Is private equity changing the world of accounting?

The landscape of public accounting is undergoing a seismic shift, driven by an influx of private equity (PE) investments that are reshaping the industry's dynamics. When major firms like Grant Thornton and Baker Tilly sell significant stakes to PE funds, it grabs headlines, but this trend extends far beyond the largest players. Over the past three years, PE firms have increasingly targeted accounting firms of all sizes, signaling a transformation that is poised to alter the profession's future.

According to Allan Koltin, a prominent accounting consultant, the perception of accounting firms as lucrative investments has gained traction. Since August 2021, the number of accounting firms accepting PE investments has surged, with 12 firms making such moves, including EisnerAmper’s partnership with TowerBrook Capital Partners. This shift reflects a broader trend where PE investors now hold substantial control over firms, often surpassing that of traditional partners. 

What makes this trend particularly intriguing is its reach across the spectrum of accounting firms. Mid-sized and even smaller PE firms are now partnering with smaller CPA firms, indicating that this consolidation is not limited to industry giants. For example, firms like Smith + Howard and Schellman & Company have successfully navigated PE investments, showing that even smaller entities can attract significant capital and resources.

The ramifications of these investments extend to aggressive mergers and acquisitions. As Koltin notes, larger PE firms frequently acquire stakes in major CPA firms and then use those relationships to aggressively pursue smaller firms. This strategy has led to the emergence of what Koltin calls "rollups," where PE-backed companies consolidate multiple smaller firms, allowing them to retain their identity while gaining necessary capital. This approach offers a lifeline to smaller firms seeking growth without sacrificing their autonomy.

Some of these rollups have achieved remarkable growth in a short time. For instance, Ascend, supported by Alpine Investors, is projected to generate $400 million in revenue within just two years. This kind of rapid expansion demonstrates the potential for PE-backed firms to reshape the competitive landscape, even rivaling established firms like PKF O’Connor Davies.

Interestingly, firms that are hesitant to pursue PE investments are also adapting to the changing environment. Companies like Andersen are considering IPOs, while others like BDO are exploring employee stock ownership plans. Significant mergers, such as BKD and DHG forming Forvis, reflect a broader strategy among firms to remain competitive without entering the PE space.

Moreover, the interest in accounting firms isn't confined to PE investors alone. Sovereign wealth funds and large family offices are now eyeing opportunities within the industry, highlighting a growing recognition of the sector's potential for robust returns.

Looking ahead, the momentum shows no signs of slowing. Koltin predicts that once a PE firm successfully partners with a Big Four firm, a cascade of similar deals will follow. Recent reports suggest that several of the largest accounting firms are already in discussions about potential PE investments, underscoring a transformative period for the profession.

As this evolution unfolds, the public accounting industry stands at a crossroads, where traditional practices meet modern investment strategies. The landscape is changing rapidly, and for firms—whether embracing PE investments or adapting through other means—the future promises to be both challenging and full of opportunities.