How Have PE Firms "Investment Theses" Changed?

Private equity's theses for CPA+ platforms is increasingly nuanced and increasingly linked to the believability of a firm's organic growth prospects. In this session, Stuart Ferguson explores what today's Investment Committees (ICs) actually underwrite: commercially led organic growth, the maturity of commercial excellence, and—critically—the scalability of the talent engine. He will also frame the portfolio opportunities and risks created by AI and outline an inorganic strategy that moves beyond CPA consolidation into adjacencies where a platform has a defensible "right to win."

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. 

Stuart Ferguson (00:11):
Don't feel like you need to be snapping pictures; we've got a lot of ground to cover because a lot has evolved over the last four or four and a half years. Let's go ahead and jump into it. Here is a quick roadmap for the discussion. First, a very brief introduction on where our data insights are actually coming from. Then we're going to look at the market to offer some context about what's changed over the last five years, and then we're going to dig into the heart of the conversation, which is the evolution of private equity investment over the last four years. It's changed dramatically as we've done our analysis. Last, we'll think about the implications for everybody in this room, both independent and PE-backed firms, and what this ultimately means for you.

(01:33):
Briefly on BrightPoint and who we are: we've been around for 25 years as a strategy consulting firm. Over the last five years, we've either diligenced or advised 17 of the top 25 firms in their processes, including Everest and others. We try to be thoughtful in codifying the data that we've been able to generate and really think through what the insights and implications are for both investors and leaders of these organizations. Here are a couple of logos of firms that we've either done diligence on or worked with. The very first point on why private equity was in this space to begin with was the size of this market. We participate in a total addressable market north of $400 billion—almost half a trillion dollars now. Historically, the majority of that market was core accounting capabilities, but it's evolved dramatically over the last two decades. Now, the majority of the market is actually advisory capabilities: technology, risk consulting, and management consulting.

(02:32):
The market has grown incredibly well. We'll dig into organic growth trends in a moment, but coming out of COVID, there was a lot of equity put into these firms. 2025 is a hard year; I think a lot of folks could say they missed budget this year. Growth was not what they had expected, and tax particularly was very challenging. Is that indicative of the new normal? Should we expect 2 to 3% growth? No, but do we expect growth to be sustainable in the way it has been historically? Absolutely not. This means growth is going to be more challenging to come by for all participants. That being said, the market overall is going to be growing at about 5% to 6% going forward, but there are pockets of the market growing much faster than that.

(03:32):
This looks like a poll, and I'll clarify what we're looking at here. The Y-axis is indicative of historical growth, the X-axis is forecasted growth, and the size of each bubble is the total spend in 2025. As you can see, there are a couple of capabilities—mostly in that northeast quadrant—like managed services and everything to do with IT or cyber, which are in high demand. This has been the case for the last five years and is anticipated to sustain. At the bottom, in the southwest quadrant, you have core accounting capabilities. Those are incredibly sustainable and consistent—an annuity for investors, which attracted many folks to the space in the first place.

(04:25):
We think about how we find these pockets of growth across four different dimensions: geography, client size, service line, and industry. If you take all of those as subsegments and identify the potential growth segments, you can see a big dispersion across the market. The Y-axis here is forecasted growth for intersections of client size, industry, geography, and service line. You can orchestrate a business architecture that is better aligned with the pockets of the market that are going faster. The overall market is absolutely growing slower, but you can find these areas with intentionality and strategic purpose to sustain organic growth that outpaces the market.

(05:30):
If we consolidate all those dots into a chart, we see the total number of dollars in these different categories of growth. On the right-hand side, we ask how many dollars are coming from segments with 9% to 11% growth or even strong double-digit growth. Many firms are very interested in capitalizing on alignment with the right areas. Let's talk about who those providers and competitors are. This is an academic slide, but the market is incredibly diverse. You've got the Big Four, and in other pockets, you see a variety of large consultancies like Accenture. But the most interesting part remains the big bucket of non-top 25 firms representing a fragmented market. Let's look past the total market and think specifically about the CPA plus advisory space.

(06:43):
This segment of the market over the last five years has fundamentally evolved. We are running out of space for the deal flow and activity to even be coherent on a slide. This is really orienting around what we refer to as the "platform investment." Let's look at the impact on the top 100 firms. We have the top firm rankings: the Big Four, then the "Next Eight," and then member regionals or emerging nationals and other firms focused on geographic regions. When you look at the impact of private equity investment, it gets a bit more complex. Every one of these boxes that has turned orange has outside capital backing.

(07:39):
I bring Grant Thornton and BDO in there too to demonstrate outside capital supporting their growth. For the red ones, we see RSM and the number of deals Done internationally. While some of that is PE-balanced by United Capital, you see a lot of orange on this page. I'm going to make it even more orange because the reality is we don't just compete with CPA firms. We compete with a broader ecosystem: office of the CFO consulting firms, firms that specialize in tax, valuations, and other areas adjacent to core accounting. We've added a whole bunch of additional firms that are seeking or actually have outside capital. At the bottom of this chart are other firms that have demonstrated an appetite for private capital and have partnered up to do their own roll-up strategies.

(08:47):
One really important thing to take away: every single private equity firm invested in one of these platform plays is convinced they backed the winner. They assume if they've invested in that business, it's going to be an above-market grower at a time when growth has never been more challenging. We've got this unique period where the interest and appetite for growth has been stronger, but the challenges in capitalizing on that growth have never been more difficult. If we look at the data, the majority of the biggest, fastest-growing firms now include private equity-backed players, as growth is a strategic necessity to drive returns to their LPs.

(09:56):
Beyond just growth, we use Net Promoter Score (NPS) as a dimension indicative of future success. NPS is asking your customers on a scale of 0 to 10 how likely they are to recommend you. In a market-based analysis, there's not actually a ton of dispersion in this space among the top firms. Even if a marketing team handpicks clients and gets an 80% score, it's still indicative of very happy clients. The takeaway is that there is limited dispersion across the top 25. If we keep looking at this big market and the flow of private equity, there isn't a lot of clear differentiation. There isn't one or two players so far ahead that they are the obvious winner.

(11:04):
Why do I care about NPS? If you evaluate its relationship with organic growth, there is a strong linear correlation. To use fancy consulting speak: if your clients like you, they're going to spend more on your services. It's pretty obvious when you think about it. Optimizing for that is a winning strategy to drive above-market growth.

(11:53):
One question we get asked a lot is: how much happier or less happy are team-backed firms' clients after the infusion of private capital? Does it change culture? Does it change the focus on providing value? We found that PE firms have actually demonstrated more of a positive change in advocacy scores relative to the overarching market. Instead of just coming in to cut costs and maximize EBITDA, sponsors realize that what drives success in a people business is serving clients better. They've demonstrated that with the way they've made investments in the business.

(12:52):
I've covered a lot of ground. From the perspective of advising north of 100 different private equity firms, take this with a grain of salt, but we've seen one distinct wave. Wave 1A started with the TowerBrook investment in EisnerAmper and New Mountain Capital in Citrin Cooperman. There was an initial wave where folks were trying to tease out if this was actually going to work. We figured out the tax structure and the potential multiples. There was a lot of conviction that this would drive a lot of money for both the accounting firms and the investors.

(14:13):
Leading up to Wave 1B, the market got better and more deals started getting done. Interestingly, the valuations for these deals were different than what we've seen in other industries. The focus moved toward how to value these businesses objectively based on a thesis. What was that thesis? We were going to focus on the core commercial and operational dimensions that drive EBITDA. Why did CPA firms become so interesting to PE? It's a huge market with incredibly consistent organic growth. Early on, investors felt there was a lot of opportunity for price increases and cross-selling. On paper, this seemed like an easy way to drive better commercial output.

(16:17):
The "war for talent" was another factor—can we get better talent or retain them in a way that differentiates us? But the most interesting dimension was the CPA consolidation play: buy it for less than the platform price, benefit from multiple arbitrage, and roll up as many businesses as possible. Offshoring was also a factor; many smaller firms didn't have that capability, but the Big Four demonstrated how much value can be yielded from an effective offshoring strategy. Interestingly, the early deals didn't focus much on AI; it was mostly about automation.

(17:26):
In Wave 2, focus areas shifted. There was more focus on organic growth because folks realized cross-selling wasn't as easy as just turning on a switch. Operationalizing "commercial excellence" became a major question for investors. Supply differentiation became more important as more firms had capital to offer similar packages. Some investment committees now have an allergic reaction to underwriting a market today that might look fundamentally different in three to five years due to the lack of long-term data.

(18:42):
Going forward, we think the most important dimension is going to be organic growth. You can't get on a call with a PE investor now without them asking about organic growth potential in the first five minutes. They are looking at growth through price and volume and how they can underwrite with confidence that a firm will be a winner. Strategic and tactical pricing, as well as more effective strategies for cross-selling and diversification, are key. Diversification has come back into focus because the CPA consolidation is starting to reach a conclusion. Many of the prime assets will have been acquired over the next 18 to 24 months. M&A needs to be oriented around gaining access to new capabilities.

(19:38):
We now do studies exclusively on AI risks for private equity. Looking back over the last decade, organic growth has been incredibly stable. The top 100 firms have grown organically at about 8% consistently. This consistency gives underwriters confidence. When private equity entered the space, it coincided with a bubble of demand coming out of COVID. There was a shortage of supply, which allowed for a push on price, and median growth went up substantially. It's come back down now, and we anticipate 2025 growth to be even lower from an organic standpoint.

(21:04):
What's fascinating is how tight the distribution of performance is. You've got a plus or minus 2% spread around that 8% median. Investors like that predictability. If you're really good, you're at double digits; if you're really bad, you're probably flat. That predictability allows for higher valuations. Let's unpack the distribution further, focusing on 2020 through 2024. This shape of growth is almost consistent, with the majority of firms falling into that 5% to 15% bucket.

(23:03):
A lot of investors now recognize they probably over-indexed on how successful the market had been recently and assumed that was the new normal. 2020 was a rough year, but the industry's resilience was unbelievable. By 2021, we entered the peak of PE interest as firms generated high growth figures. By 2023 and 2024, we shifted back toward historical normalization. Going forward, we anticipate much more dispersion. We don't think firms will be lumped together as "average." We will see firms that do really well and firms that struggle. Our expectation is less of a normal distribution and more of a "bimodal" distribution. A handful of firms that invested in the right talent and technologies will go wildly above market, while others will consistently underperform.

(25:58):
The move up-market is another dimension. If we look at the market across segments—small businesses, lower-middle, middle-middle, upper-middle, and large cap—the services required change. Smaller businesses require core accounting. As businesses get bigger and more complex, they require a broader scope of capabilities.

(26:43):
In the lower-middle market, the auditor is perceived to be incredibly valuable and is frequently used for commercial questions, not just compliance. This puts that firm in a position to have a broader conversation. When you get to the middle market, the things perceived as most valuable shift toward consulting, technology, and cybersecurity. Compliance still matters, but it's more about risk mitigation. By the time you get to the upper-middle market, you're focused on advisors who can prove the dollars spent are driving returns.

(28:46):
Selection criteria also differ by size. Quality is always high, but for SMEs, sector expertise isn't as important as the relationship and technical expertise. At the upper end, you must have sector expertise and operational knowledge. It's much harder to please larger companies. Satisfaction scores are much higher among smaller clients than large ones. Investors are waking up to the fact that it is much harder to move up-market; it requires new talent and new go-to-market motions.

(31:10):
Regarding commercial excellence and price: north of 60% of customers are receptive to their provider offering multiple services. If the clients are happy, that number goes up to 85%. The main reason we aren't better at this is that firms aren't differentiated in their ability to educate clients on their broader capabilities. This is a huge opportunity. On pricing, about two-thirds of partners think that if they increase prices by 10% or more, their clients will leave.

(33:54):
Let's look at what the customer actually says. If you increase prices by 10%, only a very small percentage of clients actually churn. We are realizing we negotiate with ourselves on price more than our clients push back. There's a ton of opportunity for the professionalization of pricing. Regarding consolidation, the top firms already represent north of 90% of total value. There isn't a ton of additional space for the replenishment of assets. M&A has become a really important growth lever.

(36:09):
Platform firms account for about two-thirds of inorganic activity. Most deals are about building national businesses or entering fast-growing geographic segments like South Florida, Texas, Georgia, and California. There is a strong correlation between firms with built-out M&A capabilities and their ability to grow. But remember, M&A is not a strategy; it's an amplifier for your existing strategy.

(37:14):
Finally, on artificial intelligence: for years, our industry has had a linear relationship between the unit of delivery (hours) and the economic outcome. Even with offshoring, it was still about hours of work. As we start using AI, those hours are disappearing. If an hour is gone, you can't charge for it under the old model. Partners have a hard time rationalizing value if they are selling fewer hours. We must move toward outcome-based and value-based pricing.

(39:07):
If an audit took 10 hours last year and AI cleans out three of those hours, and you only charge for seven hours, you've decreased your total revenue even if you technically increased your hourly rate. This is going to be a real challenge. How do you operationalize AI and ensure it's effectively commercialized?

(40:13):
The big takeaway: the market is more challenging going forward. Growth is slowing, yet the appetite for growth has never been higher. Success will go to those who invest in the right technologies and align their go-to-market strategies correctly. Private equity is thinking differently than they were a few years ago.