The private equity paradox: boon or bane for UK accountancy firms?

The UK accountancy landscape is witnessing a surge in private equity (PE) investment. Currently there are just a handful of practices with this backing (Azets being the most recognised), but the popularity of investment to help take a firm to the next level is increasing. Especially as more firms begin to take on PE investment and retain their partnership model at the same time. (As Moore Kingston Smith (MKS) has done.)

While external investment promises rapid growth and modernisation, mirroring trends in the US, it also raises concerns. So, what are the potential positives and negatives of PE investment in UK accountancy firms?

Promises of private equity investment

For UK accountancy firms, PE can be a catalyst for progress:

• Growth through acquisitions: Similar to the US model, private equity firms often employ a “buy-and-build” strategy. This involves acquiring smaller firms, expanding the client base, and diversifying service offerings, accelerating growth beyond organic means.
• Tech transformation: The accounting profession is embracing technology. PE investment can fuel the adoption of advanced accounting software, data analytics, and automation tools. This in turn helps boost efficiency and can allow firms to build on their service capabilities as well as attract new clients.
• Enhanced profitability: PE firms bring expertise in streamlining operations and maximising profitability. This can lead to increased partner compensation in the long run, potentially making the firm more attractive to talent.

Learning from the US experience

However, the highly development private equity market in the US offers valuable lessons on the potential downsides of PE involvement:

• Short-termism vs. long-term value: PE typically has a 3-5 year exit strategy. This can pressure UK firms to prioritise short-term gains over long-term investments in staff training and client relationships. This “quick fix” approach could erode client trust and compromise service quality.
• Culture clash: The traditional UK accountancy model emphasises client service and long-term relationship building. This is at the core of any partnership model. PE’s focus on profit maximisation might create friction against a more client led culture. Ultimately leading to a shift away from client needs and towards shareholder value.
• Employee stress and increased turnover: An unrelenting focus on efficiency and cost-cutting can lead to employee burnout and high turnover. This not only damages morale but also creates knowledge gaps, impacting the quality of client service.

The road ahead for UK accountancy

The impact of private equity on UK accountancy firms depends on how they navigate these potential pitfalls. Here’s what the future might hold:

• Widening the gap: PE investment might exacerbate the divide between large, established firms and smaller practices. Smaller firms, lacking private equity appeal, could struggle to compete.
• Reshaping the profession: The influx of private equity could lead to a shift away from the traditional partnership model towards a more corporate structure with professional management teams.
• Client communication is key: Open communication with clients about the impact of PE and how it benefits them overall will be crucial for maintaining trust in a changing landscape.

Whether or not large-scale PE investment will become widespread in the UK accountancy sector remains to be seen. However, the profession must tread carefully. Leveraging PE investment for growth while safeguarding core values and client relationships is critical. What is already clear is these businesses will need to prioritise client needs and relationships, if they do this at the same time as harnessing investment as a tool to help optimise and grow the business, then private equity as a tool could have  a thriving future in the UK market.

If you would like to learn more about the development of PE investment within the UK accountancy firms get in touch with Hu Kabir.