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Private Equity Spotlight: EST Partners focuses on professional services firms carve-outs
London – 3 September 2021 - published by MergerMarket
  • Will target small and mid-sized professional services opportunities in western Europe and US

  • Pipeline to comprise carve-outs from major consultancy groups and boutique shops  

EST Partners hopes to tap into an anticipated slew of non-core divestments by large consulting groups, including the Big Four accountancy firms, to build its newly established private equity investment platform, founding partner Henry Smithers told Mergermarket.

Launched earlier this year, the London-based private equity investor is dedicated to acquiring professional services businesses in western Europe and the US. It is targeting businesses with specialisms in operations and ESG consulting, Smithers said, adding that a particular focus on supply chain and procurement, regulatory, sustainability and governance, organisational change, and risk and cyber consultancies will be highly sought after.


EST will be particularly interested in specialist consultancies with a high degree of intellectual capital and technical expertise, he said.


The firm’s establishment coincides with ongoing regulatory concerns over conflicts of interest at the Big Four’s auditing departments and other divisions. The UK’s Financial Reporting Council has instructed the large accountancy firms to draw up plans to separate their audit businesses by June 2024, he said.


“Audit firms have become much more than audit over the past 30 years,” he said. “PwC, for example, makes more revenue from consulting and legal than it does from audit. Deloitte and EY’s consulting practices are much bigger than their audit practices. An audit client may end up using their tax, restructuring, incentives and pensions teams.”


Divestments from the Big Four are likely to provide a strong pipeline of opportunities in the sector in the near future, he said. KPMG has set a precedent for this, selling its restructuring arm, Interpath, to HIG this year and its Isio pensions division to Exponent in 2019.


In anticipation of this upcoming pipeline, EST Partners is reaching out to global audit and consulting firms, particularly in the UK and the US, to build awareness of its investment focus, Smithers said.

“We would like to be front of mind as consulting firms consider further divestments of a smaller size,” he said.


Targets generating between GBP 3m and GBP 8m EBITDA will be within its remit, although it has co-investment capacity to target businesses generating up to GBP 25m EBITDA, he said.


Divestments from larger consulting groups outside the auditing giants will also likely feature in EST’s M&A pipeline as the groups seek to reorientate their businesses with recurring revenue streams, as opposed to project-based revenue, he added.


Additionally, EST will target smaller consultancies seeking investments, he said. Many such boutiques are founded by former partners at large auditing and consulting firms who have left to set up their own shops, to provide specialist advice to clients without facing conflicts or red tape, he said. “Our thesis is around providing growth capital for professional services firms in the market whether they are divested from large audit or consulting groups, or are built by entrepreneurs from the ground up,” Smithers said.


EST Partners is expected to fund acquisitions on a deal-by-deal basis with the support of 20 limited-partner relationships it has already developed through Asante Capital, a private equity placement and advisory firm, he said. It may consider raising a blind pool fund in future, although that is not a priority for now, he added.


The firm anticipates investing between USD 5m and USD 50m per deal and it will consider both majority and significant minority transactions, according to its website.


As well as building out its network in the corporate development departments of large consultancies, EST Partners is reaching out to the advisory community. Most of its origination efforts have been made in-house via its own networks, alumni communities and advisors, he said. Smithers was previously a Managing Director at advisory firm Duff & Phelps.


EST is supporting the buy-and-build strategy of procurement consultancy specialist Proxima, which in June went through a recapitalisation with the backing of Pricoa Private Capital. EST has set a buy-and-build plan to help broaden the company’s geographical reach and services, as reported.

Valuation challenges

Valuation, which have “crept up” in recent years, particularly for strong people-businesses, are among the challenges EST Partners sees facing consultancy businesses in the M&A market, Smithers said.


“Larger platforms, such as KPMG’s divestments, have traded at relatively high multiples as private equity is able to raise debt financing behind the buyout,” he said.


Interpath was sold for a reported GBP 400m and Isio in a deal worth more than GBP 200m, according to Mergermarket data.


However, smaller people-based businesses – an area EST Partners is targeting – do not attract the same level of debt and are therefore priced at more modest multiples with deferred consideration, due to the risk of mass departures of consultants on day of one operating as an independent shop, he said.


Generally, banks are more conservative with project-based revenue models than recurring revenue models, as clients can switch off projects without much notice, he noted. Leverage is typically constrained to less than 3-3.5x at smaller platforms, he added.


“One of our aims is to help our affiliates grow into larger businesses with inorganic growth. Larger platforms ultimately command a higher multiple as they do not suffer the same level of project risk, as they diversify across broader customer bases and geographies,” he said.


by Min Ho in London



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