The UK accountancy market is considered one of the most mature and sophisticated in the world. However, structural economic changes and swift technological advances have created long-term challenges for the sector. This has caught the attention of global private equity (PE) investors that view the sector as a profitable investment opportunity.

Other sector challenges such as recruitment and retention, increased automation and tighter regulation, among others, have seen a jump in mergers and acquisitions, leading to greater market consolidation. 

Research conducted by ICAEW last year shows that 45% of mid-tier firms had acquired another firm in the previous three years and 5% had merged. Meanwhile, over half (55%) said they were considering acquiring again in the next three years, while 21% would be merging.

Some UK firms have already agreed to take on PE investment, but certainly this past year has seen activity increase. Neither ICAEW nor Financial Reporting Council (FRC) are against outside investment in principle. Indeed, Richard Moriarty, Chief Executive of the audit watchdog, wrote an open letter to accounting firms saying that the FRC was not against private equity investment in the sector, but urged partners to consult with the FRC and their supervisory bodies.

What really brought the issue into sharp relief was the high-profile sale of Evelyn Partners Group’s professional services business to Apax Partners, expected to be completed in the first quarter of this year. As is the current pattern in these deals, likely for regulatory reasons, Evelyn will separate its professional services business from its main business. 

This kind of established customer base and strong market reputation is particularly attractive to PE investors, says David Petrie, Head of Corporate Finance at ICAEW.  

The UK’s sixth largest accountancy firm, Grant Thornton, has also agreed a strategic investment from Cinven, an international PE firm, in a deal that is estimated to be worth up to £1.5bn. These sums are likely to be of interest to partners in their later years of service.

Evidence of PE interest in the UK market is also underlined by the amount of inquiries that ICAEW has been fielding from partners in member firms that are considering taking private equity investment, but want to better understand legal and regulatory implications.

A significant 12% of member firms surveyed have secured PE investment already, while 19% found PE investment attractive, according to last year’s research by ICAEW.

Managing the risks

From a legal and regulatory perspective, the main issues for firms are the impact of external investment on a firm’s ability to provide core audit services and other business advisory services independently. Questions over conflicts of interest between a PE firm’s existing clients and its accountancy firm investments will arise and have to be keenly managed.

From the client’s perspective, business leaders are said to be positive about private equity involvement in the audit industry as it is believed it will help modernise the audit process. 

But almost all (98%) said that if their auditor was bought by a private equity firm, it would make them more likely to switch auditor, according to findings by Source Global Research, which surveyed 200 senior buyers of audits services in the UK and US, with more than half publicly listed, and three quarters audited by the Big Four.

The study also found that around half of audit clients (53%) expect that at least 25% of the audit industry will be PE-owned in five years’ time. 

Issues around audit quality and conflict of interest are a factor for some audit clients. Fiona Czerniawska, CEO at Source Global Research, says: “A minority of audit clients are concerned that the involvement of private equity will result in more major audit scandals, with the new owners more likely to put profits above audit quality.”

Boomers v Millennials

Another vital component to understand in this shifting landscape is the generational one. Acquisitions and external capital investment offer some partners the chance to retire with a substantial payout. 

But what about the newer generation of accountants, who are facing a much trickier jobs’ market than their more senior counterparts did during their early career? What will the trajectory be for the next generation of accountants?

“One of the concerning aspects is the extent to which the investment in new technology and artificial intelligence changes the nature of the work carried out by chartered accountants. Our members in their 20s and 30s and who are newly qualified are likely to find the nature of their day-to-day work changing very rapidly over the next year or so,” Petrie says. 

Who are your investors?

It’s essential to remember that PE investment is also cyclical. Other industry sectors have also experienced a similar PE influx, such as veterinary and dental practices, which have also seen consolidation and PE investment in recent years. And although there have been many great success stories, not all deals result in efficiencies and improvements..

“Private equity deals are done with the intention of growing the business and investing in it,” Petrie says. “So, we can take comfort in the fact that PE houses are investing to grow these businesses and significantly improve them. As well as allowing partners to cash out, it also opens up the pitch for younger people in the firm to then step up.”

For now, 71% of the mid-tier firms ICAEW surveyed last year said their current structure was a limited liability partnership. ICAEW will repeat its industry survey in the next few months to gain a more updated snapshot, with the aim of publishing its findings in the summer.

“We’re keen to understand how we can support firms in making the decision to take PE investment or not. There are different trains of thought in terms of the direction of travel. Alliances are also very popular, with firms banding together under one roof without PE investment in order to deal with the challenges facing the sector,” says Julie Smith, Head of Practice, ICAEW.

Change is certainly shaking up the sector, but this transformation may yet take even more different tangents with a variety of routes to partner or the equivalent within a firm or company. It may see some firms become entirely specialist in certain popular service lines such as sustainability or technology.