Apprehension, Opportunity and the Future: Private Equity in Accounting

Private equity is reshaping the accounting profession—fueling growth and modernization for some firms, while raising concerns for others. Drawing on exclusive joint survey data from Accounting Today and Intapp, this session will feature Intapp's Global Managing Principal for Accounting & Consulting, Tom Koehler, alongside Grant Thornton Advisors LLC CEO Jim Peko.

Jim Peko will share his firsthand experience leading through a private equity transformation, while Tom Koehler will offer unique insights and experience powering transformation in leading global firms.

Together, they will tackle a key question many firm leaders are asking: Can private equity catalyze transformation, and what does it mean for cultural and structural dynamics?

Transcription: 
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record. 

Daniel Hood (00:08):
I don't think anyone in this room is kind of one of the reasons why this event works well, but everyone is active and engaged and excited about the precision. I don't know that I need to think of Grant Thornton or Grant Thornton. I don't know if you want to tell a little bit, Steve, just a little bit of background about yourself and the firm.

Jim A. Peko (00:26):
Yeah, certainly. Well, it's a pleasure to be here with everyone today. It's exciting times for sure. As I look at the logo behind me, Accounting Today, I guess it's really about accounting tomorrow and what we're all going to do in this crazy industry that we're in. But my name is Jim Peko. I'm the CEO of Grant Thornton. I've been the CEO since January. Prior to that, I was the COO for five years. I've been at the firm for 20, and prior to getting into this business, I started my career in investment banking.

(01:01):
So I bring a diverse amount of experience.

Daniel Hood (01:06):
All right. And then Tom Koehler is the global managing principal for accounting and consulting at Intact. If you could tell us a little bit about yourself and Intact as well.

Tom Koehler (01:13):
Sure. So Intact is a purpose-built provider. We focus purely on the professional service industry, from private capital markets to legal, and of course, accounting and consulting. I used to be an equity partner on the auditor end. I was also in some interesting roll-ups in the private capital market in A&A and also on technology. So actually, I went through my career for the entire life cycle of what we're talking about today.

Daniel Hood (01:43):
Excellent. So that's a sense of your expertise, but also you work with firms all around the world. You bring an interesting perspective there. We're going to talk a little bit about that.

(01:52):
That is becoming more and more of a—I don't want to call it an issue, it's not an issue—more and more of a trend in the accounting profession as you know, talking about your forays into international accounting and so on. It's very exciting stuff. I want to start with the data that we collected. We're going to be sharing a lot more of it, but the first thing we want to talk about is the reasons why firms are partnering with private equity. Tom, I want you to take this off here, talk a little bit about this data and what you see as the reasons firms are looking to partner with outside investors.

Tom Koehler (02:27):
Yeah, thank you Dan. I think one of the key topics here is that it's always about technology, which I think is right in our minds immediately.

(02:36):
But it depends; there's no one answer why, right? Because you have to think about what market you are in. Yesterday we talked about the market of Grant Thornton versus the lower end. They all have different demands currently. Technology comes out as a pattern because smaller firms might not have the funds to really raise the capital to build their strategy around centralized infrastructure processes. But it really depends on your geographic extension, whether you would like to expand internationally so you could have other investments into technology and standardizing of your infrastructure. So it really depends on what is your strategy. The number one question is, of course, do you have a strategy for that market you would like to deal with?

Daniel Hood (03:28):
That's what we've been hearing a lot all day, right?

(03:29):
You've got to have your strategy. I think you should have your strategy laid out in advance and get them to buy into that, rather than "let's figure out a strategy once we get a partner." Jim, I want to turn to you on this: what led Grant Thornton to partner with New Mountain? And maybe also talk about whether you considered other possible partners? What was that process like?

Jim A. Peko (03:49):
Yeah, it was a very interesting process. What we decided first was really to take a step back and look at our own firm and decide what we wanted to do in the future. What we found out was, historically, our organic growth was top quartile, but where we fell short was in M&A.

(04:13):
Before we did the deal with New Mountain, we had one acquisition like five years prior to that for $30 million on a baseline of almost two billion. So we weren't moving the needle at all on the M&A front. Also, we saw that the market was changing and we needed to act with greater speed and agility and accelerate our strategy. That's nearly impossible to do in an old-style partnership where you have 600 plus partners and an internal board. So it was really about accelerating M&A, getting out from an antiquated governance structure, and creating dollars for investment. That's what drove us to make the decision. We did go through a process, to be very open. We selected a partner and we decided not to go through with that deal because we didn't feel that there was cultural alignment.

(05:21):
Then we continued down the path a little while shortly thereafter, and New Mountain was the perfect partner for us. It really aligned with what we were expecting from a partner from a culture perspective. They shared the same thoughts around the strategy that we put forth and we felt very strongly that they would be able to help accelerate that strategy.

Daniel Hood (05:53):
Prior, I'm curious about items of cultural misalignment. We hear a lot about culture mattering, obviously we know it does. Can you give us an example of some of the areas where—I'm not looking for anybody to be badmouthed—but things that were important to you?

Jim A. Peko (06:11):
What I'd say on this is just consistency throughout the process, right? Consistency about what both sides are trying to achieve. I think at some point during the process, that consistency fell away and that wasn't what we wanted. Now, we were already going through a process of professionalizing our organization and moving from a lifestyle partnership to more of a performance-driven organization. One of the things that New Mountain helped us do was really accelerate our journey.

Tom Koehler (06:53):
And maybe based on the maturity of the private equity, right? I think they now have come into a very interesting playbook. They have to be the educational for private equity. They know, of course, the EBITDA et cetera, but I would be interested in what is the difference from the professional services point of view and PE? Is it so different from what they have done before?

Jim A. Peko (07:21):
Well, I think that as we get larger and larger, the level of complexity increases within your organization and it becomes more difficult to manage those complexities without having professional systems and processes in place. So that was part of our process: to professionalize the organization. I think what New Mountain brought to the table was that they already had an investment in Vistage and they got to understand what partnerships were all about.

(07:56):
Now, all partnerships are different, that's for sure. But they understood the structure, they understood what some of the drivers were, and because we already started to professionalize the organization, we understood to a large degree what their drivers were. When you have those two things come together, you basically have management alignment.

Daniel Hood (08:19):
I think as we were preparing for this session, one of the things we talked about was that your firm had a lot of that professionalized infrastructure already in place to be able to think about a deal in a sophisticated way. Some of the elements you had in-house allowed you to advance in a way that much smaller firms would find difficult because they couldn't analyze, for instance, how strong a partner would be or do the due diligence. Talk a little bit about the infrastructure you had in the firm already to allow you to think about a deal of this size and complexity in the appropriate way.

Jim A. Peko (09:00):
Yeah, sure. I think part of it really comes down to the performance-driven nature of the organization that we wanted to be and the decisions that we needed to make to move along that journey. I would say historically, and I have been with the firm 20 years now, there was a lot done based on feel. There was absolutely a strategy in place, don't get me wrong, but we very rarely used data to make decisions. Or if we did use data to make decisions, if one of our board members didn't agree, we kind of shifted course. Now, we're really using data to drive those decisions on things as simple as scorecards. We have a very data-driven partner scorecard; it's very clear what targets are, what partners need to do to meet those targets, and it's very clear to our people what success looks like.

(10:03):
That's drawn out right at the beginning of the year and that is monitored. It's not like you start your year in January, show up in November, and say "I'm having a bad year, what happens to me?" No, there are periodic checklists. Again, it's a data-driven process so that we know where we're going and where we need to adjust. That's just one example as it relates to partner performance, as well as staff performance. There are other things related to just the infrastructure and how we use data to make decisions around building out the office structure—do you build out an offshore structure to follow the sun model? Is it in a single location? What does that diversification mean? What do clients want? A lot of data has been used to drive decisions.

Daniel Hood (10:54):
When you talk about the data reporting and accountability, one of the things we've heard a lot, particularly last year, our panels talked a lot about the smaller firms that are taking PE money.

(11:05):
They talked about how they never knew anyone could report that much. They find themselves reporting a lot of stuff. It sounds like many things you already had were being reported within the firm. They had developed systems to report that for their PE partner. It wasn't a question of the PE partner taking control; it was just that they wanted numbers, they wanted to see the progress data. So it's one of those things where you had it in place already, making it much easier, whereas many firms were talking about that partner demanding that kind of reporting as part of the deal.

Jim A. Peko (11:39):
Well, let me be clear. We had some pretty good stuff in place and we had a lot of data. Once you enter the PE world, that elevates to a level over and above.

(11:51):
We had plenty of information to run our firm the way we wanted to run it as a partnership, but once you enter into PE land, there's just a different level of examination that goes on and we had to adjust. I think what allowed us to adjust quickly was the fact that we were professionalizing the organization already. So there was already some of that change management in place. But please don't misunderstand; we weren't perfect by any stretch of the imagination when we started. Your equity partner does demand a lot of you, but we were ready for that discipline because we had already started that journey.

Daniel Hood (12:36):
I think a lot of accounting firms, especially small ones, haven't even started the journey at all. I want to talk, Tom, a little bit about some of the data because there are a couple of things I want you to dive into.

(12:55):
This is all about levels of satisfaction among firms that have taken PE—a relatively small sample size, I think it's about 50 firms because that's about as many as there are—but they're telling us how they felt about it at a couple of different levels.

Tom Koehler (13:12):
The key question is who you're talking to about satisfaction, right? If you talk to a partner who just went through a liquidity process, they might be super happy. When you talk to your senior managers and directors, I don't know. So you have to cope with the perception of the firm. We heard all day yesterday that it's about communication. I think there's a misconception because communication gaps exist, and you have to make sure you're targeting your partners and your different stakeholders with different communication. For an equity partner, for instance, they had this freedom before to spend this money for their business, so you might have different existing infrastructure components in your services not working together coherently. So they might think in the beginning that they're taking something away from you, but instead, you're giving them new infrastructure components which are centralized, better, and scalable, making them more successful in the market.

(14:19):
So again, it's about the performance of the communication to ensure that the people understand your investment cycle.

Daniel Hood (14:29):
At the higher levels, there are much greater levels of satisfaction; at the lower levels, much lower levels of satisfaction. I was thinking about when Paul was talking about that a little bit—like teenagers at any point, they're just going to be unhappy with you because you did something.

Tom Koehler (14:42):
I found when I talked with Jim about the concept he brought to the firm and how you came to your innovation model, I found it very exciting. Maybe you can spend a few words on how you communicate that to your community. I found it very novel.

Jim A. Peko (14:57):
Yeah, this is really interesting because when we first did our transaction, of course, partners were happy—they got a check—but they were unsure. I think there is this perspective that when PE comes in, they're going to tear the place down. That may be the case for some.

(15:20):
I mean, there are PEs with different strategies. That was not the case with New Mountain. Of course, make no mistake, they want us to run an efficient business, but it wasn't a cost play; it's really about a growth plan. That growth translates into greater equity value. What was hard for our partners in the very beginning was because we were a cash partnership, our equity did not accrete new value. You were basically made a partner, you put in your equity contribution, and then when you retired or left the firm, you got your equity contribution back. It really wasn't worth that much because of the difference in cash and accrual taxes. So as crazy as this might sound, there were partners who were like, "I'm great with the upfront cash, but I don't think the equity will have value." I was like, "You've got to be kidding me. That is not how this is." We do a quarterly equity valuation, and we reported that as soon as it was completed. There was a fascinating thing about human nature that happened. Everybody knows how many units or shares they have. You say, "Okay, now the value is X," and you can do the mental math.

(16:53):
It took us almost a year, I guess, and we put Carta in place. Part of it is an electronic system where you can sign in, like logging into your Fidelity or Vanguard account, to see what your equity value is. We rolled that out and I received so many calls from our partners saying, "Oh my God, this is the greatest thing ever. My equity is valued so much." I scratched my head and was like, "I don't get it. We've been reporting the numbers." But when they saw it on paper, they believed. I just came back from our annual firm leadership meeting in Austin, and the energy in the room was unbelievable. That was the highest energy level we've ever had in the firm, at least in the 20 years I've been there.

(17:55):
So the partners now are coming along. Our model is fairly simple: it's based on performance-driven bonuses and your equity appreciation. Now people are seeing the equity appreciation and, granted, it's a number on paper—nothing really happens until the next liquidity event—but you can see the things we're doing in the market and how we're creating value. That's getting the partners excited. It wasn't the case right out of the box, so there was a maturation process. Now people understand, we've gone through a lot of education and change management, we've shown them what the levers are to pull to create value, and we've got everybody rowing in the same direction.

Daniel Hood (18:46):
Did you take any particular steps for younger partners or younger people in the firm?

(18:52):
A lot of people are concerned about what the next generation is going to think. Were there any special programs or approaches around that?

Jim A. Peko (18:59):
Without getting into specifics, we treated every group of partners the same. We had basically a 10-tier system. Everybody in tier one was treated the same, and everybody in tier five was treated the same. We did concentrate a little bit more equity in the lower-level tiers, but I listened to the other panel and, for the sake of being controversial, we're not managing the firm for the next three years or five years. Grant Thornton has been around a hundred years. How would I be able to attract talent if I go to a 25-year-old at a competitor or recruit undergrads and tell them we're managing for the short term?

(19:54):
I am not managing the firm for the short term. We are building a solid foundation that is going to make us competitive for the next 25 years. I'm probably not going to be in the role 25 years from now—my wife would tell me that—but it is about managing for the long term. If we do all the things right along the way, we'll be successful and New Mountain is going to be happy. It really is as simple as that. Our equity holders change all the time; you've got partners retiring and new partners coming in. This new model creates a platform that's a destination for our young people. I'll give an example—and my daughter will tell me because I use this example from time to time—she is 26 years old. She did two internships at accounting firms and then ultimately did one in investment banking and decided to go into banking because she loved the strategy work.

(21:16):
Audit was okay, but she felt it would take 15–20 years to be a partner and then she'd collect a pension over the next 25 years. She wanted an accelerated timeframe. Now, in the new model, it's getting young people excited. In the old model, we'd never be able to make a billion-dollar investment over the next few years in technology. That's got our people excited. We've put equity into the hands of our managers and senior managers—only the top performing ones—but that gets them excited. It gives them a taste of what it is to be an equity owner.

Daniel Hood (22:16):
I want to find out—just a reminder, you can always put questions in the app. In the meantime, Tom, I want to talk about this next data point. There are always firms that, when they contemplate any kind of outside investment or merger, worry about levels of control.

Tom Koehler (22:41):
So, what I thought about this 48% satisfaction rate is that it may correlate to specific governance rights in the beginning around plans, conflicts, partner compensation, and grant decisions. Those who are dissatisfied, I think maybe they treated it like a handshake eventually. Typically, expectations are dashed when leadership underestimates how capital is being allocated and how decisions are being made.

(23:17):
The PE house, of course, controls more for protection of investment. So you have to have a clear understanding of what area you have governance in and what areas are not as toughly managed. At the end of the day, it's like a copilot in an airplane where you're still flying the plane, but you have someone monitoring the instruments with a hand on the control.

Daniel Hood (23:54):
What's the relationship like? How is your partnership with New Mountain catalyzing the future of the firm?

Jim A. Peko (24:00):
We have a very constructive relationship. Because of the structure we had in place before, we couldn't just go and willy-nilly spend whatever we wanted or acquire whoever we wanted. We had to go to the partnership board. We had a CapEx committee. So when we did the deal, it wasn't all that much of a new concept that we had to go to our equity partner to get approval for things like issuing equity to our younger people or investing in technology.

(24:40):
To a large degree, that's where it ends. We run our business on a day-to-day basis. We do have a reporting cadence. We have a monthly financial call with New Mountain and our minority investors. We have a quarterly board meeting. I speak to them quite often; virtually every day. Now, 80% of those conversations are related to M&A because we've been very active on the M&A side, but they're certainly not making operational decisions or hiring and firing decisions. They've been a super constructive partner and have really allowed us to accelerate on the M&A front because we didn't have that deep of a bench in corporate development, and we used their team as an extension of us.

Daniel Hood (25:41):
I don't know if you would consider your international strategy as part of that?

Jim A. Peko (25:50):
Yeah, it's really core to the strategy. In the Grant Thornton model, each firm owns their geography. So GT France owns France. If I want to decide to do business in France, I can't. There are some good things and bad things about that. If a client calls us and says, "I need five statutory audits in these countries," we were always really good at that. But if a client called Country A and said, "I need software implementation," and that country didn't do it, we probably took a pass on it. We certainly weren't going out and selling the broad scope of services of the platform unless they were resident in that class.

(26:56):
One of the things we decided was that by bringing certain strategic countries onto the platform—and we're in 130 plus countries, though we have no intention to roll up all 130—it enables a competitive advantage and speed. For example, we recently won a significant job because we were able to act with speed and agility. We used to wind up negotiating internally: "How much of the deal is Country A going to get? How much is Country B going to get?" Now, when you have financial and operational alignment across the platform, you can make that decision quickly because it's for the best of the client.

(28:08):
Every country part of our platform owns the same class of equity that everybody else does. That creates speed and agility, and I think speed is a differentiator in the market. That client came back to us and said, "We've never worked with a firm that was so aligned and could respond so quickly." That's exactly why we did it and why we're going to keep doing it. At some point, the international set will run out because we'll have acquired the firms we want, and then we will continue to acquire within the US market. We're looking to acquire companies of scale.

(28:59):
You can acquire a hundred-million-dollar company that does 20 things and you're still subscale; that doesn't give you credibility. You can go out and buy a hundred-million-dollar company that does one thing, which is what we've been doing. That gives you instant credibility and scale. When we started this journey, we were at roughly 2.2 billion. We're going to end this year at 4.1 or 4.2 billion, and hopefully by the end of next year, we're at five or in excess of $5 billion.

(29:49):
That scale matters for our clients, especially in this environment where AI is real. It's going to disrupt our business. The question is, are we going to let it disrupt us or are we going to be the disruptor? By driving that kind of scale, it just gives us that much more firepower to invest.

Daniel Hood (30:19):
I want to turn a little bit now to the impact of PE on the profession. Tom, how do you see private equity changing the profession broadly?

Tom Koehler (30:40):
Yeah, luckily I have not memorized the 90 slides from yesterday on my iPad. The data is saying that 67% of the industry observes that firms are accelerating AI. I think the key three themes are: number one, consolidation and scale dynamics. The structural change we have discussed the last few days is real. You have to be very clear about what portfolio you're working in.

(31:13):
The next big change is happening in operational professionalization. Leadership now has to think both strategically and about technology together to create competitive advantage. It's important that you find people who are savvy enough to take this new innovation into your practices and service lines.

(32:10):
Because we are not acting in the Wild West, but in a highly regulated industry, it's not easy to get technology into your audit or tax processes. Firms have to explore multiple jurisdictions. There will be a change on the compliance side; you have to be more agile and have more data about risk management. You should take this data into your business development. You're sitting on gold because if you push this data into context, you create a new market. When the market gets tight, you're looking for higher-margin services.

(33:11):
You can achieve higher margins if you have more risk appetite and serve clients who might bring more risk, because you're managing that risk in real-time with data. These changes will distinguish the winners from the losers in the next five years.

Daniel Hood (33:33):
That makes a lot of sense. Jim, what do you think in terms of how PE is impacting change?

Jim A. Peko (33:41):
I think it is helping firms accelerate their agenda. It challenges you to do things differently. If you don't, you will be left behind. Using data to identify buying patterns or events that drive solutions is key.

(34:20):
Clients no longer want the 50-page global booklet for half a million dollars.

(34:30):
We need to align services with outcomes. If we don't, we're going to be left behind. Technology is changing how we see things today and how we do things tomorrow. At GT, we started by using it to reduce our cost of delivery—what our associates call the "Purple Grind." We're trying to reduce that load by using technology. It's a continuous improvement process. That boils over into standing up a whole new vertical to help companies do the same thing.

(35:38):
While AI can be scary, it creates huge opportunities. We just have to change how we do things. If we continue to think about our firms the old way, it's game over. The apprenticeship model is going to continue to work forever, but I personally question whether the partnership model is dying a slow death that will be accelerated by technology.

Daniel Hood (36:19):
I wonder if you could talk about the ability to invest in AI. Obviously, there are big investments being put in. A lot of firms don't have that level of money, but how much of it is an investment question and how much of it is a mindset question?

Jim A. Peko (37:18):
It starts with a mindset. If you don't have the right mindset, you'll be reluctant to make the investments necessary to stay competitive. I would posit that professional services firms—not just accounting, but law firms too—are historically horrible at differentiation.

(37:54):
Probably north of 50% of everyone's revenue comes from compliance work. The question is how you position yourself and take scale to carve out your space. So it starts with mindset. Then you look at the tools, and one of those levers is technology. Now, I don't expect every firm to have a 500-person development shop. There are really good third-party tools in the market.

(39:04):
Where we need to be careful as an industry is how much wallet share we give up to third-party tools. We have "hidden competitors"—vendors who have technology embedded in processes where we used to get 100% of the dollars. Now maybe we're only getting 85%.

Daniel Hood (39:41):
Tom, I'm sure you've heard about that investment?

Tom Koehler (39:45):
Yeah, and I'd like to share a picture I recently got from my son because everybody is asking what to recommend to their kids for a future job. My son is 19.

(40:03):
There was a study about secure jobs of the future. I shared it with him, and he sent me a picture of three monitors: one with his lecture, one with ChatGPT, and one with a book. He's already orchestrating these different technologies. We need to empower our partners and staff. It took me almost one and a half years to get the mindset in the room about "low-code/no-code" technology.

(41:00):
Young staff coming from universities are already technology savvy. For them, it's easy to contextualize it with professional services. Plus, when you talk about AI, most firms' data governance is at a low maturity. In a highly regulated environment, we need to be precise. Data governance becomes super important. I believe for high-sophisticated tasks, it will still take time to get to the top edge of deploying AI.

Daniel Hood (42:08):
There's some free-floating anxiety that AI and PE are going to deeply change the profession. Do you have a sense of how that is going to happen?

Jim A. Peko (42:48):
It is going to accelerate the investment cycle and how firms go to market.

(43:03):
One thing that's not going to change is the focus on quality. If I had New Mountain next to me, they would tell you they bought Grant Thornton because of quality. We all recognize the PCAOB has gotten tougher. But it's about the impact on the brand. There was an article in the Wall Street Journal speculating that PE in healthcare was reducing patient outcomes and wondering if that would impact audit quality.

(44:02):
I think that's completely unfounded.

(44:11):
It is about the brand. We don't have separate audit, tax, and advisory brands; we have a Grant Thornton brand. If we don't uphold quality and trust, the industry has nothing. Quality remains a cornerstone because the minute you lose that, the equity value goes down—and that's a problem for PE. There's no misalignment there. The idea that PE only wants to drive down costs at the expense of quality is far from the truth. Investment in technology will only improve quality.

Daniel Hood (46:05):
Tom, your thoughts on quality and speed?

Tom Koehler (46:11):
Enterprise-grade infrastructure is what we need to standardize delivery. With that, you get speed and quality. One of our specialties is taking care of independence processes and conflicts. That's still not easy globally. Once you have done this homework, you get more time to think about diversification and higher-value services. I'm a great believer in the multidisciplinary services model, and that's why I believe consolidation will continue.

(47:18):
Tax specialists might become part of a bigger entity to leverage a standardized delivery engine. I'm excited about the consolidation process; it benefits the client through quality, speed, and outcomes.

Daniel Hood (47:38):
Jim, what final advice would you give an accounting firm considering a PE deal?

Jim A. Peko (47:57):
Is there alignment on strategy? Can you manage the change management?

(48:09):
You have to understand that not everyone is made for the PE journey. It will create some turmoil at the partner level because not everyone likes change. However, this may be the most exciting time ever to be in this business. We know there are fewer accounting majors, but the persona of the people we hire is changing. If the value proposition remains strong, this industry becomes a destination for talent again.

Daniel Hood (49:33):
We've got 14 seconds left. Any final thoughts?

Tom Koehler (49:42):
Nothing to add. I love efficiency and aesthetics.

Jim A. Peko (49:47):
Don't be afraid.

Daniel Hood (49:50):
Perfect. Jim Peko and Tom Koehler, thank you so much for sharing your insights. Thank you all.