For both sets of buyers, there was a pendulum swing from the market craziness of 2021-2022 to a refined focus in 2023-2024. Strategic firms divested non-core capabilities, such as GlobalData’s purchase of Celent from Oliver Wyman, while PE executed calculated approaches on what businesses and industries to chase. Since 2022, we’ve seen more PE firms formalize a thesis and investment team tailored around the professional services market. This trend, combined with even more PE firms receiving pressure from their limited partners (LPs) to exit current investments, will help fuel M&A in 2025. As we see it, economic sentiment has improved, macroeconomic headwinds are abating, and professional services firms’ trendlines are heading in the right direction for more robust M&A activity this year.
Private equity is progressively becoming a bell-weather for professional services M&A, as seen across various thematic areas. Specifically, numerous acquisitions of large accounting firms made headlines – New Mountain Capital’s sale of Citrin Cooperman to Blackstone and Cherry Bekaert’s sale to Parthenon Capital. These represent the tip of the iceberg for PE’s overall appetite across accounting and the office of the CFO advisory firms; interim or part-time CFO, CPA groups, and even bookkeeping businesses are now all in the crosshairs. These businesses typically have stable, recurring revenue, sticky client relationships, and operate in a largely fragmented space, further bolstering the consolidation thesis. The outsized acquisition activity and eagerness in this space, as well as some early successes, are the firing of the starting gun and, as this race continues, this thesis is primed for expansion into broader consulting. We would not be surprised if a large, mid-tier consulting firm completes a deal with PE in 2025 that could accelerate the trend in the sector. To pull on this thread further, it’s likely the playbook for accounting firms is brought to other, traditionally shunned industries, including law and lobbying firms.
It's easy to take today’s market for granted, but if we rewind 20 years, the professional services M&A market didn’t have much of a value exchange. Instead, a merger represented an exchanging of business cards. The M&A market to that point was mainly comprised of firms with products and assets, whereas professional services firms’ most valuable, and really their only assets, are their people. Strategics, especially firms like Accenture, drove meaningful change in creating a repeatable and sustainable economic approach to valuing and acquiring professional services firms. The archetype of successful deals valued building and sustaining an organization that could recruit raw talent, then onboard, train, mentor, and incentivize them to generate a scalable enterprise. The economic element of these deals applied to the retention and incentivization of a firms’ key employees, rather than financial engineering.
That approach flourished to the extent that, 10 years ago, the main acquirers of professional services firms were large strategic buyers. Today, the buyer universe has evolved again to include not only more strategics, but even more PE firms. Along the way, the strategic buyer universe transformed from just services-firms focused to incapsulate software and data firms as well. In short, the interested buyer universe for professional services firms has expanded exponentially, driving significant economic value for business owners.
Looking at today’s substantial buyer universe, PE has arguably come the farthest the fastest. After years of headline deals and a bevy of successful investments, combined with the resulting fear-of-missing-out, the middle market PE community has realized the investment potential in professional services. Firms are building investment theses and hiring seasoned operating partners as they jockey to the forefront of the professional services buyer universe. Recent investments in the accounting and consulting space, in particular, point to PE’s growing comfortability with the project-based business models that permeate professional services. While project-based, many business models in professional services lend themselves to reoccurring or recurring revenue as firms become entrenched with their clients. Predictable, repeat business within project-based business models eases any heartburn PEs have to support these investments.
What remains true and consistent regarding LPs is their desire for a return on investment. As interest rates ticked higher over the last few years, PE firms went to extraordinary lengths to increase hold periods on their investments, often creating continuation vehicles as they awaited the glory days of near 0% interest rates. LPs are done playing the waiting game, particularly as they watch the stock market reach new heights, and are pressuring PEs to exit their investments, irrespective of optimal performance or interest rates. According to PitchBook data, there were fewer PE-backed exits in 2023 and 2024 compared to 2021 and 2022. And across all industries, almost half of roughly 21,000 PE-backed portfolio companies have been held since 2021, as 2024 notched another year of below-average exit volumes. We believe a flurry of portfolio company exits will occur in 2025 as a result.
In professional services, we continue to see M&A interest in Clearsight’s key verticals, including strategic consulting and communications, compliance and cybersecurity, and private equity services. It’s our work in the digital, data, and cloud services and health care and life sciences consulting industries, in particular, where we see a barrage of questions around AI’s impact and power. Thus far we’ve seen AI cannot fully replace the expert teams or tailored services offered by these businesses. What AI can and will do is continue to disrupt all industries. When it comes to the M&A market for AI, we’re still in the early innings. Strategic buyers, due to client exposure, have a better grasp on AI’s utility and valuation than PE firms. As consulting firms meet their clients’ demands around AI, we anticipate that M&A market to mature, though not as quickly as the technology itself.
Despite some headwinds posed by AI and macroeconomic uncertainty, we anticipate increased deal volume and valuations in the 2025 professional services M&A market. PE can only bide their time with portfolio companies for so long, and we foresee deal processes for these platforms to catalyze a strong M&A market this year. With the expectation of increased deal flow, success will depend on macroeconomic conditions and strategic positioning.
This article was authored by Clearsight Advisors' Co-Founder & Managing Director Joel Kallett and Managing Directors Brendan Curran and Justin Loeb. Clearsight Advisors specializes in M&A advisory for sectors including strategic consulting and communications, compliance and cybersecurity, and private equity services. Research source: PitchBook Data.
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