In the realm of private equity investments, certain industries tend to capture the attention of investors more than others and, as waves of dry powder flowed into funds during COVID, managers seeking robust and stable free cash flows turned to the profession that has long stood strong through the millennia: accounting.
The increasingly fragmented market of over 41,000 firms (Nov 2022) is primed for consolidation and technological revolution. Accountancies of all shapes and sizes, ranging from the big four to the thousands of owner-managed firms and bookkeepers are continually using technology to optimise their services and drive efficiency, taking a page out of almost every Private Equity house’s book.
As the AI race continues, I have no doubt that discussions are being held in the boardrooms of every accountancy firm about how both AI and other technologies can be used to further accelerate the growth of the industry.
Firstly, as mentioned above, the stability and recurring nature of the revenue streams creates a highly predictable growth profile upon which PE investors can support investment cases. Retainer fees, hourly charge out rates and project-based billing all create consistent inflows of cash which result in strong levered free cash flows to support the paydown of the senior debt raised when a firm acquires a practice.
The ability to cross-sell services, capitalise on economies of scale and enhance operational efficiency all contribute to the stability of a firm’s free cash. The same economies of scale also support consolidation plays within the space or “Buy & Build” if we’re using the appropriate jargon. The acquisition of smaller firms and the accounts that they bring with them allows for immediate synergy value to be realised.