Why Private Equity Firms Are Betting Big on Accounting Firms

Accounting firms have suddenly become a goldmine for Private Equity Firms!

Yes, you heard it right!

In the fast-paced world of private equity (PE), where billion-dollar acquisitions and high-risk investments are the norm, a surprising sector has emerged as a safe, lucrative, and growth-driven opportunity- Accounting Firms!

With global accounting services growing at a CAGR of 7.15% from 2023 to 2030, accounting firms are rapidly emerging as a major focus for PE investors.
(Source: verifiedmarketresearch.com)

In fact, according to CFO Brew, “PE firms have bought stakes in five of the top 26 US accounting firms in less than three years”.   

This trend is further highlighted by the fact that in 2021 and 2022, private equity firms took stakes in EisnerAmper (18th by revenue), Citrin Cooperman (23rd), and Cherry Bekaert (26th). Additionally, in February, Hellman & Friedman and Valeas Capital Partners secured a majority stake in Baker Tilly, ranked 10th largest, further emphasizing their growing interest in the accounting sector. 

As market conditions evolve and the demand for advisory services soars, accounting firms are shifting from traditional roles of handling tax returns and audits to becoming strategic growth drivers, attracting the attention of private equity investors. 

In this blog, we’ll break down in detail why accounting firms are the hottest new targets for PE investment and how this shift is poised to reshape the future of financial services.

Why is Private Equity Eyeing Accounting Firms? 

1. Steady, recurring revenue stream

One of the primary reasons private equity firms are flocking to accounting firms is the steady, recurring revenue model. Accounting services ranging from tax filings and audit services to financial consulting are essential for businesses year-round, making them recession-resistant and resilient to market fluctuations.

For private equity firms looking for stable, predictable cash flow, the accounting sector is an attractive proposition, providing ongoing opportunities for consistent returns.

2. Huge consolidation opportunities

The accounting industry is highly fragmented, with thousands of small and medium-sized firms across various markets. This fragmentation creates a significant consolidation opportunity for private equity firms.

By acquiring multiple smaller firms and merging them into larger entities, PE investors can unlock efficiencies, reduce overheads, and boost profitability.

3. High demand for advisory services

Once primarily focused on audits and tax returns, accounting firms are now expanding their service offerings to include advisory services. These services, such as financial consulting, risk management, and M&A advisory, are in high demand as businesses face increasingly complex regulatory environments and global market challenges.

Private equity firms are looking for accounting firms that are expanding their services to include higher-profit options, as these can help generate more revenue and improve their ROI (Returns on Investment).

4. Resilience during economic downturns

The accounting industry is less vulnerable to economic volatility compared to other sectors. While other industries may experience significant slowdowns during recessions, businesses still need accounting services to navigate regulatory changes, tax issues, and financial reporting.

In other words, accounting firms have proven to be more recession-proof, which makes them attractive to private equity firms seeking defensive investments. This resilience ensures that private equity investors can rely on consistent returns, even in challenging economic times.

5. Succession planning and demographic trends

The accounting profession is facing a succession crisis. With an aging workforce and fewer young professionals entering the field, many smaller firms are struggling to plan for the future. Private equity firms are stepping in to provide the capital needed for succession planning and growth, acquiring firms that are looking to retire or transition ownership.

This demographic shift presents a unique opportunity for private equity firms to acquire firms that may not have the resources to compete in a rapidly evolving industry. By investing in firms with a strong client base and legacy, PE firms can ensure continuity and growth, while also preparing for the eventual transition to new leadership.

6. Attractive exit strategies

Private equity firms are constantly looking for profitable exit strategies, and the accounting industry seems to be delivering. The increasing trend of mergers and acquisitions (M&A) within the accounting sector presents ample opportunities for PE firms to exit their investments through lucrative sales or even public offerings (IPOs).

7. Key Takeaways

The growing interest of private equity firms in the accounting industry is no coincidence. With its stable revenue streams, vast opportunities for consolidation, and increasing demand for high-margin advisory services, accounting firms offer an ideal blend of resilience and growth potential.

As the industry embraces technology, adapts to new market needs, and navigates succession planning challenges, accounting firms are proving to be lucrative and future-proof investments. For private equity firms looking to build a diversified, profitable portfolio, the accounting industry is undoubtedly a space to watch and capitalize on for years to come.

Want to stay ahead of the curve?

Let Infinity Globus be your partner in navigating these exciting opportunities. Our outsourced tax and accounting services are designed to help you scale, streamline, and thrive in this ever-evolving market.

Contact us today to learn how we can help you take full advantage of the changing landscape of the accounting industry!