Industries

Private equity investments are generating a massive buzz in the professional services industry at the moment. Global experts speak to Arvind Hickman about how the profession is responding to this trend and what effect it is having on the growth of firms.  

It is little wonder transaction experts are describing private equity as ’hot’, ’a global force’ and ’no longer private’. On the back of a record 2006, and with few signs of slowing down, the future appears very bright for this high-risk, high-yield form of investment. Professional services firms around the world have been rallying new troops, restructuring and streamlining systems to grow their client support teams to meet the needs of ever more demanding private equity powerhouses.  

While the processes for dealing with clients may vary from firm to firm, a few common themes stand out. They are: the private equity boom is driving organic growth across all of the transaction services practices IAB spoke to; there is a need to invest in talent from outside the traditional field of accounting; and such is the strength of the market, the good times are predicted to stay for a while.  

Billions in buyouts 
In the past few years, unprecedented wealth has poured into private equity markets worldwide. Industry analyst Private Equity Intelligence estimates that 684 new funds achieved final close in 2006, raising a record $432 billion. This was a 38 percent rise on the 2005 figure. Of these, buyout funds raised the lion’s share of $212 billion, which is up 45 percent on 2005. Real estate funds grew 30 percent to $63 billion, mezzanine funds increased by 69 percent to $19 billion and infrastructure, distressed debt, fund of fund and specialist secondary funds all grew. The only private equity model to end the year losing investment dollars was venture capital, which closed 10 percent down to $44 billion even with a record number of new funds.  

Despite solid growth across the majority of sectors, it has been the upper-end buyout market that has garnered a lot of the investor, media and Big Four attention. In 2006, six of the ten largest ever private equity funds were raised and several massive deals sealed, including the $32.7 billion acquisition of the Hospital Corporation of America by an investor group including Bain, KKR and Merrill Lynch.  

This year has begun with even more activity, underlined by the recent $38.9 billion acquisition of the US  Equity Office Properties Trust by private equity house The Blackstone Group. As negotiations take place for potentially the largest private equity deal in history - the flagged $45 billion buyout of Texan energy company TXU - professional services firms are oiling the wheels to keep transactions moving.  

Donald Spitzer is the national managing partner of private equity for KPMG US. He was recently appointed to form KPMG’s private equity group - a dedicated practice that organises the firm’s resources to serve the largest funds in the rapidly growing private equity market.  

"The private equity [industry] is no longer private - it’s on the front page of the Wall Street Journal daily - and clearly as you look at the volume of activity, private equity has become a major part of the capital markets today," Spitzer says, adding he believes private equity is a "global force" in the economy.  

"The size of the [private equity] firms has risen from $20 billion raised in 1996 to almost in excess of $200 billion in 2006, and it is expected in 2007 that number will be even higher. Going into 2007, these private equity firms had in excess of $1 trillion of buying power. So if you look at just the number of transactions of over $1 billion that was three years back, you count the number of transactions on one hand. If you look at 2006, I think the number was 40 to 50 transactions done that exceeded $1 billion," he comments.  

Caroline Grounds, head of private equity at Ernst & Young UK (E&Y), tells IAB large buyouts are also taking the European market by storm. "Probably from around about 2002 and 2003 onwards, a lot of the growth in the UK and then across Europe particularly has been fuelled by what we call the mega-funds. Those are the large European and large US houses that have recognised that there is an opportunity to look at deals that are significantly larger than the previous historical average size deals," Grounds says.  

"If I go back to that mid-market patch of businesses, E200 million [$264 million] to E1 billion, there were quite a lot of houses competing in that space for the businesses that were coming up for sale. I think a large handful, somewhere between ten to 15 of the large houses, said ’what do I have to do to create a different market where there is less competition?’."  

In 2000, Grounds explains, a large European deal would have been in the vicinity of E1 billion. Today, the deals above E1 billion number 50.  

Benefits for transaction services
Both KPMG US and E&Y have reported massive growth in their transaction services lines, largely on the back of private equity business. Spitzer says: "The back bone of private equity is transactions and each one of the firms does quite a bit of activity in that area. That business has grown 20 to 30 percent as a business the last two or three years and it will grow at that same level this year."  

Grounds notes that E&Y’s private equity business has outperformed other transactions work. "We have probably had, over the last three years, average revenue growth of over 40 percent in this particular segment. Our transactions revenue has grown about 25 percent per year in that same period. So this is a faster-growing segment than just the normal up-tick in the M&A [mergers and acquisitions] market for us," she says.  

PricewaterhouseCoopers Global (PwC) head of private equity in continental Europe Richard Burton says European member firms have experienced transaction services growth in excess of 20 percent. He adds: "Private equity has been the key driver of [transaction services] growth for the last three years, plus vendor due diligence for private equity transactions, which can be commissioned by a corporate selling a business or a private equity house which is selling a portfolio company."  

Explosive growth
As the big end of the market flourishes,  RSM McGladrey private equity group leader Robert Jensen says demand in the middle-market, where the firm is focused, is also on the rise.  

"Money is flowing into the private equity world in a big fashion versus the stock market and the pools of money are looking at how to put them to use and [looking for] good companies... to purchase, and they are very, very active in the middle market," he says. "Our transaction support business has grown to about $10 million in our firm and we can prove that another $30 million to $40 million of growth has happened as a result of just this one activity. If we do transaction work for... $10,000, it will create another $30,000 of services. It’s a three to one ratio. It is driving the entire business. It is one of the most explosive growth avenues we have today."  

Professional services firms have been quick to respond to the needs of private equity houses by growing their teams and implementing new strategies. A recent trend gaining popularity is employing specialist professionals outside the realm of accountancy to fill new roles, such as market analysts and business operations experts. 

In 2002, E&Y’s private equity team comprised 30 people made up of tax practitioners, accountants and M&A specialists. The firm began to hire market and operational experts in the late 1990s, but a serious recruitment push began in 2003 because E&Y required teams with new skill sets to remain competitive to private equity clients.  

"We decided we didn’t want to have rebadged accountants, we wanted to have people with real depth and expertise who have worked in this market and who can provide in-depth expert advice," Grounds says. "We did the same with the operations guys... We’ve got people who have worked in industry as part of our team and who have a background in having run plants or run sales and marketing functions rather than having only been a consultant.  

"We’ve grown the accountants, tax and M&A guys, and we’ve added to it a markets team of about 25, an operational team of about 30, we’ve got IT specialists, connections into pensions specialists and connections into other human capital."  

Today, E&Y has a dedicated private equity team of 150 professionals with plans to "expand the more commercial aspects of our business whilst sustaining the financial expertise that comes naturally with an accounting firm", according to Grounds.  

PwC has also been hiring outside of the profession to boost its ranks across Europe. Burton explains: "So that we are not focusing purely on the accounting side of the transaction work, we are also recruiting strategy consultants and engineers from industry who have been running production plants for ten years. We are broadening the overall resource base of the transaction business and the mix is moving away from pure accounting to a more rounded offering of various business experts." 

Burton says PwC’s attempts to tailor its services are in line with client structures and needs: "A lot of our clients in private equity are set up along sector lines so no matter where a deal is taking place their sector team will work on it across Europe and we are trying to respond to that development by establishing a similar model in our firm."  

In the US, KPMG has adopted a different approach to client service. Spitzer is leading a massive restructuring exercise to centralise private equity services. This will involve delegating operations responsibility to one senior partner for each individual client. "These private equity houses want to have a central point of contact," he says. "If you take any of these firms, they are operating all over the world and they make investments all over the world and they are using our services across all the functions. So it can get a little complicated. Sometimes if you are servicing a huge client like that just from a functional standpoint, the right hand might lose track of what the left is doing."  

Spitzer says senior partners will be responsible for pooling resources and organising the needs of individual clients.  

The big picture
RSM McGladrey is building its transaction services in high-activity markets across the US. Jensen explains: "In Chicago, for example, we’ve gone from having four full-time transaction people to 24 and we’re not done yet. That’s what I’m doing right now, I’m building out the transaction support teams that we have in the hubs of our middle market transactions so we can quickly and effectively help a private equity firm."  

Jensen says  RSM McGladrey has grown its full-time team from ten to 50 professionals in three years "and we have approximately 30 more open positions we are hiring for now". He continues: "The transaction support work we are doing for the private equity firm is just 25 percent of the services that can be provided to the private equity firm. There’s the whole fund work and then all the investments they own need somebody to look after them. Investment managers have hired us to do audit, tax and structure work for their portfolio companies, so there is massive growth there as well."