What is private equity?

Private equity (PE) typically invests in established businesses with stable cash flows that can benefit from operational restructuring or growth capital. Deals are primarily majority acquisitions funded with leverage, that target efficiency gains and returns over a time frame ranging from 3-7 years. This form of finance differs from venture capital, which focuses on start-ups and higher-risk companies, often in the technology or biotech sectors.

Is PE equitable?

There is little doubt that PE is starting to reshape the accountancy landscape, by backing acquisitions of small and mid-tier firms before consolidating them into larger groups to gain scale and market share, mirroring similar activity in sectors such as dentistry and veterinary services. The key issues are whether these external capital flows benefit the accountancy sector or risk undermining its public-interest role, and, ultimately, whether private equity can be equitable in terms of competition and the possible negative consequences for audit quality and ultimately investor confidence.  

Potential advantages

When well executed, PE investment can help to professionalise governance and reporting, improve management discipline, and finance growth, both organic and/or via acquisition. Furthermore, it can enable investment in IT (including audit technology), improve liquidity, support management buy-outs and succession planning, and help strengthen due diligence and post-merger integration. Scaled mid-tier groups may also be able to compete more effectively with larger firms.

Potential disadvantages

Fixed funding horizons (typically 3-7 years) and the pressure to generate decent returns can promote aggressive pricing, margin expansion and cash generation targets that could clash with professional independence and public-interest obligations. The regulator’s insistence on separating audit from non-audit work highlights the risks of firm’s cross-selling services with the possibility of conflicts of interest, while rapid expansion may degrade audit quality due to poor oversight. Client confidentiality and the preservation of professional scepticism central to the audit process remain critical pressure points.

Regulatory landscape

The Financial Reporting Council (FRC) currently remains the competent authority for approving and registering auditors and developing auditing and ethical standards. However, the FRC is miffed that the government has selected the Financial Conduct Authority (FCA) to be the professional services supervisor for the anti-money laundering  drive, although the former has the expertise for this role. As such, the FCA will have to monitor the consolidation strategies taking place in the accountancy and audit sector in cooperation with the Competition and Markets Authority (CMA), which has the power to impose remedies including ordering divestments when competition is compromised.  

Conclusion

PE can be deemed equitable where there is a credible regulatory framework monitoring and constraining its influence, including ring-fenced audit governance, credible budgets for developing audit quality, transparent ownership disclosures, and proactive engagement by investors with the FRC, FCA and CMA. Where such safeguards are absent, funding time frames, margin and cost pressure dynamics may erode professional scepticism and weaken local competition - outcomes that would undermine trust in the accountancy and audit service sectors.