Business
PE Firms Flag AI Risk to Law and Accounting Valuations
Private-equity investors are reviewing exposure to law and accounting firms as AI transforms professional-services workflows. The shift is influencing valuation discussions, due diligence processes and investment strategies across major markets including the US, UK and Australia.
As the use of AI becomes widespread, the impact of artificial intelligence on service delivery is bringing private-equity investment in legal and accounting firms under scrutiny and questioning how such a model can sustain its growth, workforce needs and valuation structures.
The report, which was broken by the FT, saw some of the world’s largest private-equity firms allegedly warning that AI could change the nature of professional-service investments, and the issues arrive after a long history of PE investment in legal, accounting and advisory firms- sectors that have conventionally proven attractive on the basis of their recurrent revenue and the stable nature of client relationships.
The widespread adoption of generative-AI tools which can be used to analyse legal contracts, legal research, and due-diligence documents, as well as support in audit work and in fact have a much smaller need for billable hour labor, could diminish the traditional source of revenue for the industry.
As a result, many investors are no longer focusing just on the financial fundamentals during due diligence, but rather on the degree to which any potential acquisition can be integrated and utilise technology, the robustness of the AI governance, and how well the employees are trained and integrated into the workflow and adoption processes.
These concerns are being reported in every major market, including the US, UK, Australia, and in parts of Europe; major markets all where there is increasingly more adoption of AI across law and accounting firms and from clients' demand for faster turnaround and operational efficiency.
The upcoming EU AI Act is expected to come into full force in 2027, increasing regulatory burden on those that utilize the AI tools and raising similar concerns in the US, UK and Australia as they discuss their own AI policies.
Private-equity firms are by no means staying away from the industry but the emphasis now seems to be placed more on the firms that can actually utilise the technology efficiently and effectively and will allow for strong integration with the client base, while there is an evolving conversation in markets everywhere concerning the effect of AI on labor intensive businesses.
FAQs
Q1. Why are private‑equity firms discounting valuations of professional‑services targets?
They view AI as a near‑term disruption that could reduce billable hours, so they apply a 10‑15 % discount until firms prove an effective AI integration plan.
Q2. What regulatory changes are increasing compliance costs for law and accounting firms?
The SEC’s June 1 draft guidance and the EU AI Act, effective July 2024, now require documented AI oversight and audit trails, adding operational and reporting burdens.
Q3. How can a firm quickly assess AI exposure?
Map each service line to potential AI substitutes, quantify the revenue at risk, and prioritize pilots that automate high‑volume, low‑complexity tasks.
Q4. What budget allocation is recommended for AI initiatives this week?
Allocate at least 5 % of operating spend to AI talent, training, or vendor partnerships to demonstrate progress to investors.
Source: Financial Times
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