The era of easy private equity deals in professional services is drawing to a close, with the most attractive targets already acquired and investors now applying far stricter criteria.
Over recent years, the surge in private equity activity across professional services, particularly accountancy, generated significant excitement and a flurry of major transactions across the sector.
Notable deals have included British private equity firm Apax buying Evelyn Partners’ accounting arm for £700m, Cinven acquiring Grant Thornton, and Interpath Advisory being acquired by Bridgepoint.
Rich McDonald, chief market commentator at IG, explained the sector’s appeal clearly: “Private equity’s love affair with professional services has been long-standing because these businesses looked safe, sticky and cash-generative.”
A report by law firm Macfarlanes in March stated that 75 per cent of professional services firms are “very likely” to consider, or already have, private capital investment in the next five years.
Despite that openness, professional services remains a deeply risk-averse sector, and completing deals is rarely straightforward, particularly within large legal partnerships where consensus is hard to build.
Zulon Begum, a partner at CM Murray, said getting a deal over the line requires an enormous amount of internal political will and trust from partners across the firm.
“It’s not an easy sell, especially for the larger partnerships. Getting a deal like this over the line is quite a significant endeavour, and managing partners would have to have an incredible amount of political capital and trust from their partners to be able to take the firm in such a strategically different direction,” she explained.
Begum described the relationship between private equity and professional services as “more of a dating game,” though she acknowledged the dating pool now appears to be shrinking considerably.
Private equity firms typically seek businesses that are safe, cash-generative, and structured in a way that makes an exit strategy relatively straightforward within a defined timeframe.
Aymen Mahmoud, partner at McDermott Will and Schulte, said: “Private equity will always look to focus its energy (and its dollars) on the best possible businesses and, as with any sector, there are likely to be less attractive and more attractive businesses.”
Firms that rely on client relationships tied to individual partners, or those offering bespoke high-touch services not easily automated or processed, tend to hold far less appeal for external investors.
“The low-hanging fruit was first to be snapped up, which is why we saw the initial flurry of transactions,” Begum explained, suggesting the pipeline of genuinely attractive targets is now considerably thinner.
One senior legal source told City AM that “the excitement about private equity was such that everyone thought ‘it wants to buy us’, and I’m not sure that they did.”
Beyond the shrinking deal pool, artificial intelligence is now introducing deeper uncertainty across the sector, prompting fundamental questions about the long-term value of people-heavy business models.
McDonald stated that “AI has put a question mark over the most important part of that model, the people.”
“If software can do more legal and accounting work, consulting analysis, recruitment screening or outsourced customer support, then private equity investors have to ask whether they are buying a growth platform or a business model about to be repriced,” he explained.
McDonald pointed to recruitment and outsourcing as the professional services sub-sectors most exposed to AI disruption, noting that the stock market is already wrestling with listed firms ranging from Hays and PageGroup to Capita and even RELX.
Tom Whelan, partner at Reed Smith, added that “the impact of AI (for good and bad) on a prospective target is one of the key investment committee considerations as part of analysing whether to press the go/not go button.”
Private equity has not abandoned professional services altogether, but the bar for investment has risen sharply, and many firms currently in conversation with external capital may not progress beyond an initial meeting.