Private equity is not a monolith — nor does it have a monopoly on capital. While traditional PE firms are currently the most common outside groups that accounting firms are partnering with, there are other players in the field.
What's more, as the pioneering deals between PE firms and accounting firms reach the end of their first hold periods, experts expect the range of potential investors in accounting practices to expand even further, as they buy up stakes through liquidity events. (For more on the entry of PE into the accounting space, see
As an example of current players, Phil Whitman of Whitman Transition Advisors points to large wealth management firms with significant assets under management. They are interested in accountants for a few reasons: About a third of large and midsized accounting firms have financial planning practices of their own, and the rest have a mass of potential WM clients — plus, some larger wealth management firms are looking to provide their own clients with the tax, accounting and advisory services that they don't currently offer.
One of the most attractive things about wealth managers as partners is that they don't necessarily require full ownership — as an example, Whitman suggests that they might offer $5 million for 25% of a $10 million firm.
"Imagine this — they're going to give me $5 million, and I still own 75% of the firm," he said. "Ultimately, they're going to buy the rest of it, or they're going to help me build a wealth management practice, where the multiple is so much higher than the multiple on the regular firm — it could be three or four times the multiples we're seeing now."
There are also a variety of potential partners currently operating that have much longer time frames for investment.
"You've got traditional funds that are looking at more of the three-to-four-year hold period, but a lot of private equity firms and even family offices have what's called more patient capital," explained Keith Campbell, a senior partner at digital transformation and consulting company West Monroe. "This is a 10-plus-year hold period type of venue, where they're really partnering with the management teams in looking over a longer term, but also providing the capital for growth. That patient capital is a really interesting differentiator and I feel like it fits the culture of these regional accounting firms more where it's not seen as, 'I'm going to come in and quick-flip you and put a bunch of debt on you.'"
Besides longer hold periods, these types of patient capital investors also don't need controlling ownership — they're happy to take stakes that are smaller than 51%. "The reason that they can [hold onto the investment for longer] is because the cash flow of the assets in these accounting firms is so high," said Bryan Crutchfield, partner for value creation at West Monroe. "Sometimes they do want to delay selling it because they're just enjoying reaping the cash benefits from it."
When it comes to the second generation of ownership — the investors who will buy the original PE firms' stakes — the cast of characters who might want to invest in accounting expands enormously.
"Pension funds are very possible," said Allan Koltin, president of Koltin Consulting Group. "It's a steady portfolio with predictable income and you are eliminating the middleman; you're pulling out the PE group who probably could go and get a pension fund to put money into their fund. We've talked about IPOs, we've talked about wealth management businesses, we've talked about individual investors." Other possibilities include sovereign wealth funds and, of course, other accounting firms.
"I don't even think we can imagine the ultimate buyer yet," he added. "But I would not say it's just going to be a bigger PE firm. The question that comes up all the time is, 'How do you do a deal when you don't know who your ultimate partner will be? … The truth is the accounting firm really has a lot of say" — particularly if they've made sure in their original deal to give themselves enough representation on the board.
Besides whatever protections they can work into their initial agreement, accountants are also protected by the fact that no investor down the line will want to acquire a stake in a group that doesn't want to partner with them, according to Koltin: "I think the ultimate trump card sits with the accounting firm in terms of who they partner with," he said.
