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Valuations are a core, but small, practice area that historically has been reliant on transactions and internal referrals. It has been expected that practices run lean efficient operations that provide a decent net contribution to the broader firm. In the current climate with significant revenue growth coming from consulting and advisory practices, a decent contribution is no longer good enough. Valuation practices are now required to add new revenue streams to their traditional offering.
Valuation practices amongst the Big 4 have a relatively small Partner representation. PwC’s practice is the largest with Valuation Partners equating to 1.5% of the overall number of partners in the firm. Deloitte has the smallest representation of just 0.3%. Though we feel that is more as a result of the larger number of Partners the firm has with its Salary Partners. KPMG and EY’s teams equate to 1.3% and 0.9% respectively.
The Big 4 practices tend to be the most innovative in their approach to the market and searching for opportunities to grow. There are three core strategies that the Big 4 firms have tended to follow, all of which are realigning practices to be more ‘front-end’ focused than waiting for the work to be directed to them by internal sources. Leveraging off sophisticated modelling products, linking with the firm’s Strategy consultants to provide more rigour around their client offering and teaming better with audit practices, are all strategies that have been acted upon by one or more of the Big 4.
EY have been the leader in building its modelling capabilities with the acquisition of energy modelling firm, Roam consulting, in Brisbane. The acquisition brought two executive directors and a team of 10 specialist modelling professionals.
Teaming with other practice areas is obviously going to have its usual challenges of allocating revenues and attributing client relationships. With success stories beginning to come from the effort, hopefully both parties will continue their commitment to the path, the risk is that this becomes just a temporary effort, especially if M&A activity has a more consistent growth trajectory, and the more traditional valuation work drives effort and capability away from the new revenue. Practices that are able to capture these new revenue streams by acquiring or building the right skills will ensure that this additional growth is sustainable and capacity is there to continue to deliver the core valuation work.
Sydney has been the dominant location for most practitioners. Interestingly we have seen a fair amount of movement interstate from Sydney to less saturated markets. This has been particularly prominent in Deloitte with Michele Picciotta moving to Melbourne and Rachel Foley Lewis, a Senior Partner, to Brisbane.
From our Partnership promotions analysis, we conducted across the Big 4 and mid-tier, there were only two promotions across the Big 4 in Valuations. This represented less than 1% of all appointments. Michele Picciotta (aforementioned) at Deloitte and Paul Tasker at PwC Melbourne.
Given Big 4 Valuation practices’ reliant on efficient contribution, there is the risk they have left themselves too lean to capture new opportunities or manage should there be a departure of senior staff.
As expected, Valuation practices in smaller firms take on a more generalist line. Valuations tends to be the core component of the corporate finance practices, with 47% of dedicated corporate finance professionals, actually having the majority of their practices as valuation.
The mid-tiers are geared towards servicing the SMEs and also play heavily in the space of family law i.e, valuations for matrimonial disputes; also in shareholder disputes, loss of profit assessments, compulsory acquisitions and expert witness assignments. The broad skillset adopted by mid-tier practitioners also lends themselves to being active in the forensics and litigation valuations.
Unsurprisingly, the insolvency firms such as Korda Mentha, Ferrier Hodgson and McGrath Nicol dominate in the higher margin valuation work for forensics purposes. The small boutiques, Grant Samuel and Lonergan Edwards for example, are also particularly competitive in the IER and disputes space.
The independent boutique valuation houses have had an interesting few years. American Appraisal made a brief entry into Australia between 2008 and 2012, disbanding when the most senior director, John Farrant left to another independent boutique, Value Advisor Associates. More recently Leadenhall, currently entering a growth phase, led by Richard Norris and Simon Dalgarno, have poached Dave Pearson from Deloitte, and are making inroads into the Melbourne market with another senior hire soon to be announced.
It is apparent that the Big 4 valuation practices that are able to ensure their practices are capable of adapting will be the long-term winner. In our view, 60-80% of existing revenue being generated from internal referrals, is too much to ensure the independence of a practice. Whilst a comfortable position to be in, it does not necessarily allow for opportunities for progression internally, both for established Partners wanting to move in to broader firm leadership roles and staff into Partnership opportunities. To become more independent the practices need stronger go to market strategies, utilising modelling skill sets and strategy linkages.
Mid-tier firms also need to be able to adapt their go to market strategy to ensure they can compete and deliver for additional revenue streams. Generalist valuation professionals are always going to be the core of a practice, though being in a position to be able to capture industry related knowledge, insights and skill sets will set them apart from their competitors. Industry alignment will also ensure a fair referral network is created internally.
The boutique firms simply need to add scale to their offering. Their offering of flexibility and being the ‘core’ or lead service line will always be an appealing option for valuation professionals.
In summary, Valuation practices across the country are in good shape, though as always there is room for growth and improvement. We are more than happy to discuss these views in more detail, so please feel free to call us for a coffee.