Blog – Private Equity Malaysia | Observations

The New Frontier: Private Equity’s Influence on Accounting

Leave a Comment / Uncategorized / Secret PE Practitioner / April 7, 2024

The accounting profession stands at a crossroads. Recent acquisitions of second-tier accounting firms by private equity groups signal a shift that could redefine the industry’s future.

In February 2024, US accounting firm Baker Tilly agreed to sell a majority stake to Hellman & Friedman and Valea. A month later, the US arm of accounting firm Grant Thornton has agreed to sell a majority stake to the investment group New Mountain Capital.

A Tradition of Trust

Accounting has traditionally been a profession grounded in trust; at least, this was what was drilled into us when I qualified as a chartered accountant in England years ago.

Accountants are the gatekeepers of capitalism. They ensure financial statements reflect a company’s financial health and underpin credit and investment decisions by vendors, bankers and investors. This trust is the cornerstone of the profession’s proud legacy.

The Winds of Change

However, the landscape is changing. Private equity’s foray into accounting, exemplified by the recent acquisitions of two notable second-tier firms, raises questions about the future. These moves are not isolated incidents but part of a broader trend where private equity sees potential in the steady, reliable returns that accounting firms can offer.

The Private Equity Proposition

Private equity groups bring capital, business acumen, and a drive for efficiency. They promise innovation, growth, and a path to rapid scaling that traditional models cannot match. But at what cost? The profession’s ethos of putting truth above profits may be challenged as these investors seek investment returns.

Would an accounting partner walk away from subtle client pressure to sign off on accounts that flatter sales and profits, knowing the impact on fees and profit? Client pressure exists under the partnership model today, and the profession’s track record has not always been great (Enron et al.). What would happen when more accounting firms are owned by private equity, which demand a 2-3x return in 5 years?

The Future of the Partnership Model

As more accounting firms align with private equity, the profession may witness a transformation. The partnership model, which prioritizes collective decision-making and long-term client relationships, might give way to corporate structures emphasising efficiency and profit.

The question remains: Can the accounting profession maintain its foundational principles in this new era? Or will the relentless pursuit of profit erode the trust that has been its hallmark? Should regulators step in for the sake of public good?

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Why Private Equity Partners Have a Love-Hate Relationship with Fundraising

Leave a Comment / fundraising / Secret PE Practitioner / June 25, 2023

Hey there, fellow PE enthusiasts! Today, let’s dive into the exciting and somewhat secretive world of private equity fundraising. It’s the lifeblood of these fund managers, enabling them to secure the capital needed to invest in promising businesses and make some serious returns. However, despite its importance, partners in private equity firms often have a love-hate relationship with fundraising. Let’s uncover why!

Importance of Fundraising

Fundraising is the fuel that powers private equity fund managers’ operations. Without it, their investment strategies would remain mere concepts on paper. With millions, or even billions, of dollars at stake, fundraising allows fund managers to participate in high-value transactions, acquire businesses, and support portfolio company growth. It’s the key to turning potential investments into tangible opportunities.

Dreaded Challenges for Partners

Now, let’s get to the heart of the matter. Partners in private equity firms sometimes cringe at the thought of fundraising. Why? Well, for starters, it demands tremendous time and effort. Partners are typically laser-focused on generating lucrative investment opportunities and overseeing existing portfolio companies. Diverting their attention to fundraising can be daunting, as it requires extensive due diligence, pitch presentations, and nerve-wracking negotiations.

The Sales and Marketing Stigma

Another reason partners may shy away from fundraising is the sales and marketing aspect. Fundraising demands exceptional interpersonal skills and the ability to effectively communicate the fund’s investment strategy, track record, and potential returns to potential investors. Not all partners are natural-born salespeople, and some may prefer to focus on the analytical and operational aspects of their roles rather than selling their fund to potential investors.

Navigating the Competitive Landscape

Let’s not forget about the fiercely competitive fundraising landscape. The number of private equity funds is at an all-time high, making it increasingly challenging to secure commitments from investors. The pressure to consistently meet fundraising targets and maintain relationships with existing investors can be overwhelming for partners. It’s a high-stakes game that demands persistence, adaptability, and an unwavering belief in the fund’s value proposition.

Fundraising in 2023

According to an FT article, private equity funds raised $347bn globally in 2022, down 16% from $413bn the previous year and 5% below the average of the past five years. Fundraising in Q1, 2023 was down further, especially in the Venture Capital, where funds raised dropped 38% year-on-year. Fundraising is not for the faint-hearted!

Conclusion

Fundraising is undeniably vital for private equity fund managers. It provides the capital needed to turn investment strategies into reality, diversify investor bases, and build a stellar track record. However, partners in these firms often grapple with the challenges fundraising presents.

The time-consuming nature, the need for sales and marketing prowess, and the intensifying competition can create a love-hate relationship with this crucial activity. Nevertheless, recognizing the significance of fundraising and finding ways to navigate these challenges is essential for private equity firms’ long-term success and growth.

So, there you have it, a glimpse into the intriguing world of private equity fundraising and the delicate balance partners must strike. Want to start your own private equity firm? Build a track record and master fundraising. 🙂

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On secondaries

Leave a Comment / secondaries / Secret PE Practitioner / June 24, 2023

Bee Alternatives, a Japanese pioneer in private equity secondaries in Southeast Asia with a Labuan fund manager license, was a breadth of fresh air in the local private markets scene. What are secondaries, you ask? Before we continue, this topic interests mainly private equity fund managers and limited partners; feel free to skip this post if you are neither. 🙂

LP-led secondaries

The best way to understand secondaries is to start from the perspective of a private equity fund investor, known as a limited partner (LP). An LP commits capital to a private equity fund for a period of ten to twelve years. The private equity fund manager, known as a general partner (GP) has five to six years to invest the funds into promising businesses and then a further five to six years to sell these businesses for a profit (hopefully!) and distribute the proceeds back to their LPs.

Unlike owning stocks on public markets, where one can choose to liquidate one’s stake for cash under most circumstances, an LP traditionally has difficulties liquidating their stake in a PE fund mid-way through the fund life. There are many reasons why an LP wants to liquidate its PE portfolio mid-way (a discussion for another day). The secondary market was developed to address this. Sophisticated buyers can value LP stakes in one or more unlisted businesses and provide LP ‘liquidity’ when needed.

The scenario described above is an LP-led secondary, the most common form of secondary.

GP-led secondaries

The second scenario is when a private equity fund comes to the end of its fund life without exiting all its investments. There could be multiple reasons why a GP is not able to sell all its investments after ten to twelve years (a discussion for another day). The traditional consequence usually has two outcomes: 1. the LPs begrudgingly extend the fund life, or 2. the fund distributes its stake in private companies for LPs for direct management.

A GP-led secondary is where a GP initiates a restructuring or liquidity event for its LP, typically selling its stake to a ‘continuation fund’ where a secondary investor agrees to participate, alongside existing LPs who agree to ‘roll over’ their stake to this new fund vehicle.

Now that we understand what a secondary is, you will agree with me that the presence of Bee Alternatives and other PE investors specialising in secondaries is important for the development of private markets in Southeast Asia. Anecdotally, several secondary transactions have been completed over the past year or two in Malaysia.

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