Private Equity Expands Influence in US Accounting Firms, Raising Regulatory Concerns

Key Takeaway

• Private equity is set to own one-third of the top 30 US accounting firms, with recent acquisitions including Grant Thornton and Baker Tilly.
• Atlanta-based Aprio plans to sell a majority stake to Charlesbank Capital, while Armanino is in talks for a minority stake sale.
• Regulators express concerns over audit quality under private equity ownership, highlighting potential conflicts of interest.

Private Equity in Accounting Firms

Ten of the 30 largest US accounting firms could soon be under private equity ownership, according to sources familiar with ongoing negotiations. This follows the recent sales of Grant Thornton and Baker Tilly, two top-10 firms by revenue, to financial buyers. These acquisitions have opened the floodgates for other deals, positioning private equity to significantly increase its influence over the US accounting profession.

One top-30 firm, Atlanta-based Aprio, is planning to sell a majority stake to private equity firm Charlesbank Capital, according to sources. Additionally, New York’s PKF O’Connor Davies and Alabama’s Carr, Riggs & Ingram have engaged bankers to facilitate their sale processes. California-based Armanino, the 19th largest accounting firm in the US, is in talks to sell a minority stake to a private capital provider. Armanino gained attention as the auditor of the US operations of crypto exchange FTX, which collapsed in 2022.

Alan Whitman, former CEO of Baker Tilly, commented, “Partners are waking up to the fact that there is leverage to be had by tapping into the capital markets. The capital needs of the firms have increased exponentially in recent years, in terms of people costs and investments in offshoring and technology.” Deals can also mean windfalls for partners and the prospect of capital appreciation via their ongoing stakes.

However, regulators have expressed concerns about the potential impact of private equity ownership on the quality of audit work. Paul Munter, chief accountant at the US Securities and Exchange Commission, stated last month, “Firm leaders need to be sensitive to the message such arrangements could send and stand ready to correct any such misimpressions.”

Robust Market Activity

Private equity groups have shown strong interest in the accounting sector. New Mountain Capital, along with two co-investors, acquired a 60% stake in Grant Thornton for $1.4 billion, marking its second deal in the sector. Grant Thornton resolved a dispute with former partners over retirement benefits, and the acquisition closed last month. There was also strong demand from the loan market for a $1.9 billion debt sale to refinance Grant Thornton’s liabilities, which priced with an interest rate 325 basis points above the Sofr benchmark.

Allan Koltin, a deal adviser to accounting firms, noted, “Private capital is penetrating the accounting profession in a way that we never thought possible. This is getting into the bloodline of firms of all sizes.”

Carr, Riggs & Ingram, with revenues of $455 million in its past fiscal year, has narrowed potential investors to a field of three after an initial bid deadline last month. The deal process is being managed by investment bank William Blair. PKF O’Connor Davies, with annual revenues of $380 million, has engaged Capstone Partners to run its sale process. Aprio, with annual revenues of $420 million, is using the advisory group Falcon.

Engelhart Expands in Power Trading

Engelhart Commodities Trading Partners has agreed to acquire Trailstone, aiming to create a significant player in power trading. The purchase, from private equity group Riverstone, is subject to regulatory approval and is expected to be completed in the third quarter. The terms and price of the deal were not disclosed.

Trading firms and hedge funds have increasingly entered power markets globally, driven by the volatility in electricity prices following Russia’s invasion of Ukraine. This volatility has generated substantial profits for companies trading electricity. While other energy markets like oil have cooled, the deregulation, rise of renewable power generation, and extreme weather patterns associated with climate change suggest that electricity grid supply will remain volatile.

The deal marks a return to large-scale physical commodity trading for Engelhart, which had previously scaled back its business to focus more on commodity derivatives. Trailstone specializes in trading and optimizing renewable power generating assets and has a natural gas supply and storage business in North America. Both companies have been investing heavily in technology and data management functions essential for trading short-term power supply contracts.

Huw Jenkins, CEO of Engelhart, will run the combined business, with John Redpath, Trailstone’s current head, taking the role of deputy CEO.

Street Views

• Alan Whitman, former CEO of Baker Tilly (Cautiously Optimistic on private equity in accounting firms):

  "Partners are waking up to the fact that there is leverage to be had by tapping into the capital markets. The capital needs of the firms have increased exponentially in recent years, in terms of people costs and investments in offshoring and technology."

• Paul Munter, Chief Accountant at the US Securities and Exchange Commission (Bearish on private equity ownership impact):

  "Firm leaders need to be sensitive to the message such arrangements could send and stand ready to correct any such misimpressions."

• Allan Koltin, deal adviser to accounting firms (Bullish on private equity penetration):

  "Private capital is penetrating the accounting profession in a way that we never thought possible. This is getting into the bloodline of firms of all sizes."