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It's all about the details, every PE deal is different. If there is a large loan and equity, then the loan eats up an outsize share of current profits, and disproportionately affects remaining equity partners.
Younger partners could in theory benefit from PE growing the overall pie (revenue and profits) and share in a future monetization event. Realistically, there is a better chance of their firm being part of a roll-up strategy which can be the best case scenario.
As these roll ups continue and firms get larger and larger, traditional middle market clients will likely not fulfill the growth goals PE needs to grow EBITDA for an exit. Double digit growth for these mega conglomerates over a 5ish year period is going to be a challenge without offshoring, AI and cost cutting. Client service will suffer. Lower middle market, private firms are already seeing the benefit as they are winning work away from these PE owned firms because of pricing and service. I believe principals at these PE backed firms are going to have a difficult time meeting the demands…this is what I’m hearing and seeing with a record number of principals from these firms looking for new opportunities. It’s staggering really.
It’s partially valid, but you also get an equity stake in the new structure so you’re an owner with a vested interest in the future success of the firm. Continue to support the firm’s growth and you’ll hopefully participate even more in the next turn. The firm will be revalued so continue to watch that and industry multiples to see your equity value grow. Also interested what others have to say, though.
Regarding your first sentence in your reply, partners already have equity and have a vested interest in growing the firm, so I’m not sure that supports the PE concept.
Another add here is that some of the more senior partners that are still milking the firm are forced out (with cash of course) and replaced by PE who may create more incentives for younger partners and may be more pay-for-performance than pay-for-seniority.
Not sure what’s better - senior partners who are pulling most of the cash and not doing much to grow the business or PE who s pulling that share of profits.
It is likely that smaller firms are positioned better cause they will likely be sold more than once and in turn would get more upside.
That’s great feedback. My concern has been the larger firm strategy and having to wait for two turns to realize PE benefits. Not sure two turns would happen on multi billion dollar firm size valuation before some of us had planned to originally retire.
Part of PE structure now, plus young partner, lot of the upfront convo was in paying down legacy retired partner deferred comp/pensions to free up working capital for reinvestment. Plus the “turns” when you hit the mid billions are planned to be “fund to fund” within similar ownership family. There’s only a few that could make a bid for a future combined firm like Moss Adams and Baker Tilly at $4B (today, more at turn). The value comes in young partner’s equity value growth (way faster than pre PE) and the target multiple of a liquidation event (or many). Beware though, conversion to alternative practice structure, changing tax years, and seeing all the deferred income from past partner years all come due at once is eye opening. Never thought my annual tax bill due for extension would have so many digits.