Private Equity meets Public Accounting

To expand on our latest newsletter, in this edition we’re talking all about private equity and it ominous entry into our wonderful profession. To catch you up, I began seeing noise regarding Aprio, a Top 25 firm, on Reddit’s r/accounting subreddit a few weeks ago.

One Reddit user posted about a quiet layoff at his office, with users at other offices also confirming they'd seen layoffs. Another user noted "the recent cyber attack happened right after the C-suite IT guy was let go". I cannot independently verify the cyber attack, but it has been mentioned dozens of times now on various Reddit posts.

On June 11th, the can of worms was opened when another Redditor posted this Going Concern article, as well as detailing a surprise all-hands meeting called by Aprio's CEO.

As of this writing, there are at least a dozen posts and hundreds of comments on Reddit's r/accounting detailing the anxiety, confusion, and anecdotal experiences with the dismal reality of PE acquisitions in the public accounting space. Take a peek at the comments and you’ll see how excited our fellow professionals are.

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So what gives? Why private equity? Why now?

Private equity 101:

Private equity is an alternate investment class that invests in, or acquires, private companies. PE firms raise capital from investors to form the funds that acquire ownership stakes, with the goal of improving operations and increasing value before selling their equity at a premium. 

Fund investment life cycles typically last for 10-12 years and exit strategies can include Initial Public Offerings (IPOs), sales to other companies, or sales to other PE firms.

The history of private equity and public accounting:

Private equity investment into public accounting is relatively new - so new, in fact, there have been no successful exits (yet) from the original investments. According to the Journal of Accountancy’s interview with Allan Koltin, the first attempt of a PE entry into a top 20 firm was in 2006, but the deal was derailed by the recession of 2008. Another attempt was made in 2012, but the target firm was not in need of capital at the time.

Fast forward to 2021, TowerBrook Capital Partners became the first PE firm to crack the top 20 with its investment in EisnerAmper LLP. This was the turning point that has guided the collective hand of private equity to our current day.

Later in 2021, Citrin Cooperman received a capital injection from New Mountain Capital.

In 2022, Cherry Bekaert partnered with Parthenon Capital in 2022.

February 2024: Baker Tilly announced a $1 billion investment from PE firms Hellman & Friedman and Valeas Capital Partners.

A few months later, in May 2024, Grant Thornton received a “significant growth investment” from New Mountain Capital.

As detailed above, Aprio will mark the most recent headline acquisition target. The Financial Times recently ran a paywalled article detailing the fact that one in three top 30 firms has been acquired, or is close to it.

Why now?

• Growth potential: The accounting market is highly fragmented, with thousands of firms across the country. Private equity sees an opportunity to consolidate and build larger "platform" firms through acquisitions.
• Recurring revenue: Accounting firms provide steady, recurring revenue streams from ongoing client relationships, which is attractive to investors.
• Need for capital investment: Many accounting firms require significant capital to invest in technology, talent, and growth initiatives. Private equity can provide this needed funding.
• Industry transformation: The accounting profession is facing major changes due to automation, offshoring, and the shift towards advisory services. Private equity sees an opportunity to help firms navigate these changes.
• Untapped advisory market: There is significant potential to expand higher-margin advisory and consulting services, which private equity can help accelerate.
• Recession-resistant: Accounting services tend to be in demand in both good and bad economic times.
• Talent retention: Private equity investment can provide new equity opportunities for younger talent, helping firms attract and retain key employees.
• Efficiency improvements: Private equity firms believe they can help accounting firms become more efficient through technology adoption, standardized processes, and economies of scale.
• Exit opportunities: Private equity sees potential for profitable exits in 5-7 years through sales to larger firms or public offerings.
• Regulatory changes: New ownership structures like Alternative Practice Structures have made it possible for private equity to invest in the non-audit portions of accounting firms.

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The results are (partially) in!

To reiterate, there is no historical data to go on, and none of the deals made thus far are anywhere near maturity.

EisnerAmper: this is all you need to read. Some highlights:

• Atrocious scheduling
• Mass offshoring to India; abysmal quality of work, especially outsourced billing
• “From a client perspective, Eisner is god awful.”
• Extremely disorganized; partners getting fired “left and right”

Citrin Cooperman:

If you believe what both Citrin and PE partner New Mountain Capital say, everything is sunshine and rainbows. In all honesty, there isn’t much for negative noise, but the acquisitions have been fast and furious. We’ll watch this one from the sidelines.

Cherry Bekaert:

Similar to Citrin, this company doesn’t make much noise. Reviews have been mixed on Glassdoor since the acquisition.

Baker Tilly:

Less than a year prior to the PE deal, then-CEO Alan Whitman abruptly resigned, effective immediately. Per Bloomberg’s paywalled article, Whitman disagreed with the firm’s other leaders on how to execute on the company’s business strategy. During mid-2023, there were also around 180 layoffs. Whether all of this is related to the PE investment is uncertain.

Grant Thornton:

Rounds of layoffs of 300 in May 2023, 200 in November 2023, and 350 in May 2024. Roughly 10% of its workforce has been reduced leading up to the PE investment. Read about the most recent round of layoffs here, and learn about the start-date push-backs here.

My thoughts on all of this:

I am staunchly opposed to PE’s entry into public accounting. PE is notorious for bleeding companies out with a laser focus on profits. Public accounting demands strict professional standards, no matter the type of engagement. Looking into the future, I believe we’ll see the following:

• Extreme cost cutting leading to reduced work quality
• Undermining of professional ethos in favor of increased profit
• Limits on career growth for younger professionals
• Even higher workloads and less work-life balance

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