Let’s start with the collapse of Carillion in 2018. The construction company failed after, as some argue, underestimating—and more importantly, underplaying—the risk of some contracts they took on. Debt continued to pile up until it was impossible to hide from public view. As talks with various parties capable of keeping them alive fell through, it became clear that it was over for Carillion.
At some point, inevitably, the spotlight also landed on its auditor, KPMG. In September of 2020, the FRC drafted an Initial Investigation Report to signal an official investigation into conduct from both parties. Though less prominent, this case is reminiscent of another, from two decades ago, also involving a major Auditing firm, then one of the Big 5. The main similarity is their levels of consequence—Carillion employed more than 40,000 staff globally, most in the UK, and was a major provider for the public sector, so its failure involved more than just one economy.
This isn’t the first time financial regulators had floated the idea of separating Advisory and Auditing practices at the Big 4, but Carillion was a welcome catalyst for reopening these discussions and implementing some serious measures. New legislation aimed to limit conflict of interests by eliminating overlap between client activity in the two verticals and introduced legal consequences for stakeholders in the event of unreported audit issues.
Deloitte’s UK Restructuring practice was engaged in profitable work in 2020—for clients New Look and, as administrators, for Victoria’s Secret UK—but they anticipated that future growth would be stunted by this renewed FRC pressure. Advisory work was not possible anymore for Audit clients, which limited a variety of practice interactions and development opportunities for as long as the Restructuring arm was owned by them.
Then, rumours began to swirl in the industry—Deloitte were in “advanced talks” with Teneo Consulting. It became official a short while after that. The practice, which consisted of around 350 people, of whom 30 Partners, was acquired. Numbers remain, of course, undisclosed, but there are whispers of low hundreds of millions of pounds.
Teneo Consulting is an American-origin PR and Advisory firm, backed by Private Equity House CVC. It’s got an extensive history for its relatively short time in existence (it was founded in 2011), and it promises to keep expanding. In fact, they recently announced the creation of Teneo Performance, which will “help companies successfully navigate the long term social and business impacts brought about by the events of the last 12 months.” When you consider that Deloitte’s Restructuring practice isn’t the only one they’re acquiring (Goldin Associates in the US, for instance), the development in the direction of operations improvement and performance optimization makes perfect sense.
The extensive history I mentioned is intricate—business interests, high-profile friends, instant potential, emails. A New York Times article titled A Constellation of Influencers takes you down the path of this ever-evolving story.
KPMG is in a similar position. “KPMG has signed an unconditional agreement to sell its restructuring practice to Interpath Advisory, a newly-formed company backed by private equity firm HIG Europe.” This team is just over 500 staff, of whom 22 Partners, which means Interpath is “the largest independent restructuring and turnaround business in the UK.” The numbers, as you’d expect, weren’t released, but there’s been background conversation of £400m.
Blair Nimmo, Head of UK Restructuring at KPMG, now one of the leaders of Interpath, has said: “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.” You get the sense that the freedom from audit shackles is only half the benefit of these acquisitions—the potential from their rebranding is the other half. The team can grow by leveraging the name that aided its development up to this point, but shed it in all other aspects of its existence and start anew.
The other two of the Big 4 have been categorical: their Restructuring practices aren’t for sale. Given the fact that the KPMG and Deloitte sales happened within two weeks of each other, questions were immediately directed at EY and PwC leadership, with very little hope of a direct answer as to why, and as to how their structure differed from those that needed to make the change.
Among responses has been Steve Russell’s, PwC’s Head of UK Restructuring: “If you think about the skills that you could draw on not only in the UK but across the globe that are increasingly needed by clients to deliver the solutions, then those are on-tap in our firm, and importantly we can call on them at the drop of a hat, because in restructuring situations speed is key. You might argue ‘well, you could mix and match’, and maybe, but could you do it fast enough? For us, the answer is yes.”
The term ‘quiet confidence’ comes to mind.
Don’t look away
An early draft of this recap contained the word ‘unravelling.’ That’s not quite what’s currently going on in consulting, but significant plates are shifting under us. I hinted earlier that the last time that happened was when we had the Big 5, and that changes in the basic structure of these firms have rippling effects on other obvious—as well as unpredictable—economies. This is just the beginning. Now, at Patrick Morgan, we wait and watch for whatever comes next.
All eyes are on the freshly acquired teams, and on the two giants who are currently refusing to sell. We’ll hear about Teneo and Interpath a lot more, and we’ll watch the fines roll in on those audit mishaps I mentioned earlier; then we’ll watch how the Big 4 react to the underdogs shoving their way into the ring with no auditing collars around their necks.
The news moves fast. Don’t look away.