In 2021, TowerBrook Capital Partners acquired accounting firm EisnerAmper’s non-audit business, the first significant buyout activity in the industry. Close followers included New Mountain Capital’s deal for Citrin Cooperman and Parthenon’s investment in Cherry Bekaert, among others.
A few years on, early signs of success from those deals have led to widespread interest and a series of increasingly competitive processes as sponsors hunt for an accounting platform of their own.
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In February, Hellman & Friedman and Valeas Capital Partners acquired a majority stake in Baker Tilly at a more than $2 billion valuation, the largest U.S. accounting firm to take outside capital.
Just six weeks later, New Mountain Capital broke that record with its second accounting platform, taking a 60 percent stake in Grant Thornton U.S.’ non-audit business.
It’s even more active in the middle market, but the recency of investor interest means there’s still a fragmented universe of targets that are up for grabs.
Baker Tilly CEO Jeff Ferro characterized the firm’s new strategy under H&F as an “extremely aggressive” push to bolt on smaller middle market and regional providers.
For H&F, it’s a chance to put more capital to work. Partner Blake Kleinman says the firm’s investment could even double in size from future add-on equity contributions.
Using a similar strategy, new entrants should have more leeway to go after a sub-scale deal if they believe it could serve as a starting point.
Bob Lewis, President of accounting practice management advisory firm The Visionary Group, tells Accounting Today that “we’ve got ballpark 400 [accounting firms] in this country that are probably viable for any kind of a private equity opportunity.”
That figure stretches to 1,500, says Lewis, if you drop down into the $5 to $10 million revenue range, which can mean attractive founder-owned targets searching for a viable succession plan.
The value creation story also has more substance than the headline consolidation play.
Like early trends in law firm investments, accounting is preparing for its shift from a traditionally human capital-heavy operation to something closer to a tech-enabled services business.
New vertical workflow tools and AI-led automations seem likely to disrupt the industry’s status quo. Prolonged supply shortfalls in the CPA labor market could add even more urgency (and have already contributed to an offshoring trend).
But, a pile of cash is often needed to fund modernization efforts. For firms still under the partnership model, an understandable reluctance to contribute personal capital can become a roadblock.
Those dynamics mean an even greater opportunity for first-movers to open up a gap over slow-to-adopt peers—a potential competitive tailwind for sponsor-backed firms.
It could be a meaningful difference. Lewis believes today’s average of $200k in revenue per professional will be closer to $400k going forward.
This line of thought was one of the factors behind Baker Tilly’s decision to partner with H&F, says Ferro: “Over the last decade, we did a really nice job building up our balance sheet, putting more equity into the organization. But the landscape got more complicated, more competitive, and it got more expensive to run the firm and to achieve our strategy.”
Early evidence suggests sponsor-backed firms are indeed out-performing legacy competitors.
Three of the top four fastest-growing U.S. accounting firms are under private equity ownership—the initial cohort of EisnerAmper, Citrin Cooperman, and Cherry Bekaert—with year-over-year topline growth of between 38 to 100 percent, benchmarked against an industry average of 18 percent, per Accounting Today.
The figures are a little misleading, given their inclusion of inorganic growth, but there’s no disputing private equity’s rapid take of market share.
And if all else fails, the downside case isn’t bad either. Sticky clients and stable, predictable cash flows are perhaps the biggest draw for investors.
The accounting industry has had only “two down years in 30 years,” notes Kleinman, on top of its “great track record of organic growth.”
“Up to 85 percent of engagements are repeat work,” says Lewis. “It’s mandatory.”
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Other sponsors active in the space include Charlesbank (invested in Aprio this July), TPG (who tried to carve out EY’s non-audit business earlier this year), Aquiline Capital Partners (LeaseCrunch), DFW Capital Partners (Harris CPAs), and Unity Partners (NDH).
Just last month, Lovell Minnick Partners announced an investment in Cohen & Company, and Further Global Capital Management took a minority stake in Armanino.
Next up could be New York-based firms PKF O’Connor Davies and Carr, Riggs & Ingram, which have each hired bankers, per the Financial Times.
There’s also the ongoing Rothschild-led auction for Grant Thornton UK in which Cinven, EQT, and New Mountain have progressed to the final round after beating out initial interest from a field that included Carlyle, Blackstone, Permira, CVC, and Bridgepoint.