Private equity firms have long been interested in the broader business services market, attracted by high growth rates and profit margins. In early days, nervous of businesses whose value depended almost entirely on the people who worked there, most PE firms focused on business services that had an attractive combination of long-term contracts and tangible/intangible assets, eschewing the short-term revenue models of traditional advisory firms. However, in the decade before the pandemic a relatively small number of high-profile, high-growth deals prompted greater investor confidence and encouraged PE firms to consider “purer” consulting firms. While this was put on hold during the pandemic years, and more recently by high interest rates, private equity firms are once again poring over opportunities in this sector.

Deals are looking increasingly attractive from the sell side, too. Many professional services firms face challenges around their historic organisational structure, career progression, partner remuneration, and pensions. The conventional pyramid firm works well when the market is growing quickly, allowing high-performance employees to become very highly paid partners in return for working exceptionally long hours. But the realistic prospect, now, of a market environment that’s low growth, punctuated by periods of high volatility, means there’ll be less space at the top of firms for those upcoming stars. Moreover, the partnership model makes it harder for professional services firms to invest at a time when technology-enabled service delivery is becoming increasingly important to clients.

Another factor that’s boosting interest in possible deals among professional services firms is, ironically, EY’s attempt in 2023 to split its firm. The so-called “Project Everest” raised lots of questions about ownership models in the professional services industry, but also made it harder for other large and mid-sized firms to follow suit. Attention was fixed on whether the deal would go through, and firms that had been asking some of the same questions posed by EY’s move put their plans on hold, partly because they wanted to see what would happen but also because they didn’t want to be seen to be copying the former’s move. The cancellation of Project Everest cleared that particular deck.

So, if deals between professional services and PE firms aren’t new, why is a deal such as that announced between Grant Thornton and New Mountain Capital headline-worthy news? It’s because of what this tells us about the future of the external financial audit. There are, we think, four main implications.

The focus of the financial audit will be increasing profitability, rather than growth: The external financial audit is a dependable but slow-growing market. Much of the growth in recent years has come from higher fees rather than increasing complexity or volume. Any investor will want to maximise that—and there’s probably significant scope to do so, primarily through greater automation. Yes, this will require investment, but the prize is a larger share of what’s essentially a captive market, so the return on investment is almost guaranteed.

Growth is most likely to come from non-audit assurance services: Most accounting firms see significant opportunities around non-financial assurance, especially around sustainability. While the broader advisory market in this area is being held back by clients who don’t have the data to create robust business cases for investment in the current economic environment, everyone agrees that there will be more regulation and that compliance will depend on technology-enabled professional services firms with a track record in similar work—in other words, accounting firms. With growth coming from other “audit” services, the importance of the external financial audit in the firms that do this work will diminish.

Technology will be key: The involvement of PE firms will increase the level of short-term investment in technology, as both increasing margins for the external financial audit and the ability to stake a claim in emerging non-financial assurance markets, such as sustainability, will depend on completing the move from people-based processes, sampling, etc., to real-time data monitoring. The shift to technology may also reduce the number of problems with the quality of the audit, as regulation will increasingly focus on automated data gathering processes and protocols rather than examining human error. None of this will be cheap and few audit firms have the technical and programme management skills required to complete this wholesale business model change, so it will make sense for PE-backed audit firms to seek alliances and joint ventures with technology companies. All the above will put technology at the heart of PE-owned firms.

Relationships will become less important: Historically, the core of an external financial audit has been the opinion—the judgement of a qualified expert about whether a business is viable. That decision typically comes with observations about the business, which in turn creates a unique relationship between the audited and the auditor. There’s an open question about whether this will continue to be the case in the future: As the basis of the decision moves from judgment to data, the role of the expert may diminish.

What all this points to, in essence, is that audit will be a service, not a raison d’être.