The professional services sector has increasingly captured the attention of private equity firms, driven by the sector’s stability and potential for robust returns. With attributes such as recurring revenues, strong cash flows, and substantial opportunities for mergers and acquisitions, businesses in domains like accountancy and pensions consultancy are becoming prime targets. However, the allure of these firms has not translated seamlessly into public market appeal.
The reluctance of public investors towards professional services often stems from their heavy reliance on human capital rather than intellectual property. This characteristic makes them less attractive compared to higher-tech industries, which typically enjoy the twin benefits of hype and defensive moats. Additionally, concerns about staff retention and profit-sharing practices raise further red flags in the eyes of investors, leading to persistently low valuation multiples regardless of healthy margins and cash flows.
The complexity of the sector has contributed to a proliferation of partnerships and private equity-backed firms, which keeps many larger and more established names out of reach for public market floatations. Nonetheless, there are newcomers making significant strides. MHA, the UK and Ireland branch of Baker Tilly, made headlines recently by breaking from the conventional partnership model to list on Aim. The firm raised £98 million through a combination of institutional and retail offers, and is now valued at £271 million. This initiative signifies a strategic pivot towards scaling up through mergers and investments in technology, particularly artificial intelligence.
MHA's recent acquisition of Baker Tilly's operations in Cyprus and Greece for up to €24 million illustrates this ambitious growth strategy. The acquisition is aimed not only at bolstering MHA’s European presence but also at capitalising on the increasing interest private equity holds in the accountancy sector. Private equity's involvement has been transformative, with valuation multiples for firms in this space reaching as high as 15 times EBITDA, as noted by Gresham House, a significant backer of MHA.
Investors are drawn to MHA's impressive metrics, including a 40% EBITDA margin and a target for medium-term turnover of £500 million compared to £154 million projected for 2024. The firm's recurring revenues, driven by audits and tax compliance, further bolster its position, as clients typically resist switching providers. Recent high-profile failures within the sector—including KPMG's audit of the collapsed construction firm Carillion—have led to perceptions of increased risk, thereby validating fee increases.
Despite these promising indicators, MHA’s stock performance post-listing has been tepid, potentially due to ongoing regulatory scrutiny from the Financial Reporting Council regarding its audit of ISG, another collapsed construction giant. As investors retrogress following past disappointments in the professional services market, any sign of regulatory trouble may heighten skepticism and caution.
The legal sector, notorious for volatility, has showcased both turmoil and potential growth. Instances such as RBG Holdings' governance dispute and subsequent winding down, Ince Group’s administration, and DWF’s selling to private investors below original listings highlight a tumultuous environment. Conversely, firms like Knights Group and Keystone Law have faced their own hurdles, with declining share prices despite recent recoveries.
However, not all firms in the sector are struggling. Elixirr International, a challenger consultancy, has seen its shares soar by 300% over the past five years, outperforming larger rivals like Accenture and Capgemini. Since its listing in 2020, Elixirr has consistently achieved double-digit revenue and profit growth, setting its sights on transitioning to the main market to attract a larger pool of investors. Similarly, XPS Pensions, having recently joined the UK mid-cap index, has doubled its share price and demonstrated steady revenue growth, affirming that well-managed, people-intensive firms can indeed succeed in public markets.
The evolving dynamics of the professional services sector—a mix of private equity interest, fluctuating investor sentiment, and varied performance across firms—illustrate the complexity and potential inherent in this field. With private equity's appetite for growth through consolidation and enhanced operational effectiveness, alongside the nascent successes of certain public firms, the landscape is ripe for transformation. For those within the sector, the focus now lies not only on attracting investments but on delivering consistent, tangible results that inspire confidence and drive long-term shareholder value.
Reference Map
- Article Overview and Trends in Professional Services
- MHA Expansion through Acquisitions
- Private Equity Trends in Professional Services
- U.S. Professional Services and Private Equity Expansion
- Grant Thornton and Private Equity Investments
- Increase in Professional Services Acquisitions
- Private Equity’s Attraction to Professional Services
Source: Noah Wire Services