The Takeaway: A Q&A With Patrick Hughes on Private Equity’s Rising Interest in Accounting Firms
What is driving private equity’s interest in accounting firms?
Highly predictable revenue streams, trusted brands, and the unique opportunity to invest in these businesses for the very first time make this very enticing to PE. But, the ability for PE to invest directly in CPA firms is really what’s new here.
PE investors definitely see parallels between insurance brokerages, RIAs, and physician, dental, and veterinarian practices, which have all been pretty successful roll-ups.
TowerBrook’s acquisition of EisnerAmper (August 2021) was a first-of-its-kind transaction for the industry. It was the first PE investment in a major accounting firm. Once the funds and CPA firms realized there was a mechanism that permits outside investment, the deal activity took off immediately. Since then, dozens of CPA firms (from very small to global) have pursued the alternative practice structure conversion, which allows for private equity investment.
How big is this market anyway?
The U.S. market alone is $150 billion of revenue, and globally, it’s more like $700 billion.
Those estimates don’t include all of the specialty consulting firms that are engaged in providing transaction advisory services, valuation, OCFO support, etc.
We are seeing the very largest firms enjoy 9.5% 5Y growth CAGRs, and the smaller firms are growing even faster.
As organizations evolve, they are looking for fewer service providers that can deliver more services. This is a huge opportunity for CPA firms to expand their wallet share.
When you put all of that together with the growth anticipated, the total enterprise value available is likely $1+ trillion.
It’s just an enormous new market for private equity.
On the heels of that, who would you say is heavily investing in this market? Is it mostly financial sponsors, or is it a combination of both sponsors and consolidation of firms?
We can certainly expect the primary driver of consolidation to be sponsored-backed platforms. EisnerAmper, Citrin Cooperman, Baker Tilly, and Grant Thornton all spring to mind, but there are others: Aline, Crete PA, Ascend, etc.
Well-known funds have already made investments, including New Mountain Capital, Towerbrook, Hellman & Friedman, Audax, Charlesbank, Further Global, Lovell Minnick, Parthenon, & Ares.
CPA firms are still deliberating as to whether they want to be part of a large platform or become one themselves.
The PE-backed firms are going to be super aggressive consolidators, though.
How is Houlihan Lokey situated to help clients as they navigate the new waters in the sector?
Well first, our brand credibility gives business owners and investors comfort that a transaction is being thoughtfully prosecuted. There have been a number of transactions executed on a relatively informal basis. As the market matures, so will the advisor ecosystem.
Next, these investments are new. The transactions themselves are somewhat complex and really require an advisor who understands the intricacies of the partnership conversions—legally and economically.
Being global matters here. This is a global trend. The CPA firms want to know you have global reach, and firms operating outside the U.S. are interested in having a firm that can help them navigate the financial sponsor ecosystem. We are peerless here.
Similarly, firms are looking for a range of options in a transaction solution, which means there’s a big opportunity for us to bring our capital markets capabilities to the forefront here.
So, what’s The Takeaway?
There’s a generational opportunity to invest in accounting firms, and it’s an enormous new category.
Given our commitment and differentiated perspective, we are really well positioned to capitalize on an exciting new market.
