Can Connolly and Cogital take on the Big Four, and how?

AFTER weeks of speculation, the new venture by former Deloitte global chairman John Connolly and private equity house HgCapital was officially announced on Friday, though somewhat underwhelmingly given the fanfare one may expect from the birth of a rumoured Big Four challenger.

In what may allude to a rushed announcement in light of the recent media speculation that Connolly was mounting a challenge to the Big Four (though providing very little indication as to how this may look), a short press release was issued.

Headed with HgCapital and Blick Rothenberg’s branding, but not CogitalGroup’s, the press release said that ‘CogitalGroup will provide accounting, taxation, financial and other advisory services to entrepreneurial businesses and high net worth individuals.’

The entity will do this by initially growing its business through acquisitions, targeting firms servicing entrepreneurs, continued the press release. Mid-tier practice Blick Rothenberg was its first acquisition, announced on 25 July.

Big Four threat

This raises several questions, but most obviously, why do John Connolly, HgCapital and the as yet corporate identity lacking CogitalGroup think they can now succeed where many attempted consolidations have failed in the past (see Tenon, Vantis and Numerica)?

Phil Shohet, a senior consultant with Foulger Underwood, thinks CogitalGroup is setting up to challenge in the established entrepreneur space, private companies with already several years’ growth and experience behind them. “By doing this they won’t have to wait for new start-ups and fledgling entrepreneurs to get going, where you may get one in a hundred or a thousand that becomes really successful.”

While not a full-frontal challenge to Big Four dominance, a threat to the large practices comes into view through the proposal of a network of quality practices already genuinely dedicated to the entrepreneur market banding together. Shohet thinks such practices would be in a better position to hang on to clients when they’ve grown big enough to go public, when often the natural progression is for a client to move their business up to a Big Four firm.

“That’s a hell of a big plus, being able to hang on to your client,” said Shohet. “And I have identified at the outset some 20 accountancy practices that deal ostensibly with the entrepreneurial market. They’re not tiny, but mid-tier and above practices, with £5m turnover upwards.

“That has to be the angle. If so it would be a definite threat to the Big Four and the SME market because you’re going after them from a different direction, you’re going after the mature entrepreneurs that have established businesses, using Blick Rothenberg and a number of other professional firms. It’s absolutely logical, and these practices can be identified. If I was John Connolly I would approach these 20-30 firms, that would be my starting point, then you would be servicing that market quickly.”

Geographic scope

But what of the venture’s geographic scope: will it be UK focused or have its sights set further afield? This may be determined by the nature of the client base they’re looking to nurture. Entrepreneurs are by definition ambitious and they’ll likely not be satisfied working with a practice that does not share their entrepreneurial and expansionist vision.

Companies will seek similar and likeminded professional services overseas to support expansion, help make inroads into new markets and service new offices. If they can do this with the firm with which they’ve already established a trusted and fruitful relationship in their home country, this could be another threat to the larger international practices, who have been natural bedfellows for firms exploring overseas opportunities.

“It’s a natural angle that there’ll be a global set of accounting practices that are again servicing the entrepreneurial market,” says Shohet. “You’re going to want accountancy firms overseas that have a similar client base to your own, you want to know that the mentality of the overseas accountancy business is the same as the UK practice.”

Blick Rothenberg could be a very canny base from which to grow the business, continues Shohet. “Blick Rothenberg is pretty well represented in most countries, it already has the infrastructure, so by using their international contacts and associates they could take off globally quite quickly. I wouldn’t be put off by the fact they’re a relatively small player in the UK. They’re more like an international player, not at an audit level, but at a small to mid-tier client level.”

Theoretically, tempting new acquisitions that share their clients’ entrepreneurial drive should not be a tough ask. The chance to be part of an ambitions venture led by a proven leader in John Connolly, through which you may be able to expand your network overnight and overseas, while also challenging Big Four hegemony, is surely appealing. “Further attraction to joining this elite group who specialise in this market would be premium earnings for the partners and a good capital value for the practice,” said Shohet.

“Above all else will be HgCapital’s ambitions, and they are very ambitious, though they’ve mainly been focused on the UK and Europe,” says Shohet. “What’s their direction of travel? Is it simply UK or is it global? My suspicion is, having picked up Blick Rothenberg, with its overseas network, it has to be global. If you were going to focus on the UK alone, you could probably have picked up something better than Blick Rothenberg.

“But there has to be a compelling argument here to make it work, compared to the previous consolidators who couldn’t.”

HgCapital and Blick Rothenberg were unavailable for comment

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