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The US accounting firm Baker Tilly has agreed to sell a majority stake to the investment groups Hellman & Friedman and Valeas, marking the largest private equity deal to date in the sector.
The sale gives Baker Tilly US an enterprise value of more than $2bn and capital to fund what its chief executive Jeff Ferro called an “extremely aggressive” acquisition strategy, signalling the firm’s ambition to challenge RSM, Grant Thornton and BDO in a mid-tier of accounting giants outside the Big Four.
H&F’s investment also underscores the growing interest of private equity in professional services firms, and represents a return to large-scale dealmaking in the US accounting sector after a hiatus caused by rising interest rates.
The sector “has a great track record of organic growth, maybe two down years in 30 years, and the down years are hardly down”, said Blake Kleinman, partner at H&F. “There’s an opportunity to consolidate the industry.”
Chicago-based Baker Tilly US is on course for $1.8bn in revenue for the year ending May, said Ferro, putting it in the top 10 largest firms in the US.
A person familiar with its deal said that the two private equity firms would take an equity stake of about $1bn for just over 50 per cent of the firm, with more than $900mn coming from H&F. There will also be an undisclosed amount of debt financing provided by a group of private lenders including Blackstone Credit, HPS Investment Partners and Blue Owl Capital.
The money will predominantly be used to buy out retirement obligations to former partners and return capital to its 600 current partners, as well as to recapitalise the balance sheet and build a war chest for mergers and acquisitions.
Kleinman said H&F’s investment could double in size over time as it funds future acquisitions. The US-based group will make its investment from a $24.4bn fund raised in 2021 that is one of the largest funds dedicated to private equity deals.
H&F has invested in business services companies such as advertising agencies, advisory firms and insurance brokerages for decades. As with Baker Tilly, H&F’s investments are often the first external capital to come into closely-held partnerships. Its notable deals include the advertising agency Young and Rubicam in 1996 and the wealth manager LPL Financial and business advisory group AlixPartners about a decade later.
US accounting firms have been flirting with private equity for several years, attracted by the ability to put an equity value on a firm that has historically paid out most of its earnings to partners. Two top-30 US accounting firms took private equity investments in 2022, and more deals were in the works until rising interest rates disrupted discussions. BDO last year took an alternative approach, opting to convert to an employee-owned corporation, funded by private debt.
With the accounting profession facing a shortage of new recruits, Kleinman said that an equity-like model had advantages over the traditional partnership structure.
“The promise that, if you make partner and you stay 30 to 40 years then you will have some defined payout between age 63 and 70, that does not have a lot of value to a 24-year-old entering the industry,” said Kleinman. “The discount rate on that is infinite.”
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