Hey guys,
are professional services companies attractive targets for PE funds? My understanding is –no because (a) the barriers to entry are low if no strong brand value (b) no real economies of scale, scope (c) harder to exand the business (?). However some examples of such investments exist: e.g. the Booz Allen Hamilton deal. What do you think?
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Agree on A especially for smaller/higher-value add firms with a few key employees, disagree on B (there are serious economics of scale for the largest law/consulting/accounting firms), am divided on C (you can expand by acquiring smaller competitors or rolling up local firms to grow globally as the Big 4 have done in accounting, but it's tough to expand organically beyond a given pace).
To me the challenge is that once the founders/partners who represent the real value of the firm (embodying the brand value) take their payday and don't have the same necessity to keep fighting for their bottom line you're going to have trouble retaining their undivided attention, and once you lose the partnership carrot to keep middle management hungry, you end up either losing talent or paying them more than before to stay.
Agree with Kenny, it is the same with media companies often, their strategy and nature do not fit with a PE firms remit in the same way as an industrial or consumer facing business does,
Business services/ Marketing is very much of interest to MM PE firms. I actually somewhat agree with your reasons for thinking they wouldn't be, but they are. Lots of dry powder.
For sure, they're definitely being targeted, just like other asset-lite or cash-flow poor business have been targeted in the past when too much money is chasing deals. Just think it's a bad idea.
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