Private equity activity shows potential to grow client fees by All in Place

The financial services market, specifically the IFA sector, has been an attractive prospect in the eyes of the private equity space for a number of years, but it would seem that the accountancy profession has now also joined the party.

In recent months we have seen an increased number of PE transactions. In March, Moore Kingston Smith announced it had received external investment from the European private equity firm, Waterland. In the last couple of months, however, we have seen a coach-load of activity. Azets closed a deal with Partners PAI, TC Group secured capital from Inflexion and LB Group has been backed by Sovereign Capital Partners.

The similarities

So, why the sudden interest in PE transactions? For starters, there are multiple similarities between the IFA space and the accountancy profession, such as:

Growth potential

In the IFA sector, growth opportunities may arise due to a greater need for individuals to take professional advice, perhaps because of product complexity, or to focus on financial planning and retirement. In the accountancy sector, growth may come organically or through acquisition. At the same time, growth may come through enhanced technology or enhanced service offerings.

Predictable revenue streams

IFA firms generate a significant proportion of their revenue through recurring revenue streams. Similarly, accountancy firms have stable clients with consistent revenue streams. Visibility of cashflow is important in PE funding.

Fragmented market

There is a strong parallel across both sectors’ market landscapes. Where numerous small firms operate, opportunities arise for consolidation, economies of scale, improved technology and operational efficiencies.

Exit Opportunities

Investors need to be able to see an exit in PE. The financial services world has a number of quoted players, keen to acquire. Whereas the accountancy sector is at an earlier stage, with a greater likelihood of secondary exits to another PE house.

Impact on the accounting market

When the Azets Group did a deal with HG Capital back in 2016, many wondered whether it was a one off. However, the recent level of activity would indicate otherwise.

Certainly one driver is interest rates. With higher base rates, comes a higher minimum return on capital for the PE house and a greater expectation on the deal.

Revenue synergies might be one driver. A large cohort of many accounting firm clients will emanate from the SME Sector, especially as you move away from the Top 6 accounting firms, with their audit and consulting specialisms.

As consolidation and acquisition in the IFA sector matures, the accounting space is an attractive route to financial services revenue. SME owners need financial planning, as well as financial advice, especially at a time when there is an advice gap.

Proposition and process matter

An opportunity exists to build a transparent vertical into the “client proposition” within the accounting firm for business owners, so that the business owner knows that all their personal advice can be “bought” or “sort” from one source. As the accounting firm acquires other smaller firms, this process can be rolled out.

The PE market has worked out that buying an accounting firm to scale can lower the acquisition cost of the financial service sector, which is not so silly an idea! 

“Wooden Dollars” only work when client opportunities are optimised through good data management. One of the perceived short comings of the accounting profession is the low grade “value proposition” offered to SME clients, typically anchored around remuneration planning. In order for accounting firms to build a true ecosystem for their private clients, and a referral opportunity, more needs to be known about the client and a structured offering in place.

Empirical research has identified that revenue gains of some 10-20% can be made, by having an optimised strategic proposition and process.

Knowing your client makes a difference 

If an accountant knows little about their client’s personal finances then any referral made, whether internal or external can go wrong, for the following reasons:

Relevance

Cross-referral requires offering services that are relevant to the client's specific needs and financial situation. Without sufficient knowledge, it's difficult to assess whether a particular offering would be beneficial or applicable to the client.

Customization

Personalizing based on the client's financial situation enhances their experience and increases the chances of success. Lack of knowledge limits the ability to tailor recommendations and may result in poor outcomes.

Trust and confidence

Clients expect their accountants to have a comprehensive understanding of their financial situation. Insufficient knowledge may erode trust and reduce the client's confidence in the accountant's ability to provide suitable recommendations.

In a world of innovation, plus the threats from AI, it is essential that accountancy firms, and not just the ones backed by Private Equity, build processes to leverage the revenue opportunities of their business owners, not just the business.

When a business sells, the owner and their family still need professional advice… 

This article appeared originally on AccountingWEB here