The private equity paradox: boon or bane for UK accountancy firms?

The changing landscape of UK accountancy: private equity investment and its implications

The UK accountancy landscape is witnessing a surge in private equity investors and private equity funds entering the market. Currently, only a handful of practices have this backing, Azets being the most recognised, but the popularity of external investment to help take a firm to the next level is increasing. Especially as more firms begin to take on PE investment while retaining their partnership model, as seen with Moore Kingston Smith (MKS).

While external investment promises rapid growth and modernisation, mirroring trends in global private equity and US private equity markets, it also raises concerns. So, what are the potential positives and negatives of PE investment in UK accountancy firms?

Promises of private equity investment

For UK accountancy firms, PE can be a catalyst for progress.

Growth through acquisitions

Similar to the US model, private equity firms often employ a “buy-and-build” strategy. This involves acquiring smaller private companies, expanding the client base, and diversifying service offerings. These buyouts accelerate growth beyond organic means and are attractive to institutional investors, pension funds, and limited partners seeking exposure to alternative investments. This strategy also supports diversification across sectors such as real estate, healthcare, and financial services.

Tech transformation

The accounting profession is embracing technology. PE investment can fuel the adoption of advanced accounting software, data analytics, and automation tools. Platforms like Bloomberg are increasingly used to support valuation models and performance tracking. This transformation boosts efficiency and allows firms to enhance their service capabilities, attracting new clients and financial advisors.

Enhanced profitability and value creation

PE firms bring expertise in streamlining operations and maximising profitability. This can lead to increased partner compensation and long-term value creation, making the firm more attractive to talent and individual investors. For general partners, this also means stronger distributions and potential carried interest gains. These improvements contribute to higher assets under management and more strategic allocations across the asset class. Firms may also benefit from reduced volatility through diversification and a well-defined investment strategy.

Private equity strategies often include targeting mature companies for operational improvement, or investing in start-up ventures through growth equity and venture capital. These approaches offer different risk-return profiles and appeal to a range of investors, including high-net-worth individuals and institutional clients.

Lessons from the US experience

The highly developed private equity market in the US offers valuable lessons on potential downsides.

Short-termism vs. long-term value

PE typically operates on a 3–5 year exit strategy. This can pressure UK firms to prioritise short-term gains over long-term investments in staff training and client relationships. Such short-termism may conflict with the principles of investment advice and fiduciary responsibility, especially for endowments, mutual funds, and ETFs seeking sustainable returns. It also raises questions about past performance as an indicator of future success.

Culture clash

The traditional UK accountancy model emphasises client service and long-term relationship building—core to any partnership model. PE’s focus on profit maximisation might create friction with a more client-led culture, potentially shifting priorities from client needs to shareholder value. This is particularly relevant when private equity fund managers apply corporate strategies used in public companies or public markets to professional services.

Employee stress and turnover

An unrelenting focus on efficiency and cost-cutting can lead to burnout and high turnover. This not only damages morale but also creates knowledge gaps, impacting the quality of service provided by providers and portfolio companies. The pressure to meet performance targets can also affect due diligence and long-term investment management quality.

The road ahead for UK accountancy

The impact of private equity investment on UK accountancy firms depends on how they navigate these potential pitfalls. Here’s what the future might hold.

Widening the gap

PE investment might exacerbate the divide between large, established firms and smaller practices. Firms without PE backing may struggle to compete, especially in areas like valuation, tech adoption, and client acquisition. This could also affect access to the secondary market and limit liquidity options for smaller players.

Reshaping the profession

The influx of PE could lead to a shift away from the traditional partnership model toward a more corporate structure with professional management teams. This may also influence how firms interact with the stock exchange and regulatory bodies like the Securities and Exchange Commission (SEC). Firms may also consider IPO strategies, following the lead of major players like KKR in New York. These shifts could attract high-net-worth individuals and institutional investors looking for exposure to mature companies, growth equity, and public equity opportunities.

Client communication is key

Open communication with clients about the impact of PE and how it benefits them will be crucial for maintaining trust. Clear disclaimers must distinguish between content provided for informational purposes and regulated investment advice. Clients must also understand the implications of investing in illiquid assets and the volatility associated with hedge funds, venture capital, and other investment funds. Transparent communication about management fees and investment strategy will be essential, especially for high-net-worth individuals and financial advisors.

Whether or not large-scale PE investment will become widespread in the UK accountancy sector remains to be seen. However, the profession must tread carefully. Leveraging PE investment for growth while safeguarding core values and client relationships is critical. If firms prioritise client needs and relationships while harnessing investment as a tool to optimise and grow the business, then private equity could have a thriving future in the UK market.

If you would like to learn more about the development of PE investment within the UK accountancy firms get in touch with Hu Kabir.