Financial Times reported yesterday that TPG Capital — “a leader in the alternative asset space” — approached EY to discuss the possibility of the PE firm getting a piece of the firm’s consulting business through their own version of a split:
TPG outlined its plan for a debt-and-equity deal to separate the consulting arm from EY’s audit business in a letter sent to the firm’s global and US bosses. The consulting business could then be floated on the stock market at a later date, according to the letter, which was seen by the Financial Times.
US-listed TPG, which manages about $137bn of assets, did not put a value on the consulting business in its letter.
They may not have put a value on the business but they did lay out the plan and dangle a carrot that might tempt partners who were expecting big payouts up until Everest crashed and burned a couple months ago:
Under the plan, EY’s audit operations would continue to be owned entirely by the partners who run it, and TPG would make an equity investment into the standalone consulting arm. It said it was “highly confident” that it would be able to commit the sums required “from both TPG funds and our limited partners, without the participation of other financial sponsors”.
The consulting arm would also raise debt and the transaction proceeds would be used for cash payouts to audit partners and to settle other liabilities, TPG said.
An important point made by FT in their article: egos are still bruised over the failure of Everest and the turmoil that prompted its collapse hasn’t really been resolved since the plan was shelved in April. Any remaining resentments will come back to the forefront any time the word “split” is uttered by leadership. “It also threatens to reopen internal divisions that surfaced during talks over Everest, which leaders are now trying to heal,” wrote Michael O’Dwyer and Stephen Foley.
Second, there’s the issue of Carmine’s soon-to-be vacated post as global CEO (he is due to leave at the end of this fiscal year in June 2024). It’s said fellow Everest cheerleader EY Global Managing Partner Andy Baldwin is in the running and “the favorite by a large margin” but he was also pushing Everest way, way too hard and some might still be bitter about that. A transaction like this is not the kind of thing you want to get into when leadership is an open question.
Up until audit and consulting started bickering about where the tax people would end up — consulting getting too many tax people in the plan was the issue that ultimately doomed Everest to failure — the biggest concerns were unfunded pensions and market conditions. TPG’s proposal potentially solves the market conditions problem and they said in their letter they “remain highly flexible with respect to the division of the tax business . . . and would be comfortable with [audit] retaining a majority portion.” That just leaves pensions and hurt feelings.
All that said, reviving the split could just be a big nothing burger. Said FT:
It is unclear whether EY has responded to TPG. But one person familiar with EY’s internal discussions said: “The expectation is that the organisation will not pursue this expression of interest.” EY and TPG declined to comment.
TPG approaches EY about buying stake in consulting arm [FT]
Update 8.18.23: It’s not. “EY has rejected a proposal from US private equity group TPG to break up the Big Four firm and take a stake in its consulting business, according to a statement sent to partners yesterday,” said Gordon Smith in his FirstFT wrap up.