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All accounted for — Private credit eyes audit firms
Jemima Denham
+Fin Strathern
•4 min read
Accountancy and audit firms may not be usually known as the most exciting of sectors, but they’ve driven a whirlwind of deals in private credit markets this year.
A flurry of updates on transactions and sale processes came through the pipeline this week. We reported that Cinven and EQTEQT are in talks with direct lenders to back their bids for the hotly-contested sale of Grant Thornton’s UK arm. New Mountain Capital, which invested in Grant Thornton USearlier this year, is also in the running to acquire the company, with an all-equity bid.
TA Associates, Goldman Sachs’s private equity arm, and Bridgepoint entered the second round of bids for the sale of Evelyn Partners,reportedly submitting bids as high as £500m for the London-based accounting firm.
Amid all this activity,9fin has tracked ten closed or in-market private credit deals in the European accounting sector year-to-date, compared to six in the same period in 2023. Four of the ongoing sales launched in October alone.
And more could potentially materialise. “We think there are approximately 20 [UK accountancy firms] now under private equity, of which around 75% are in the top 50,” said one lender.
Source: 9fin data
“Phenomenally profitable”
Accountancy firms tend to be cash-generative businesses with high margins, market sources told 9fin. They also provide strong scope for buy-and-build strategies, making them attractive for lenders and sponsors alike, sources added.
"They're phenomenally profitable businesses with very high margins, much like a law firm,” said one lawyer. “And the playbook is easy - they're scalable businesses that benefit from buying smaller regional players and consolidating."
Looking to regional businesses, investment firm Castik Capitalrecently acquired a majority stake in Norwegian accounting and technology consulting firm Aider.
Several direct lenders circled the financing opportunity. The sale was marketed off a NOK 250m (€21m) EBITDA valuation, from a reported NOK 155.6m (€13m) in Q2,as 9fin reported.
Technology offerings by accountancy firms like Aider are a bonus when it comes to garnering interest from private credit managers.
“Top of people's minds is how [accounting firms] can use technology to optimise efficiency,” said one direct lender.
For private credit firms that have supported buyouts of accountancy stakes or units, incumbency will also be important when loans mature.
“It continues to be a theme across the market for assets that have performed well, with fresh equity coming in lenders remain keen to stay invested,” said one lender about debt incumbency.
Does the maths add up?
However, amid the flurry of excitement around accountancy firms, some private credit professionals have warned of the industry’s shortfalls. In particular, the structure and agency of local offices can be complex for direct lenders to navigate, according to 9fin sources.
"Accountancy firms are funny animals. Their structure is not dissimilar to a law firm's partner model, but unlike a law firm they are mostly owned by local partners,” said one source. “So in the event of a sale you tend to get a bunch of local partners looking to cash out.”
‘Cashing out’ is likely in a sale because partners at accounting firms tend to hold large stakes in their company. Additionally, there can be a key person risk — factoring in the cost of a partner leaving a firm, taking their clients and revenue as they head out the door.
“One of the main areas we've been through in our diligence programme and trying to pick up on is: what is the key person risk here? What are the partner retention metrics?” said one direct lender who looks at the sector.
The risk around future sales also brings up questions around exit strategies from accounting and audit firms later down the line.
“They are hard businesses to grow and scale beyond their current capacity,” a source told 9fin. “There is some roll-up out there but it's not what it used to be — how many Ma-and-Pa accountancy shops are still open?"
To boost revenue in the face of rising costs and scale up effectively, accounting firms have felt the pressure to add products like advisory services to their remit.
But interest in the industry shows no signs of slowing down.
Turnover in the accounting and audit industries boomed from £27bn to £44.3bn between 2017 and 2022 in the UK, according to the latest figures from the Office for National Statistics.
“Having looked at the advisor pipelines being put forward, there are several more [deals] in the space scheduled to come to market over the next 18-24 months,” said a direct lender.
