When we invested in LB Group in May last year, we did so because we believe it has the potential to become a leader in the UK SME accountancy market, acting as a consolidator in a sector long defined by its high level of fragmentation. There are more than 40,000 accountancy practices across the country, of which around 80% have five advisers or fewer, and a further 10% have six to 10 advisers. After phases of consolidation in other areas of professional services over the last decade – most notably in insurance broking and wealth management – accountancy is now experiencing its own wave of increased M&A activity.

As we see it, there are several drivers behind this trend:

Opportunity

The 10 largest accountancy firms in the UK (ranging from the Big Four to their larger challengers) are seeking ever-larger and more valuable clients, and in doing so are shedding what they regard as lower-value clients. For many mid-market firms, these present highly attractive opportunities (for example audit fees in the £10-50k range). Currently, there is no single clear mid-market leader, and investors, including ourselves, see an opportunity to build one, without necessarily aiming to challenge the Top 10 incumbents.

Technology

There is certainly a growing demand for user-friendly customer portals where small-business owners can upload invoices and receipts. However, there are also pressures to invest in internal-facing technology that drives efficiencies within accountancy businesses. These require investments of time and money to get right, and an ageing ownership may not see the personal value in this kind of long-term planning. Again, an external investor can think about a longer time horizon and draw on deeper resources to develop technology that will be scalable and future-proof.

Succession

Many smaller accountancy firms are owned and managed by their founders, and the dynamics for internal succession are increasingly challenging. Younger directors find it difficult to raise the money to buy out older partners who want to exit, a situation exacerbated by rise in the cost of living. External capital can solve this problem by giving exiting partners a capital event while providing exciting career options in a growing firm for the next generation.

Hiring and retention

While hiring is a challenge across professional services, the accountancy market is particularly tight. Many promising young accountants who have trained at smaller firms see a limit to their progression opportunities, and end up leaving for a Top 10 firm. Building a true mid-market leader and a brand to match could be part of the answer to hiring and retaining top talent, especially if doing so presents greater opportunities for career mobility to young and mid-career accountants.

As is the case with all the investments we make, we spent a significant amount of time researching and analysing the sector before we invested in LB Group to understand the unique market dynamics, the trends, opportunities and challenges. LB’s ambitious growth plans and strong market reputation made it a natural fit for us. If you would be interested in finding out more about our work with them, or our views on the accountancy market more broadly, please contact James Buckhalter.