Neil Hughes, an Irish corporate insolvency practitioner of more than two decades, knows all too well how torturous it can be trying to round up directors, investors and jockeying creditor factions on to one page in efforts to rescue – or wind up – tricky cases.
However, sealing a deal to sell Baker Tilly Ireland, where he was managing partner, to Azets, a London-based international accounting, audit and advisory group, took less than four months from the time he was approached late last year to when it was unveiled in March, for an undisclosed sum.
The attraction for both sides was clear from the outset. For Azets, it is the Republic’s “strong trading ties and business connections with the UK, Europe and North America, buoyant SME community, and resilient economy”, said a spokesman for the group, which aims to double what is now Azets Ireland’s staff to 220 over the next 17 months with tie-ups with other practices around the country.
Hughes, now chief executive of Azets Ireland, says joining a bigger group offers the firm a chance to meet what he calls the underserved needs of small businesses when it comes to exploring equity financing for growth – and debt restructuring for those in financial stress.
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“If you are a large corporate in Ireland you can get all sorts of advice readily. That is not the case for many, many quality SME businesses around the country who have the same right to access advice on restructuring or, say, raising money through the EIIS or other corporate finance options,” said Hughes, referring to the employment investment incentive scheme (EIIS), a mechanism for growing companies to raise money from private investors, who receive tax relief as a result. “There is no national firm of scale focused on SMEs, which are the backbone of the economy.”
He estimates “there will be hundreds of companies with massive tax overhangs that should be restructured” under Small Company Administrative Rescue Process (Scarp), which was introduced in late 2021 to help overhaul insolvent small firms through debt writedowns and new investment and is significantly cheaper and less bureaucratic than a court-supervised examinership.
Overseas groups are seeking to tap into the EU’s fastest growing economy but also opportunities from a long-delayed post-Covid spike in insolvencies
It comes as companies grapple with rising costs and interest rates – and as more than €2 billion of warehoused tax debt built up over the pandemic falls due in 12 months’ time.
“If you are a business in a regional town that owes €500,000 in warehoused taxes to Revenue as a result of the pandemic and have no way of paying that, you may be a good candidate for a Scarp. But your local accountant is highly unlikely to have the expertise to guide you through the process,” he said. “We want to bring that expertise right around the country and hopefully be in a position to save thousands of jobs.”
Azets, one of the UK’s fastest-growing accountancy firms, is among a number of overseas groups – mainly backed by private equity – that have entered the Irish market in recent times.
They are seeking to tap into the EU’s fastest growing economy – on track to expand by 4.9 per cent this year and 4.1 per cent in 2024, according to the European Commission – but also opportunities from a long-delayed post-Covid spike in insolvencies, as an unofficial moratorium by banks and other creditors against taking on debtors in arrears during the pandemic dissipates.
Interpath Advisory, a UK-based corporate restructuring and advisory firm, excited the industry early last year when it hired some of the highest-profile experts in the State, led by Kieran Wallace and Ken Fennell, formerly of KPMG and Deloitte respectively, to set up a practice in the Republic.
It followed on from the Irish arm of Teneo, the public relations and advisory company, hiring Damien Murran, a partner with accounting firm RSM, to build a corporate restructuring outfit in Dublin in 2021, fresh after the group bought Deloitte’s UK restructuring arm. Murran has about a dozen on his team and aims to grow that to 20 by the end of the year.
Azets is controlled by US private equity group Hg Capital, which is seeking to sell its stake in a process that reportedly values the business at about £1.5 billion (€1.7 billion). Interpath is mainly owned by investment firm HIG Capital, while CVC Capital holds a majority stake in Teneo.
Elsewhere, Noone Casey, the 31-year-old Dublin-based accounting firm with a niche in media and entertainment (with testimonials on its website from comedian Tommy Tiernan, journalist Mark Little and Grammy award winners Rodrigo y Gabriela), tech and professional services sectors, sold a 51 per cent stake in itself to fast-growing German-based accounting group ETL Global, which has a network of over 1,000 offices in 50 countries.
ETL has a target of investing in as many as 20 firms in the Irish market by the end of 2025.
My concern is over the long term, when these practices have been flipped a few times ... I fear that private equity is a slightly strange bedfellow for professional services
— Brian McEnery, BDO
The burdens of mounting regulation and compliance, technology costs and succession planning are also weighing on small, independent firms as they consider their future, according to industry participants.
Brian McEnery, managing partner of BDO Ireland, the second-tier law firm below the so-called Big Four, is aware of a number of accounting practices that have been approached by private equity in recent times.
“From talking to colleagues in the profession around the country, my sense is that a lot of firms have been approached,” he said. “I can see the attraction for owners of the [initial business] that private equity would buy, as they become a consolidator. But I do have my concerns about the longer-term impact of private equity getting involved in the sector.”
Other industry sources said that Dains Accountants, a fast-growing British firm backed by private equity group Horizon Capital, is among those assessing an entry into the Irish market.
Activity in the Irish market follows a wave of private equity deals in the sector internationally in recent times. New York-based TowerBrook Capital took a majority stake in the US member firm of EisnerAmper Global, the international accounting network, in late 2021, in what was seen as a groundbreaking transaction. Since then, the likes of fellow US accounting firms Cintrin Cooperman, Schellman and Cherry Bakaert have secured private equity investment. Still, deals have had to be structured in ways to ensure that the audit practices of firms remain majority-owned by accountants to comply with laws in many countries.
The Financial Times reported late last year that BDO and fellow second-line accounting firm Grant Thornton had considered a deal with private equity, though neither decided to take up such investment.
The attraction of private equity is the fact that much of accounting revenue is recurring, which makes it easier for private equity firms to fund borrowings in a takeover transaction. While much of the work is recessionproof, corporate restructuring comes into its own during a downturn.
Private equity firms are also increasingly seeing an opportunity to drive consolidation in a fragmented sector and introduce more technology to increase efficiencies and keep costs in check in an era of increasing regulation and compliance demands.
However, the private equity model, where senior executives may be willing to take a salary below the market rate in the industry in return for the prospect of a massive pay-day – from rollover equity and long-term incentive plan (LTIP) arrangements – when private equity sell on is very different from traditional accounting firms, where partners, or owner-managers, share the profits.
The prospect of getting into bed with private equity may be particularly appealing for partners in a firm that are the latter third of their career, according to a senior industry figure, who declined to be named. That’s because of the “naked in, naked out” partnership structure, where new partners buy into a partnership when promoted but have to sell out as they leave.
However, McEnery of BDO said the real upside is for the initial management teams tapped by private equity firms to drive deal making.
“My concern is over the long term, when these practices have been flipped a few times,” he said of the private equity model, where funds sell on their investment, often to other funds, after a period. “Will they be able to hold on to key talent in the meantime? Will they also be able to keep clients through ownership changes? I fear that private equity is a slightly strange bedfellow for professional services.”
Hughes, however, sees prospective clients – and the economy – as clear beneficiaries of private equity-owned Azets Ireland’s expanding reach.
“Businesses are going to be crying out in the next year for restructuring as warehoused taxes fall due. We’ve done Scarp arrangements where Revenue has agreed to write down 98 per cent of what it is owed. In the history of the State, we have never before seen tax authorities actively support – not just acquiesce or abstain in votes on restructuring arrangements – deals involving losses to Revenue if there is a viable business that can be rescued,” he said.
The level of corporate insolvencies has picked up since late last year, following a hiatus during the worst of the crisis as companies under pressure were kept on life support through various government supports and creditor forbearance.
There were 146 corporate insolvencies in the State in the first quarter of this year, up 22 per cent on the same period last year, according to Deloitte Ireland. But the figure is still well off the average of 192 in the corresponding quarter of the two years preceding the pandemic.
“Recent levels of corporate insolvency activity would suggest we are getting back to pre-pandemic levels of activity. However, taking 2019 as a previous ‘norm’, we are not yet seeing a material fallout from the economic impact of Covid or increased interest rates and inflation,” said David Van Dessel, a partner in financial advisory at Deloitte Ireland.
The services, hospitality and retail sectors, all hit severely by the pandemic and subsequent cost-of-living crisis, accounted for the majority of businesses that went under in the early months of this year.
Creditors’ voluntary liquidations, a director-initiated process where company liabilities exceed assets, accounted for more than two-thirds of the cases in the first quarter.
While court liquidations remain low, with seven recorded in the first quarter – including Cork-based blockchain-based trade finance network Marco Polo, after it failed to secure investment from Bank of America as the Wall Street giant became wary of such businesses in the wake of the collapse of cryptocurrency exchange FTX –, examinerships and Scarp cases are on the rise.
There were 11 Scarp appointments and four examinership appointments in the first quarter, with the combined figure more than double the seven restructuring procedures initiated in the first three months of last year.
Interpath’s Wallace, who was finally able to join the firm at the start of this month, having handed in his notice in January 2022, said his new colleagues have noted an increase in restructuring-related enquiries in recent weeks.
“They’re mainly from small-sized companies facing rising costs – with many of them looking to address warehoused tax debt,” he said.
“We see a real opportunity to build an all-island, independent advisory business that is part of an international group that isn’t affected by conflicts of interest.”
Interpath Ireland has built up a staff of 50 in less than a year, with recent hires including Liam Booth, the former head of corporate finance at Investec Ireland, Siobhán Connolly, a former senior finance executive with Gecas, the aircraft lessor that merged with rival AerCap in 2021, and Owen Travers, who previously worked as finance director at home builder Dres Properties and once headed AIB’s corporate finance business.
It is also in talks with boutique accountancy firm Friel Stafford, as first reported by online business publication, The Currency, last month.
Noone Casey co-founder Anthony Casey reckons consolidation of the sector below the Big Four and second-tier firms in Ireland “is in its infancy”.
However, he highlighted that German, family-owned ETL’s model is different from private equity-backed consolidators.
“ETL’s offering to firms joining the network is the purchase of a 51 per cent stake, but also the possibility of funding new partners coming on board to take a stake in the business, in order to help with succession planning,” he said. “ETL has appointed us as their master partners in Ireland. It’s our role to identify firms that would be of interest to ETL and add value to the group. We’re currently talking to 10 different firms.”
Still, Casey knows he’s got competition. “There is a lot of private equity money looking at the industry and a lot of conversations happening behind the scenes. I’d expect there will be a lot of announcements later in the year.”
