The Takeaway: A Q&A With Oliver Vaughan on Private Equity's Pursuit of Professional Services Firms
What is driving the momentum behind private equity interest in professional services?
Private equity's burgeoning interest in the professional services sector is driven by several factors, shaped by both industry dynamics and, more recently, by the broader economic landscape. Private equity firms are continuously searching for nascent markets and emerging opportunities with which to deploy capital, and up until the past five years or so, large sways of the people-based businesses were underserved by investment. In recent years, however, we've started to see that change, with firms recognising the ability for high-value-add consulting to drive outsized returns.
Additionally, parts of the consulting industry are perceived as a safe haven during market volatility, owing to the metronomic nature of certain revenue streams and services, and enduring client relationships. These relationships provide the bedrock of an equity creation plan, underpinning retention and allowing companies to upsell supplementary services, even within more challenging economic environments.
How do you perceive the dynamics of transitioning from a traditional partnership setup to a corporate structure backed by PE?
The transition from a partnership structure to a corporate one needs a complete mindset change-moving from a partner-centric outlook to a plan that is predicated on delivering sustainable, long-term growth across the entire organisation. The economics behind this change match the objective, with partners accepting that a percentage of the profits will be allocated to an investor (resulting in lower drawings per partner), but in return, the PE investor will help create equity value that more than compensates for any drawings shortfall. As private equity continues to deliver success stories, partnerships are becoming increasingly comfortable seeking investment (and it is also an obvious mechanism to deal with the big issue of succession in people businesses).
Do you think emerging technology is having a meaningful impact on the sector?
It's spoken about a lot, and for good reason. Emerging technology, or Al more specifically, will indeed reshape the consulting and accountancy sector, transforming the way consultants operate and provide value to their clients, as well as opening new avenues for growth and efficiency. Digital transformation is starting to disrupt the traditional "pyramid" consulting model, enabling firms to streamline processes, automate simpler tasks, and increase productivity.
High-value-add, client-facing work is always going to require human interaction, but technology will play more of a supporting role in providing insights and analytics to enhance this advice.
However, when it comes to repetitive tasks (the more BPO end of consulting) and streamlining workflows, Al technology will enable businesses to handle a larger volume of work and service more clients, ushering in a new era of scalability in the sector.
Do you see any other prominent themes materialising in 2024?
Each area of professional services will have its own nuances. Take accountancy as an example. As the market continues to mature, and especially given the number of firms that are now PE-backed, we're likely to see a growing emphasis on specialisation as companies face mounting pressure to differentiate their offering in a competitive landscape. Accounting firms have a range of options at their disposal to achieve this, which may involve adopting and embracing tech-led solutions, targeting specific geographic markets, or honing in on certain areas of the market, whether that be certain customer cohorts or increasing the capabilities on offer. These strategies can help companies present a differentiated value proposition and capture the attention of potential investors.
So, can the recent flurry of activity continue?
I think so, fuelled by ongoing interest in pockets of growth and fragmented markets. Again, as seen in the accountancy sector, for example, there has been a flurry of activity but still ample opportunity for investment, and we can see that the broader legal services space is beginning to attract similar attention. Overall, the professional services sector remains dynamic, with continued potential for growth and innovation driving further investment activity.
