Drawn to the asset-light, people-centric nature of the subsector, private equity can provide capital and expertise to unlock value through consolidation, boosting digital capabilities and expanding geographically.  

Business services has long been a hot sector among investors due to the typically non-discretionary nature of its offerings. Within this, the professional services space is particularly popular, with regulatory tailwinds and a focus on energised end-markets boosting its activity to a third of European mid-market business services deals in 2023.

“We see an ability to create real value and accelerate growth in many firms in this subsector,” says Isabelle Pagnotta, Partner and Head of Business Services at Inflexion, which is working with a number of professional services businesses.

The capital and expertise of private equity can also be used for longer-term investment, helping mid-market firms to accelerate growth such as: strategic M&A to transform businesses into robust growth platforms, or organic growth from digital enhancement and a focus on talent to underpin future success.   

Inflexion provides a range of bespoke funding solutions addressing the full spectrum of the European mid-market. It has dedicated funds to support both traditional buyouts and minority investments, as well as a lower mid-market vehicle, which all leverage Inflexion’s in-house Value Acceleration team to drive rapid growth.   

Professional services firms offer tremendous scope for creating scalable platforms to consolidate fragmented markets, domestically and internationally. “Before we make an investment, we make sure the business has the potential to become a platform. That means being institutionally ready with the right scale, management capability, and tech backbone to execute acquisitions and integrate them effectively,” Isabelle explains.

In addition to providing hands-on support with the sheer resource required for such an undertaking – from target identification to negotiation to post-acquisition integration – private equity can play a tremendous role in developing M&A capabilities in-house. "We help companies create an M&A playbook," says Isabelle. "This guides them through the acquisition process, from deal sourcing to integration, ensuring they harness synergies like cross- and up-selling."

Integration is where the significant value lies, whether through harmonising service offerings or improving internal efficiencies, according to Tom Green, Inflexion Partner. “In professional services, you need to integrate the deals properly. The people-centric nature of these businesses presents unique opportunities.”

One success story is dss+, a professional services firm active in the operations consulting segment, which delivered over 15% revenue growth in 2023 and completed three acquisitions in the last twelve months across the UK, US and France. The acquisition dss+ made in the UK enabled them to enter a new vertical, delivering operations consulting services to private equity and infrastructure firms. “dss+ was already operating in this space but now has the scale and focus to expand significantly,” says Isabelle. The US acquisition has helped them penetrate further one of the largest markets in the world, hence accelerating their growth.

Another portfolio company, legal services provider DWF, has also leveraged M&A for international expansion. “DWF recently acquired a business in Australia and is in the process of completing another deal in the insurance services space,” explains Tom. "We’ve applied a rigorous approach to M&A, from screening and diligence to post-merger integration, to help them expand efficiently.”

Some professional services firms rely on M&A to build scale. “I’ve met with a number of highly impressive specialist businesses with capacity to grow quickly with buy-and-build,” says Michael Baster, Partner with a focus on business services in the lower mid-market. “Acquiring other business in your space can build scale, create operational synergies and drive operating leverage, while purchasing firms operating in adjacent markets can boost offering and cross-sell,” Michael adds.

TC Group, a provider of accountancy and taxation services to UK SMEs, has continued its impressive acquisition spree since receiving investment from Inflexion last year. The firm has acquired over three dozen businesses since inception, nine of which took place in the first six months post-investment. Celnor Group is growing similarly, with the platform for testing, inspection, certification and compliance businesses created with Inflexion’s backing only a year ago and just announced its 19^th acquisition since then.  “We have supported both TC and Celnor to build-up their internal M&A functions and they now benefit from significant in-house experience and the ability to move quickly to agree and integrate add-on acquisitions,” says Andrew Mainwaring, longstanding Inflexion Partner.

Inflexion also supports businesses to expand into new regions organically. Specialist renewables engineering consultancy Wood Thilsted received minority investment from Inflexion in 2022 and later that year announced a new office in Japan. The following year it announced its first presence in the South Korean offshore wind market with the relocation of two of its specialist engineers to support the development of about 10 potential fixed and floating offshore windfarms.

Digital transformation is another critical way to build successful professional services businesses, with benefits including enhanced client service, improved employee engagement and commercial uplift as internal systems are modernised.

“We see digital as a key enabler in professional services,” says Isabelle. “It allows companies to be more efficient in how they deliver services and helps improve internal operations, ultimately boosting margins.”

This focus on digital is not just about keeping up with the times; it’s about using technology to unlock new opportunities. By streamlining processes, improving data analytics, and enhancing the client experience, digital transformation can unlock data-driven decision-making to improve cross- and up-selling (as examples), which can impressively impact the bottom line. This is particularly important post-acquisitions to optimise the synergies. Says Tom: “We inject value through a structured approach to M&A and post-merger integration, and we enhance that value with digital transformation. Whether it’s optimising go-to-market strategies, improving pricing, or introducing new service lines, digital tools enable our companies to perform better post-acquisition.”

DWF for example has embarked on a comprehensive digital refresh. “We’ve just signed off on a three-year digital overhaul for DWF, completely modernising their application landscape,” says Tom. “We’re also partnering with Microsoft to roll out AI across the company, which will improve the working experience of employees in the company, and the client experience.”

Tom stresses the importance of carefully managing digital transformation, especially in people-reliant businesses. “You need to prepare both the professionals and the clients for this transition. There’s no point in implementing AI if people aren’t ready to use it. That’s why we’re taking a gradual approach, ensuring that both internal teams and clients adopt the new technologies smoothly.”

For other portfolio companies, digital is already at the core of their service delivery. GRC for instance, was carved out of its former listed parent by Inflexion earlier this year and provides governance, risk and compliance software and services through digital channels. “Being tech-enabled allows them to scale more efficiently and enter new markets more easily,” Isabelle explains.

Balancing commercial change with culture is key to attracting and retaining talent.
The success of professional services businesses is intrinsically linked to the capabilities of its people and so attracting and retaining top talent is critical. “Maintaining a strong culture and offering attractive incentives are pivotal for long-term success and competitiveness,” Tom stresses, noting it’s challenging in an industry where employees frequently move between firms. “This makes management incentive schemes essential, with an effective retention and lateral attraction tool crucial,” he explains, adding that it’s more of an art than a science.

Tom highlights the challenge of managing different partner personas, including those nearing retirement who want to crystallise the value they’ve earned, and younger partners eager to create future value. "They need internal pools of liquidity to satisfy these different needs," says Tom.

Private equity capital can be used for investment without altering the financial structure for partners of professional services firms. This can empower new partners with equity that can grow significantly with future value creation, key for talent attraction and retention, and compensate retiring partners for their past contributions.

Offering equity or tailored incentives can also help align employee interests with the firm’s long-term goals, keeping key performers invested in its success. "Retaining top talent is a significant challenge, but equity schemes can incentivise performers to stay longer and reinforce the company culture without impacting profits," Isabelle notes.

A combination of talent management, scaling through M&A and boosting digital capability can really accelerate the growth of professional services firms.

Isabelle Pagnotta, Partner and Head of Business Services, Inflexion

Ambitious businesses can grow faster with the right capital and expertise, with Inflexion’s flexible funding offering minority or majority capital and access to a sizable team to accelerate growth. The Inflexion team has significant experience in supporting the growth of a number of professional services companies of different sizes, including dss+, DWF, GRC, Celnor, CMSPI, TC Group and Wood Thilsted. All have access to Inflexion’s value acceleration strategies of digital enhancement, international expansion, M&A, commercial effectiveness, sustainability and talent management.