The trend of private equity firms acquiring businesses in the professional services sector continues with CVC Capital Partners eyeing a possible buyout of EY’s Italian consulting branch.
According to the Financial Times CVC, which manages EUR186 billion in assets making it one of Europe’s largest private equity firms, has expressed interest in taking over EY’s Italian consulting arm, which posted revenues of EUR366 million last year.
If successful, EY will join Teneo and Deloitte’s UK restructuring arm in falling under CVC’s control, and will form part of a larger move by private equity firms into professional services operations.
Oliver Vaughan, Managing Director in investment bank Houlihan Lokey’s Business Services Group, says several factors are driving private equity’s burgeoning interest in the professional services sector.
“Private equity firms are continuously searching for nascent markets and emerging opportunities with which to deploy capital, and up until the past five years or so, large sways of the people-based businesses were underserved by investment. In recent years, however, we’ve started to see that change, with firms recognising the ability for high-value-add consulting to drive outsized returns,” Vaughan says.
Vaughan says that private equity firms see parts of the consulting industry as a “safe haven” during market volatility, owing to what he calls the “metronomic nature of certain revenue streams and services, and enduring client relationships”.
He adds: “These relationships provide the bedrock of an equity creation plan, underpinning retention and allowing companies to upsell supplementary services, even within more challenging economic environments.”
The impact of emerging technologies including artificial intelligence (AI) and machine learning are key to private equity’s interest in professional services. First the sector needs capital injections to support a transition to new working models. Second, as they adopt more efficient processes their profitability increases.
Vaughan says: “AI will reshape the consulting and accountancy sector, transforming the way consultants operate and provide value to their clients, as well as opening new avenues for growth and efficiency. Digital transformation is starting to disrupt the traditional pyramid consulting model, enabling firms to streamline processes, automate simpler tasks, and increase productivity.”
Vaughan says there is evidence of a virtuous circle in private equity funding for consultancies that traditionally favour a partner model. He argues that partners are willing to forgo some of the revenue, which is returned to investors, in return for equity value creation.
“As private equity continues to deliver success stories, partnerships are becoming increasingly comfortable seeking investment and it is also an obvious mechanism to deal with the big issue of succession in people businesses,” Vaughan says.
Whether the private equity sector continues to invest in professional services will depend on firms’ willingness to let go of their operations to investors that have not always had the best reputation.
A string of disasters, notably in the healthcare sector, could make some consultancies nervous about relinquishing control.
However, Vaughan predicts acquisitions will continue fuelled by ongoing interest in pockets of growth and fragmented markets.
“As seen in the accountancy sector, for example, there has been a flurry of activity but still ample opportunity for investment, and we can see that the broader legal services space is beginning to attract similar attention. Overall, the professional services sector remains dynamic, with continued potential for growth and innovation driving further investment activity.”