment’s surge, fearing that investors could prioritize financial performance of an accounting firm over impartial oversight of corporate finances. As a result, several firms have implemented significant corporate rearrangements; for instance when Cherry Bekaert LLP took over leadership of EisnerAmper LLP from their sister company Cherry bekaert was restructured so staff retained ownership over their work; furthermore it changed from an ownership structure model to profit sharing plan compensation models for partners.
CPA firms see investments as an opportunity to accelerate growth and meet client demands for greater scale and expertise, and state that investors provide valuable strategic guidance that helps their firms thrive in today’s more challenging business environments.
Experts note that it may take months or even years before the full impact of a new investment becomes clear. At first, initial investors may seek a profit when selling back their stakes in accounting firms they purchased earlier; and, if those firms continue growing at rates anticipated by initial investors, larger players may become willing to invest even more money, according to Allan Koltin, former managing partner of an accounting firm.
No matter the benefits of PE investing, accounting firms must remain sensitive to how these deals might come across to clients and regulators. Barry Melancon, CGMA, president and CEO of AICPA advised: “Accounting firms need to place extra emphasis on ethics and independence when setting tone at the top. Furthermore, any arrangements must be approached carefully.”
The Financial Times (FT) recently reported that other large accounting firms have also seen increasing interest from PE groups and have initiated sale processes with bankers, such as New York-based PKF O’Connor Davies and Carr, Riggs & Ingram in Alabama. No one knows if either firm will accept an offer, nor if their processes will eventually lead to a sale. Both firms would need to separate their auditing and consulting businesses in order to satisfy SEC regulations; that could add cost and limit profitability achieved from any deal; plus it’s uncertain if either can grow fast enough to justify further investments from PE investors.
