The first wave of private equity investments in the accounting space are coming to the end of their terms, and it's time to see what direction they will take.
Private equity has enabled rapid rates of profitability and growth in the profession, and for firms with aging partners looking for liquidity, it offers multiples that are double, triple or even quadruple what they could take home on their own, and the ability to take cash off the table much earlier than expected.
The trend kicked off in August 2021 when Top 25 Firm EisnerAmper took a PE investment from TowerBrook Capital Partners. Later that year in October, Citrin Cooperman, another Top 25 Firm, took an investment from New Mountain Capital.
Then, in January of this year, Citrin Cooperman announced it would receive an
"They'll go down in the history books as grand-slam home runs. What they thought would take five to seven years got accomplished in three to four," said Allan Koltin, CEO of Koltin Consulting Group, who has advised many of these large PE deals. "What they underestimated — everyone did, me included — was how fast this industry would take off."
"I've watched, now, over 16 of these transactions go on. Every one of them is hitting or exceeding their numbers," he continued. "I'm not seeing the kind of stereotypical heavyhandedness or micromanaging that we always talk about when we talk about private equity."
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While the wave of PE is unprecedented in the accounting profession, investments in the broader professional and financial services are not. Just look at insurance firms, brokerage advisory firms, consulting firms, appraisal firms, valuation firms, forensic firms, outsourcing firms and recruiting firms.
"Many of those firms are already on their second, third, fourth, fifth flip, so there's a whole industry already with professional financial services," Koltin said. "They're all people businesses, so people seem surprised sometimes at how fast this has moved and question whether they'll actually be flipped. I don't think we have to look too far to see that this has actually been going on for multiple decades already, and it's working."
David Wurtzbacher, CEO of Ascend, echoed the sentiment: "There are deep capital markets for great companies and great industries."
Ascend is a platform firm
"I have found that the profession questions who would want to own a big accounting firm, and that is a pretty uninformed view," Wurtzbacher said. "Having come from finance and investing, what I can tell you is that investors exist in all shapes and sizes, and some of them are very, very large investors that can own very, very large companies. From a starting point, there's going to be a market because this is a great profession. It's an essential service. It's very steady revenue; investors call that high revenue quality. It's quite profitable; a significant portion of the profit is actual cash flow, which is not true in every business. And it's an industry that's growing. So for all those reasons, there will always be demand in general for businesses in this space, no matter their scale."
Meet the players
There are two main camps of firms with private equity money: the "motherships" and the "roll-ups." Motherships are when large firms, like Top 10 Firm
Experts say private-equity backed firms have four main exit routes: Sell to a strategic investor (like
CBIZ is currently the only publicly traded accounting firm. But in 2023, Ernst & Young
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"The Big Four, ultimately, in the next two to three years — I think they're too big for private equity, [so] I think they'll all go the way of IPOs." Koltin said.
He also sees third-party buyers entering the space, like large family offices, sovereign wealth funds, pension funds and international buyers from Canada and Europe.
"One thing I do not think we will see is the exits of the PE firms in the roll-ups," Koltin said. "I do not see them going to what we'll call the 'mothership' CPA firm. I see them, rather, just going to the next PE firm that comes into the deal. The reason is, there's a level of autonomy that those firms wanted, and if they wanted to go into one of these big mothership firms, they would have done it the first time."
Myths, fears and truths
There are two sides to every story. While there is much conversation about the upsides of PE, there is also discussion of its downsides. The business model of private equity relies on return on investment, so some experts worry that the hyperfocus on scale and profitability may mean compromising firm culture, talent and values. Others worry that private equity does not have accounting firms' interests in mind, and, in the extreme, will load their books with debt and leave them high and dry.
"I think the myth or the fallacy is that the PE firms are running these accounting firms," Koltin said. "When I talk to the firms that have gone the way of PE, what they say to me is they're an independent firm with a financial sponsor. For many of these firms, they're still running their firms. The PE partner — which could be a minority partner, it could be a majority partner — what they've done is select firms that have really good leadership, and as the story goes, they've said, 'Listen, we have day jobs, too. The last thing we want to do is micromanage your business, so we're going to find the best in class, and you go run it. If you have a major capital or strategic issue, get us involved.'"
Firms have warmed up to the presence of PE in the accounting space.
In the beginning, "I don't even think people were really that open to having discussions," said Tim Brackney, CEO of Springline Advisory, a Top 100 Firm with $89 million in revenue and 365 employees. Springline is a
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"It was more of a struggle to even try to have a discussion because the perception of private equity — some of it earned, some of it out of the zeitgeist — was, 'Hey, you've got barbarians at the gate. They're going to come in, and they're going to destroy your culture.' So a lot of that first phase was helping people understand that PE is not a monolith," Brackney said. "We spent a fair amount of time educating people about the different models within PE so that they would be at least open to having a discussion if the word 'PE' was in the sentence."
To be sure, there are potentially negative side effects to firms' long-term relationships with PE, particularly to firm culture.
"There are some firms who are going to take PE money and who will lose some of their identity and have some degradation to their culture," Brackney said. "The soul of any company is the culture, which is the fabric of the operating norms of the people there. That has to be a lens through which you're making decisions. If you're not, you will lose that."
Private equity is also changing the market landscape as we know it. As large PE-backed firms eat up smaller and midsized firms, the middle hollows out.
"I think that there are national firms right now who ostensibly are focused on the middle market, or taking in PE money, and that PE money is going to drive them upstream to hunt bigger game," Brackney explained. The issue there is that when PE-backed firms begin to scale, they try to take on the big firms and miss out on the client opportunity they're leaving behind.
Additionally, as more private equity firms chomp at the bit to get their piece of the accounting pie, firm valuations soar and PE firms overpay, Brackney said. Then, at the turn, they are stretched too thin. "Their time frame and their methods for extracting value are going to be under pressure," he said.
At the end of the day, the pros and cons come down to the unique partnership of the two parties involved.
