Non-public fairness corporations have been doing extra funding offers within the accounting career these days, inflicting some corporations to restructure their practices, and so they’ve wanted recommendation from legislation corporations on arrange their attest practices in a method that does not run afoul of regulators.
Hunton Andrews Kurth, a legislation agency in Richmond, Virginia, has been helping in a number of offers, together with an funding from Parthenon Capital in Cherry Bekaert in June and from Lightyear Capital in Schellman & Co. final 12 months. One other deal concerned A-lign, a CPA agency that makes a speciality of cybersecurity audits fairly than monetary audits, which acquired investments from FTV and final 12 months from Warburg Pincus.
“We’re actually seeing curiosity throughout the board,” mentioned Hunton Andrews Kurth associate Matthew P. Bosher. “We have seen personal fairness curiosity in very massive corporations and in corporations outdoors the Accounting At this time Prime 100. You have received huge personal fairness corporations concerned and middle-market personal fairness corporations concerned. To this point we have seen curiosity in very massive corporations, smaller corporations and corporations in between.”
“There may be this excessive degree of curiosity by personal fairness to consider these skilled companies companies and get their foot within the door on these skilled companies companies,” mentioned Hunton Andrews Kurth associate Kevin Georgerian, who additionally runs the accounting agency M&A crew. “A number of the curiosity might be arising from the truth that it is comparatively novel and new, so there’s a chance to get in right here early. There is a view that there is in all probability going to be consolidation within the business, and in the event you spend money on a platform and then you definately develop that platform, there’s an actual tail to the funding.”
Non-public fairness traders view CPA corporations as guess. “They’re reliable companions and generate regular returns,” mentioned Bosher. “There’s not loads of debt typically and actual alternative for progress, notably in non-attest advisory companies. You mix a historical past of regular returns with a chance for progress and scalability by know-how, and it turns into guess.”
In some instances, PE corporations have been chilly calling accounting corporations, and CPA managing companions even have been speaking in regards to the curiosity they’re seeing.
“The checklist of PE corporations which might be considering accounting corporations — and that is a really lengthy checklist, by the best way — is usually identified to accounting corporations,” mentioned Bosher. “I believe the checklist of accounting corporations which might be probably considering a associate is commonly known as properly. There are additionally funding bankers who specialize on this space, and we have seen in some situations massive accounting corporations begin by teaming with an funding banker that shall be bringing potential traders to the desk.”
In some instances, CPA corporations have wanted to separate their audit and attest practices earlier than different components of the agency might settle for the funding, notably on the consulting facet, as occurred final 12 months when EisnerAmper acquired funding from TowerBrook Capital and when Citrin Cooperman offered a stake within the agency to New Mountain Capital.
“The place there’s attest work, whether or not it is audit or SOC work, that attest enterprise must be owned by a licensed CPA agency,” mentioned Georgerian. “In New York, a licensed CPA agency must be 100% owned by particular person licensees. In each different state, a licensed CPA agency must be a minimum of majority owned by particular person licensees. So that actually precludes personal fairness funding, or actually any outdoors funding, in a CPA agency that does attest work. So in each one in all these offers the place there’s attest work, it stays within the licensed CPA agency. The non-attest work is contributed to a brand new entity, and it is that new entity the place the skin funding — whether or not it is personal fairness or one other outdoors investor — has its possession.”
Some accounting corporations have been hesitant about accepting PE funding due to perceptions about giving up management or being topic to intense value chopping.
“I believe tradition issues, and the tradition at some accounting corporations is just not going to suit properly with the tradition at some PE corporations,” mentioned Bosher. “There is not any doubt about that. Now we have seen accounting corporations suppose very exhausting about whether or not the tradition and the enterprise mannequin of the PE corporations that may be considering them are match, nevertheless it’s in all probability flawed to consider personal fairness in a monolithic method.”
Convincing the entire companions to go together with the deal may also be a problem.
“Clearly an accounting agency is a human capital intensive enterprise, and it has loads of homeowners, so these homeowners do have loads of leverage,” mentioned Georgerian. “Oftentimes they’ve the power, with some potential constraints, to ‘stroll’ if they do not just like the transaction, so the customer desires to ensure that they don’t seem to be going to stroll previous to closing. The companions do have energy in these transactions. All of our expertise with the administration groups of accounting corporations is that they need very a lot to make the transaction occur in a easy and logical method the place there’s an acceptable rollout of data to the partnership, the place the companions have the chance to ask the questions which might be on their thoughts and actually perceive what the transaction goes to do for them from a day-to-day possession perspective, so there’s loads of emphasis on not simply negotiating the deal paperwork, however then on explaining the deal to the broader partnership.”
The roles of the managing associate and CEO might shift if the agency splits up the audit and advisory sides throughout the transaction, and the board will in all probability be restructured as properly.
“Initially, post-closing, the roles are comparatively the identical within the sense that they’re now the CEO of advisory, however advisory is actually working the enterprise apart from the pure audit observe, which is retained by the accountants on the audit agency,” mentioned Georgerian. “The majority of the enterprise is in advisory, so the CEO function is pretty related, and that goes down the chain to the opposite management of the accounting agency. What is clearly totally different and is clearly a key a part of the negotiations on these transactions is that you’ve a board or another governing physique that’s now broader than simply accountants and consists of personal fairness representatives, so there’s a new governance committee that entails outdoors funding.”
The general governance of the agency will change as properly. “The attest enterprise and the brand new non-attest firm are individually ruled and have separate management and separate boards,” mentioned Bosher. “The distinction from the outdated mannequin is these enterprise traces do not all report as much as one agency managing associate or one board as a result of the attest enterprise is actually individually ruled from the non-attest enterprise. However in any other case, the roles are related. The opposite factor is for certain senior service suppliers who aren’t CPAs who wouldn’t be technically talking homeowners of the CPA agency, when the brand new non-attest enterprise is created, these people will be companions within the new non-attest entity as a result of the brand new non-attest entity is just not a CPA agency and isn’t regulated in the identical method. So you should have some senior service suppliers who right this moment at a CPA agency are usually not companions however will grow to be companions or members or homeowners of the brand new non-attest entity, which isn’t a CPA agency. So there are some variations in titles and possession. After which the bottom line is the attest enterprise is individually owned and individually ruled from the brand new non-attest enterprise.”
With any such PE funding deal, some changes will should be made for the members of the agency.
“Typically while you’re taking a CPA agency and splitting it into two the place the attest enterprise stays in a single entity, and the non-attest enterprise and the entire staff go into a brand new firm, you may think about there are some operational challenges within the quick time period,” mentioned Bosher. “We expect these challenges are very a lot surmountable, and we have seen a number of the challenges. However in any enterprise, while you’re splitting in two and the entire staff are shifting to a brand new individually owned and ruled entity, there are definitely going to be operational challenges within the quick time period.”
Companies additionally must be cognizant of the SEC audit independence guidelines when accepting PE funding, and that can usually dictate the cut up within the audit and consulting sides. SEC performing chief accountant Paul Munter weighed in with some steerage in August that’s serving to make clear a number of the points.
“The SEC independence guidelines don’t presently ponder this construction, so for a very long time events have been left to type judgments about apply the SEC independence guidelines in a construction of this nature,” mentioned Bosher. “The SEC revealed high-level steerage, however steerage nonetheless, as to how the Workplace of Chief Accountant views the appliance of the SEC independence guidelines on this context. That is new and is a useful roadmap in some methods for events contemplating establishing another observe construction the place there’s an SEC audit observe. Clearly that steerage is related solely the place there’s an SEC audit observe and the SEC independence guidelines apply, however it’s a useful roadmap that didn’t exist beforehand.”
The SEC steerage might assist extra accounting corporations get readability on how the SEC views such offers, though some might even see it as a warning.
“I don’t view it as a deterrent as a result of what you had earlier than was uncertainty and ambiguity,” mentioned Bosher. “That steerage eliminates loads of the uncertainty, which I believe creates a roadmap for events to observe in making use of the SEC independence guidelines on this construction. I view it as an support. It is definitely an admonition to events to ensure they’re taking note of the foundations, a reminder to events to ensure they’re following the foundations. However what you had earlier than was uncertainty, and I believe elimination of loads of that uncertainty will in the end assist events shut offers fairly than deter them from doing so.”
Some corporations have additionally acquired funding from funding corporations outdoors the PE world, as Warren Averett did final 12 months in its asset administration enterprise. In such instances, the foundations differ.
“You do not want another observe construction to promote your wealth administration enterprise,” mentioned Bosher. “The attest enterprise is just not impacted by that typically.”
His legislation agency hasn’t been handing these sorts of offers. “The regulatory points there are usually not the identical because the regulatory points and the choice observe construction transactions we’re engaged on,” mentioned Bosher.
And as for PE corporations shopping for into the accounting career, the development does not appear to be slowing down anytime quickly.