The big story this week by a long shot was yesterday’s news that New Mountain Capital has taken a majority stake in Grant Thornton. When I say big I mean HUGE. Having written for this website for 15 years while observing the accounting profession from the sidelines and playfully making fun of Grant Thornton the entire time, I was not expecting that story to blow up the way it did. The last time a GT story had this much interest it was probably the temporary tattoos incident.
BUT ANYWAY. Twitter had quite a lot to say yesterday not necessarily about GT but about private equity. This is a new trend in the profession and as such, it’s difficult to say for sure what effect it will have ten or even five years down the road. But we’ve seen what happens in other industries. See: The Secretive Industry Devouring the U.S. Economy
It’s funny, if you search “private equity bad” of course you find articles like the above piece from The Atlantic but if you search “private equity good” you get…more negative articles. Like this NYT opinion piece. Hmm. Maybe accounting isn’t the only sector filled with unusually negative people.
The Xitter response and buzz around this deal thus compelled me to pose the question to you, dear reader, as this week’s weekend discussion. How do you feel about private equity in the accounting profession? Thoughts, gripes, hopes, predictions, and general curmudgeonry from all perspectives are welcome. It would be especially nice to hear from some of the senior partners who will be bailing out of the plane with a parachute made of private equity money.
Have at it, the floor’s yours.
The question I have is, if profitability and efficiency (antecedents to possible reductions in audit quality due to the overarching focus on engagement profitability) are high when partners want more profits, how will they be when third-party investors demand a return? I’d love to know what the SEC and the PCOAB think of this.
Maybe the next step is actually to have audit-only firms. Is GT McKinsey now? It appears the MBAs have taken over.
I couple of points I’ve seen elsewhere: (1) PE knows what they want to accomplish before buying, and (2) funds to acquire (ala FORVIS recently, but without PE money) other firms will result in a 5th “Big4” firm, based on revenue. So, consolidation could be on the way. The gap between KPMG and the #5 firm is about $8 billion, so there would need to be a couple of major business combinations to make it happen.
Again, what’s the focus when transactions are the focus? A peek into the PCAOB inspection reports just released provides a possible correlation between EY’s failed deal and the substantial increase in inspection findings for EY over that term.
How would it be good??
PE is going to do their best to increase Ebitda and then sell in 3-10 years depending on the PE firm. The easiest way to do this will be to mandate offshoring of hours. This is a cash out by the older partners and it will hurt younger partners as well as staff coming up. Look at the IT industry to see what’s coming. You have all this cheap labor replace the people working now and the next generation will only be outsourced staff. It’s bad for accounting and most of the offshored staff are not nearly as qualified.
Was at a consulting firm when P/E acquired us. Culture changed for the worse within a year or so. Bad for us. GT, on the other hand, had bad leadership and couldn’t raise tax revenues in the year of the biggest tax change since 1986. Probably good for that firm. Bad for firms who are already good.
The partnership model is dead outside of the Big 4. A small handful of soon to retire partners control the votes and leadership roles in all the 5+ firms. None seem to have a succession plan with an eye on continuity like the Big 4 do.
Short-term capital mindset as they do not have enough time left to invest in growth or platform investments and realize a return. Therefore, makes sense to cash out to the highest bidder.
5+ Firms that try to remain partnerships will not be able to keep up with increasing competition from the PE backed firms who can lever, merge, offshore and invest in scale (tech and training) without the baggage of partnerships blocking pure financial investment strategy.
The days of lifestyle inheritance are over. Time to operate CPA firms as businesses.
Perhaps the least unpleasant path amongst a host of almost uniformly bleak options. Only DT, PwC and possibly EY have the balance sheets, scale and operating models to fund the investments necessary to be competitive in a world of talent scarcity and technical disruption. I idea what the hurdle rate is for this fund, but as noted PE will do whatever is necessary to extract a return and the manager / GP will be ruthless. Will be interesting to see what the structure is going forward. By law, most if not all states require CPA firms to be majority CPA owned.
Personally, I just think it’s funny every time I hear about another firm getting bought and it’s not Marcum.
This is is more than just about the new pressures it could put on audit quality when PE investors demand higher profits, but about the whole value of the CPA in general. The CPA designation derives it’s greatest value from our independence and objectivity. That is what had lifted the CPA to higher status when it comes to tax and financial advice, not just audit. PE will suck the value of the CPA. This in turn will devalue the firms they have invested in. It’s a short sighted greedy play by these partners and will be the death of a once noble profession. Iwe were once the guardians of the free market system. Helping ensure everyone played fair as best as possible. Calling out the bad actors when we found them. No more, now we swim with the.
New Mountain Capital also acquired Citrin Coopermann, which I would imagine now will just merge into GT.
It may be good for an acquired firm in the short term, but don’t see how it can be long term. Don’t they have polar opposite objectives? PE…maximize value and cash flow in the short term, possibly some add-on acquisitions and exit within 4-7 years. PA….stewardship, stability, long term vision, develop future leaders, etc. With the current shortage of accounting students, younger folks leaving PA, cashing out the most seasoned partners, etc., the industry will be an even less attractive option than it is today. “Partner” will become the equivalent of a highly comped employee (but less comp than those partners are used to). PA will survive, but the shape of it in the future will look very different.
I beileve this is a 10-20 year change to the industry. Once the consolidation leads to a certain level you will then have the fat cats that cashed out from the first PE flip go and start boutique firms again with better service and cheaper fees. There can only be so many flips of a firm (2 max) so eventually the remaining partners will be stuck buying out the last standing PE firm.
My first thought on these PE deals is independence issues. Most of these deals are with firms that don’t have large public company audits, but I would think there could be some very murky waters with the confidential information that accounting firms have that could have meaningful impacts on share prices. I would think independence would dictate the PE firm couldn’t hold any investments in audit clients.
PE firms typically want a return on investments in 4-7 years like others mentioned, but if they are generating leads with insider information on future deals, that could be a very valuable avenue for the PE firms to gain a significant advantage on future M&A. However, doesn’t that lead to independence issues?