Too Big to Sell? The Big Four’s Partnership Paradox
Private equity is changing the economics of ownership in the accountancy profession. Much of the attention has focused on consolidation, valuations and the growth of PE-backed platforms. I am interested in what this might mean for the Big Four, which are probably beyond the reach of conventional private equity acquisition.
Traditional partnership has always involved an unusual but effective economic bargain. Partners gain access to an established and valuable earnings franchise without purchasing their proportionate share of its accumulated goodwill at market value. They participate in annual profits but generally retire without realising that goodwill at a conventional enterprise valuation.
Each generation inherits an institution it hasn’t had to buy, contributes to its development and passes it on.
The model has endured for good reasons. Beyond the economics, partnership has traditionally encouraged collective responsibility, professional standards and a shared interest in protecting the firm’s reputation. At the largest firms, these characteristics have long coexisted with centralised management and relatively limited individual partner influence. That has done little to diminish the attraction of partnership, with its combination of substantial earnings, professional standing and access to an established franchise.
Private equity is introducing an alternative. Existing partners may roll over equity on a transaction, while incoming and continuing partners can receive incentive equity, sometimes for little or no upfront investment, alongside their annual earnings. Subject to the terms of those arrangements and the eventual success of the business, that equity can provide an opportunity to realise a substantial capital gain.
The attraction is obvious. A professional who can earn competitively while also participating in the capital appreciation of the business, potentially without making a substantial personal investment, has an opportunity that traditional partnership rarely provides.
For the Big Four, this presents a particular challenge.
They have accumulated enormous franchise value, but their scale, international network structures and regulated audit businesses make conventional monetisation exceptionally difficult. EY’s abandoned Project Everest illustrated some of the practical obstacles, even when the objective was to separate and monetise only part of the organisation.
The firms with perhaps the greatest accumulated franchise value may therefore offer their individual partners the least opportunity to realise any of it as capital. Historically, that has mattered relatively little. The annual rewards of partnership have been substantial, and incoming partners haven’t had to purchase the underlying goodwill at market value.
But the emergence of PE-backed competitors changes the comparison for professionals contemplating a long-term career at the top of the profession.
A Big Four partnership offers exceptional earnings, major clients, international opportunities and the resources of a formidable institution. A successful PE-backed competitor may offer attractive remuneration alongside participation in enterprise-value growth and a prospective liquidity event. There is no reason to assume that the latter is necessarily more rewarding, and little evidence yet that these differences are materially influencing recruitment or retention at the Big Four.
Nevertheless, the largest partnerships may find it difficult to match the capital opportunities now available elsewhere. Long-term incentives linked to enterprise value are possible, but without an external capital event, the resulting payments must ultimately be financed from the firm’s resources or by succeeding generations of partners. That would begin to alter the intergenerational bargain on which traditional partnership rests.
The question is whether the prospect of capital appreciation, alongside competitive earnings, will become sufficiently attractive to influence the career decisions of some of the profession’s most talented people.
The Big Four may be too large and structurally complex for private equity to buy. But they are not beyond its competitive influence.
PE’s most significant effect on the largest firms may ultimately have little to do with acquiring them. It may be to change what the next generation expects partnership to offer.
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