Nearly half of UK accounting firms are open to private equity investment
Nearly half (46%) of UK accounting firms are open to private equity investment, a survey undertaken by law firm Kingsley Napley reveals.
Of the 22 respondents from the top 60 UK accounting firms questioned in May this year*, 27% have already taken private equity funding, whilst a further 19% would be prepared to consider doing so in future, the survey found.
A striking 86% of those responding said their firms had received approaches from private equity houses or other external investors in the calendar year 2024.
In contrast, just over half – 54% of respondent firms – said they had no interest in private equity investment now or down the line.
In conducting this survey, Kingsley Napley wanted to explore attitudes to private equity investment given the ‘hot’ interest in the UK accounting sector at the moment from a range of private equity funds. Kingsley Napley has worked on several related transactions recently and can help parties to navigate the transactional documentation, legal due diligence and regulatory steps involved.
Julie Matheson, partner specialising in Accounting Regulatory at Kingsley Napley, comments: “Our survey confirmed that UK accounting practices are aware of the various benefits private equity investment can bring but also wary of the risks, particularly in relation to regulatory compliance. It shows the potential for private equity in the sector, yet it also identifies where further education and confidence building is required to make decision makers comfortable with this new funding model.”
Attractions of private equity investment in the sector
Perhaps not surprisingly, the primary attraction of private equity investment cited by respondents is the ability it gives firms to invest in new technology.
John Young, partner in the Corporate, Commercial & Finance team at Kingsley Napley says: “The popular view of why accounting firms are welcoming private equity investment is that a major injection of funds to make a step-change difference in tech will help to future-proof practices, without having to rely on raising partner capital or obtaining loans or overdrafts from a bank for such. And our survey results concur with this.”
Funding for geographical expansion and succession planning were also advantages mentioned.
Perceived risks of private equity investment in the sector
The top internal fear factors cited by respondents included concerns about loss of strategic or operational control, loss of identity and partner retention.
John comments: “In our experience older partnerships tend to be the most favourably disposed to private equity investment, whereas younger partners may have different priorities and be wary of a remuneration model where the future earn out is more difficult to predict. Private equity funds need to be mindful of seeking to assuage these concerns when approaching target firms.”
External risk factors cited by respondents included the fear of loss of clients, conflicts of interest, and concerns about regulatory compliance and increased regulatory attention.
Julie comments: “Whilst regulatory considerations need to be high on the agenda for investment deals, especially in relation to audit, the challenges are not insurmountable. There are strict rules to protect the independence of audit functions and also prescribed requirements for probate and other licences offered by regulators. However, several examples exist of where firms have successfully managed regulatory requirements and embedded a new management structure and governance model in a compliant manner.”
A big take-out from Kingsley Napley’s survey White Paper is that just as different private equity houses have different strategies and objectives underpinning their proposed investments, so too do accounting firm partnerships have different outlooks, concerns and priorities when talking to investors. Hence parties need to find the right match.
John added: “It is important for each party to be very clear with each other up-front about their drivers, motives and concerns so as to help maximise the chance of a good fit deal and to avoid discussions being aborted, with the wasted time and cost implications that can involve for both sides.”
Julie concludes: “Without doubt private equity is reshaping the accounting sector, not just at the larger firm end but in the mid-market and smaller firm market too. Our survey shows many accounting firm leaders see the benefits and believe this funding option is here to stay. It also suggests we are not yet at the peak of the deal curve. It will be very interesting to see how the market develops from here – how firms which choose to embrace private equity capital evolve and how those who decide to differentiate themselves by a traditional funding model respond on the other hand. The sector could look quite different in years to come.”