Although this sale is driven by a very specific set of circumstances, private equity firms are increasingly active in the professional services space. The outcome of those investments, whether they involve a trade sale or a public offering, depends on being able to demonstrate to investors that there’s a sizeable addressable market for a firm’s services that’s likely to grow at above average rates. And the deal between Allegro and PwC makes us wonder: Is that true for public sector consulting?

The answer to the first part of the question—size—is relatively straightforward. We estimate that public sector consulting will account for around 10% of all consulting globally in 2023, approximately $25bn. North America dominates, with around 41% of the market, some way ahead of the Europe and APAC markets, which we estimate to have about 29% and 21% of the total, respectively.

The answer to second part—growth—is much more contentious, not least because the size of many firms’ public sector practices means that potential changes here will always be carefully scrutinised and often hotly contested. Growth rates vary substantially by country, reflecting different national approaches to the use of external advisers in public institutions. There’s also a roughly positive correlation between the rate of growth and the proportion of consulting revenues that come from the public sector in a given market. Twenty-four percent of the Middle East consulting market (primarily the UAE and Saudi Arabia) comes from the public sector, more than twice the average percentage, and public sector consulting here is expected to grow at a CAGR 2022-24 of 10%, compared to 7% across all other regions.

However, at the heart of the argument about likely growth rates in public sector consulting is the extent to which this market has changed since the pandemic. 2020 saw the public sector consulting market shrink by 1%, less than the 4% contraction seen across the consulting market as a whole. While some parts of government saw budgets for consulting work slashed as priorities changed, this loss was mostly offset by very large contracts around helping those governments respond to the challenges of COVID. With more interventionist governments, enabled via rapid digital transformation, the post-pandemic expectation was that the public sector would be one of the fastest growing consulting markets.  

But that assumption is now being challenged in a variety of ways. War in Ukraine has meant the diversion of resources, including consulting, to defence. Rising costs and interest on government debt is restricting the amount of money left for investment. What’s more, pressure on fee rates, which are almost always lower in the public than in the private sector, will eat into the dollar value of the market, even if activity levels remain high. In some countries, there’s also resentment over the amount of money spent with consultants during the pandemic, leading to greater public scrutiny of the use of professional services now.  

All these pressures will have an impact on the types of consulting services public sector organisations will want to buy. While the intention to invest in technology-related consulting remains high, it's not as high as in the private sector, and investment in business strategy and data & analytics looks as though it could be significantly lower. By contrast, demand for risk management services and productivity improvement will be much higher. 

Overall, we expect average growth in public sector consulting to remain relatively high in 2022-24, but to return to 2019 levels (around 5%) thereafter. For firms looking to grow more quickly, the challenge will be to identify and exploit specific opportunities, and not to assume that the market as a whole will continue to grow as fast as it has been. And for private equity firms eyeing up this substantial market, there will certainly be pockets of above-average growth, but it’s vital to understand the extent to which individual investment targets line up with a narrower set of opportunities.