By David Summers (London School of Economics)
Photo: Sven Piper (Unsplash)
Overview of the deal
Acquirer: H.I.G. Capital
Target: KPMG UK Restructuring
Total Transaction Size: £400M
Announcement date: 4th March 2021
Closed date: April 2021 (expected)
Acquirer advisor: DC Advisory
Target advisor: Evercore
The Miami-based private equity firm, H.I.G. Capital has acquired the UK restructuring and insolvency arm of ‘Big 4’ professional services firm, KPMG. Following reported rumours of the intended divestiture in October 2020, the acquisition will lead to the rebranding of the practice under the name ‘Interpath Advisory’. With Deloitte selling off its UK restructuring business to Teneo in February 2021, the transactions are in light of imminent legislation that will force the UK’s biggest audit practices to split off to ensure independence in their service offering. Interpath Advisory will be the largest independent restructuring and turnaround team in the UK; the business will be led by three of its current senior partners. With companies seeking adjustments to their capital and operational structures alike, which are due to serve Interpath Advisory well in its initial years.
“This is tremendously exciting news for our business and our people and opens up enormous growth potential. With over 500 people based across the full breadth of the UK, Interpath Advisory will become the largest independent restructuring and turnaround business in the country. From the strong foundations that we’ve built over the past 50 years, we’re looking forward to building a market-leading international advisory business that is capable of servicing the largest and most complex engagements.”- Blair Nimmo, UK Head of Restructuring (KPMG)
Company Details: (Acquirer - H.I.G. Capital)
H.I.G. Capital is a diversified alternative investment firm, focusing its investments across private equity, credit, real estate, infrastructure, growth equity, and BioHealth. Throughout its 17 offices, H.I.G. invests in portfolio companies throughout the US, Europe, and Latin America. Notable portfolio companies include Classmates (school yearbooks) and SPORTFIVE (sports marketing), within its active list of 164 businesses, having exited an additional 192 (including custom gaming controller brand, SCUF Gaming).
Founded in 1993, headquartered in Miami, Florida (USA)
Co-CEOs: Tony Tamer and Sami Mnaymneh
Number of employees: 400+ investment professionals
Assets Under Management (AUM): $44B
Company Details: (Target - KPMG UK Restructuring)
KPMG is a global professional services firm, with UK service lines of audit, tax, consulting, and deal advisory. Its restructuring practice sits within the deal advisory team and is mandated to advise its client list on challenging situations within financial distress or under-performance more broadly. The division is then split into 25 capabilities, such as insolvency services and risk management.
Founded in 1971, headquartered in London, UK
UK Head: Blair Nimmo
Number of employees: 22 partners and 528 staff
Market Cap: NA (privately held)
EV: £400M
Annual Revenue: £130M (as of 10/11/2020)
LTM EBITDA: £40M
LTM EV/Revenue: 3.1x
LTM EV/EBITDA: 10.0x
Projections and Assumptions
Short-term consequences
Breaking away from KPMG will allow for Interpath Advisory to continue serving its client list without breaching regulatory standards. As such, they can go on to seek new market opportunities and fully realise their potential, without restrictions on certain clients due to conflicts of interest. This will also serve as an attractive exit for KPMG UK, as they shift focus onto their other deal advisory streams, such as M&A and debt advisory services. Given the decline in insolvency appointments within the UK market for each quarter from Q3 2019 to Q2 2020, it is clear that the current market for restructuring advice is on a slump. The £400M cash injection will serve as an additional cash flow from investing activities, which was £121M for 2020.
H.I.G. will benefit from an established business, covering 11 sectors and 36 sub-sectors, and strong business development of the target. With the practice now tracking the financial performance of all UK businesses with turnover >£10M, there is clear growth for identifying business potential. With businesses recovering from the COVID-19 pandemic, there is scope for widespread application of restructuring advisory to recapitalise their operational and financial performance.
Long-term Upsides
For the most part, UK businesses have been navigated through the pandemic via government support and protection. This includes safeguarding against creditor actions and the suspension of winding up petitions and wrongful trading. As the furlough scheme and other mechanisms come to an end, it is clear that restructuring will be necessary to counteract the operational burdens from the past year. The sectors worst affected, including retail and hospitality, are unlikely to reach pre-pandemic levels for a long time; balance sheet issues and transformational changes may therefore be necessary for many businesses. Seen by many as a counter-cyclical industry to the broader national economy, Interpath Advisory will have a broader client base going forward, with H.I.G. serving as a benefactor to this.
With H.I.G holding a broad portfolio of UK and European companies, the ownership of a UK restructuring practice will serve as a clear service provider to raise new equity capital and debt for its highly leveraged companies.
Risks and Uncertainties
Moving away from the KPMG brand name, which was brought about through the merger of Peat Marwick International and Klynveld Main Goerdeler in 1987, will serve a reputational loss. Despite its 50-year history, clients which may wish to use a well-established restructuring practice may look past the KPMG spin-off and seek the advice of integrated professional services firms (including EY and PwC) or from the restructuring franchises of investment banks (including Evercore and PJT Partners). As such, there is the operational risk moving forward, which will require strong pitching to prove their worth, due to the loss of a brand name that is recognised by every boardroom.
Similarly, in an industry driven by relationships and relying on its human capital, there is the long-term risk of losing key employees to competitors. In doing so, clients may follow their key contacts at the firm, causing a fall in future deal flow for Interpath Advisory. This is particularly relevant given the spin-off is likely to lead to a change in working practices and culture within the company, which may not be favourable for some of its employees and executives.
“We have been impressed by Interpath's track record, deep client relationships and above all its collaborative culture. Interpath will be ideally positioned to support its clients in their recovery from the disruptions caused by the COVID-19 pandemic. We are proud to partner with Blair, Mark, Will and the entire team and look forward to supporting Interpath's continued growth.” - Nishant Nayyar, Managing Director (H.I.G. Europe)