Why are PE investors interested in CA practices?

Jason Harvie CA is in a unique position to comment when it comes to this question. He is a private equity professional, has served as an ICAS Council member for six years and is leading Penta Capital’s investment in Sumer, an accountancy and business service firm in the UK and Ireland.

“Private equity sits at the intersection of the investment business, enterprise and entrepreneurialism,” he says. “It gives you the chance to bring those three worlds together, solving a wide range of problems including incentives, alignment and growth. The CA training provides a strong set of skills that really helps with that. If you look back at the history of private equity, a lot of the founding firms in the UK had significant input from CAs.

“From an investment point of view, when we first looked at the accountancy sector, we saw a group of high-quality independent firms across the UK facing similar challenges. Many had questions around succession solutions, technology investment and talent recruitment pressures. Private equity can step in to support firms through these issues, deliver strong growth and free partners up to focus on what they do best.”

Robert Mudge, ICAS Executive Director of Professional Standards and a key adviser to the working group, points to “the steady income streams and good reputation of the profession” as key drivers behind PE interest. “It’s a market that some people see as ripe for consolidation,” he adds. “And if you’re looking to invest in a lower risk area, it has a lot to offer.”

Why are CA practices taking PE on board?

ICAS President Karen Scholes CA is clear that PE is not an option for her Orkney-headquartered practice. “Our strategy is not private equity, and it’s not a merger with somebody else,” she says. “It’s very much about staying independent. But, for that, we do need to nail a sustainable succession.”

As a result, she understands why other practices are interested in the PE route. “I see lots of situations where the partners have done their time but don’t have succession options,” she says. “So I can see where private equity helps with that, and how it allows for fresh capital.”

James Barbour CA (Director, Policy Leadership, ICAS, and another member of the working group) agrees. “If firms want to invest in technology and growth, they need capital,” he says. “And clearly, succession is a big issue for many practices. Over the years, there have been increases in the audit exemption threshold so a lot of firms have been sitting with relatively small numbers of audits. That has made them ripe for economies of scale if someone’s willing to be that consolidator.”

What are the benefits to CA practices?

Allan Wilson, Managing Director of Wilson Partners, a Berkshire-headquartered accountancy firm with offices across the south of England, has had a positive experience since his 2021 partnership with Fordhouse, an investment business that focuses on working with owner-managed SMEs in the UK. “We weren’t actively pursuing private equity,” he says.

“Bigger firms had approached us about buying the business, but none of us were looking to retire or had succession issues. Fordhouse came in cold but the more we spoke with them, the more we saw it as an opportunity to accelerate our ambitions and create even better opportunities for everyone in the business.”

“One of the big benefits of private equity is the way it aligns everyone around the same goals,” adds Wilson. “In a typical firm, you’ve got partners at very different stages in their careers, with very different financial motivations, and that can lead to clashes over whether or not to invest. With private equity, that tension just disappears. We’re all aligned around the future of the business, with the right capital to support it.

“Private equity allows us to invest in technology at a scale we couldn’t have done as an independent firm. And making acquisitions is challenging but hugely rewarding. The success comes down to working with people you respect, who share both the joys and the pains of running a business.”

What are the potential pitfalls?

Scholes echoes the anxieties of many CAs reflected in the ICAS paper. “My concern is that, where you have private equity, you will also have a need for a return on that investment,” she says. “How much time can you spend on getting the work right for clients if you have people on the board who are not accountants?”

Wilson understands these concerns but hasn’t experienced them with his PE model. “I know from speaking to others that there is a big risk of interference,” he says. “That’s why it’s crucial that the partner you choose understands this is a people business. There are really only two things that matter – our team and our clients. If you’ve got an investor who is only looking at short-term profits, you run the risk of damaging both.”

Mudge agrees. “We very much encourage people to fully understand what the PE offer is and what the new ownership structure of the firm is going to look like. You have to be sure that you’re going to comply with eligibility requirements and you can’t know that for sure until you get down to a significant level of detail.”

As Barbour adds: “PE also comes in many shapes and forms, so it’s important to look at the range of models that might be available to you.”

Does PE threaten auditor independence?

This question was central to the ICAS paper, which stated: “There may be tensions between the motivations of a private equity investor and the duties and responsibilities of auditors to their stakeholders. There could be a negative impact on the culture of the firm which affects the level of professionalism in making audit judgments. Difficult ethical decisions might face undue influence as a result of commercial pressures.”

But Harvie disagrees with this point: “With proper investment, I think audit quality will improve because it will be supported by better technology and more sustainable profitability. It’s not about cutting corners, it’s about raising standards.

“I don’t see consolidation as a danger. In fact, fragmentation poses a risk too. Without the benefits of scale, many smaller firms will struggle to invest sufficiently to compete for talent and provide opportunity for the next generation of CAs. Bringing the best talent together with the right investors strengthens the profession and supports continued improvement across the sector. At Sumer, we’ve built a national hub platform, with leading regional firms around the UK supported by significant central infrastructure. That gives firms access to the best technology and back-office support, delivering their services locally in their communities.”

Mudge, however, believes there are practical considerations for PE-backed auditors. “Ownership structures with larger numbers of investors can make it more difficult for auditors to identify and assess possible threats to independence,” he says.

Can PE undermine your culture and lead to short-term thinking?

“A recurring theme in the working group’s discussion was the uncertainty over how things will play out in the medium to longer term. The impact on culture is something we need to keep a very close eye on, given its fundamental importance to audit,” says Mudge.

Wilson agrees this is an important issue, saying he regards “fun” as a key factor in the success of his business. “My advice to any CA firm considering an investor is simple – focus on cultural alignment,” he says. “Spend the time getting to know who you’re partnering with, test their track record, and speak to firms already working with them. It’s about finding someone you genuinely want to go on the journey with.”

Harvie agrees. “In a people business, cultural alignment is absolutely critical. You need an investor who shares your values on client service and ethics, and who cares for your team. That’s what makes the partnership work.”

He adds: “The perception that private equity is all about the short term is a misunderstanding. Yes, private equity may have liquidity events every five years or so, but that doesn’t mean we’re making short-term decisions. You can achieve an enormous amount in five years if you’re focused and driving towards creating stronger, long-lasting firms fit for the future.”

“There has been no pressure on us to hit a four-year exit,” says Wilson, adding that it helps that Fordhouse is backed by a family office. “We can do what’s right at the right time. The key is making sure that your investor isn’t just looking at a spreadsheet. It’s about people, clients and culture. If you get that right, the numbers follow.”

What should CAs do if they receive an approach from a private equity investor?

Speak to ICAS, is the most obvious practical advice. Barbour adds that it is important to remember there is a wide range of investors. “Across the PE spectrum, there might be one that does fit but doesn’t make an offer, whereas the one that comes with the offer might not be the right fit,” he says. “And, of course, there may also be alternative forms of capital to explore. So, firms really need to make a holistic assessment and do their due diligence before making any decision.”

Read the Private Equity and Audit: A Threat or an Opportunity? report and the ICAS media statement in full