Private equity can accelerate the growth of smaller consultancies

01 April 2019

Smaller, challenger consultancies have in recent years booked market leading growth in UK’s consulting industry, on the back of a strong niche expertise and an entrepreneurial approach. Mark Ligertwood, a Partner at private equity firm Dunedin, an experienced investor in the professional services sector, explains how niche consultancies can grow even faster without compromising their specialist quality.

You might call it the rise of the specialists. While the large global consulting firms have become household names, a separate breed of smaller and more focused advisories are growing much more quickly. These firms have been increasing sales at an average rate of 20% a year according to the Management Consultancies Association (MCA), five times’ more quickly than their larger counterparts. 

Specialist consultants concentrate on a market segment where their founders have deep expertise and experience. Often focusing on very particular areas of consultancy rather than offering a more generic service, they are highly regarded for their client-focused approach. Indeed, clients often followed the firm’s leaders out of a larger consultant when they were setting up the business.

Very often, the leaders of these organisations are evangelical about their specialism, with huge ambition for both their clients and their own businesses. They relish the opportunity to work with people with similar levels of creative energy and work hard to protect what makes them special; but they are also highly motivated to grow their organisations.  Private equity can accelerate the growth of smaller consultancies

Scale-up opportunities and challenges

For investors and private equity firms, this is a potentially attractive opportunity. But herein lies a dilemma. How do you scale a business that is performing so strongly precisely because of its specialism and focus? The danger for specialist consultancies is that growth could undermine their unique selling point – by moving them into areas where their expertise is less deep, for example, or by diluting the culture and skill sets of the business through recruitment of staff that don’t fit the mould.

The good news is that these ambitions are not irreconcilable – as the growth rates achieved by specialist consultants generally go to show. 

New markets will be an important element of the growth plan. That might mean working with a broader range of clients in different sectors or identifying adjacent services that appeal to both existing and new customers. International expansion is also a huge opportunity: many of the most successful niche firms with whom we have worked have grown rapidly by taking their business model from one geographic market to the next. Offering the deepest specialty in their respective niches, they are well-placed to win business in each new geography.

Attracting and nurturing additional talent is also critical. One challenge for specialist consultancies is to find people with the right expertise to operate at senior levels of the business. Here too, internationalisation provides a solution: firms that follow existing clients into overseas locations can gain access to new pools of talent while simultaneously growing revenues. Over time, this enables the consultancy to take on more work and bigger projects, particularly since new recruits will come with their own client relationships.

At more junior levels of the businesses, there is an opportunity to develop the skillsets of the next generation. Their leaders are inspiring role models, but there is also a need to create structures that deliver training and development and recognise success – through talent academies, for example. Specialist firms often provide younger consultants with the opportunity to reach senior levels of the business more quickly than they would in a much larger, multi-disciplinary organisation. 

Culture is another key piece in the growth jigsaw. The most successful specialists seek to protect their culture at all costs; these are often businesses where the founding partners have rejected the corporatism and politics of the large consultancies in favour of values such as meritocracy, client centricity and passion. As the organisation increases in size, it may be challenging to keep those values front of mind, but their leaders work hard to do so.

“With private equity on board, niche consultancies can grow even faster without compromising their specialist quality.”
– Mark Ligertwood, Dunedin

Investment and support to accelerate growth

External investors in such businesses can provide crucial funding as consultants seek to accelerate their growth. This does not have to mean abandoning a diverse ownership model, with specialist consultancies often committed to employee share ownership as part of their meritocratic culture. But the broader support an investor can offer may be just as important, spanning needs such as recruitment, operations, IT, finance and governance. 

For example, Dunedin’s investment in FRA, a specialist consultancy that helps its clients respond to regulatory investigations, has seen it help the firm hire at a senior level and provide support in building the internal infrastructure that businesses need as they grow. That includes enabling technology in areas such as customer relationship management and financial reporting, as well as advice in areas such as the retention and recruitment of key personnel. FRA has doubled in size over the past two years.

Our other successful investments in this area include Blackrock, widely regarded as the world’s leading practice of independent expert witnesses providing support predominantly to the construction sector but increasingly to related industries such as IT; and Alpha FMC, which provides operational consultancy to asset management firms. 

What these firms have in common is a leadership that understands that it is the combination of expertise and character that makes them special. Highly-engaged leaders and partners are motivated by the desire to deliver exceptional customer service – and often relish in the us-and-them mentality as they secure new business ahead of larger competitors. They show that specialist consultancies have the potential to grow fast and establish international market leadership whilst staying true to what has powered their success so far.

Related: Why private equity firms are upping their stakes in the consultancy sector.

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Private equity firms ramp up sustainability focus

19 April 2019

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.