The „third-party ownership prohibition“ in Germany actually forbids pure financial investors from holding a direct or majority stake in law, tax consultancy or auditing firms. However, this does not stop private equity firms from becoming increasingly involved indirectly in these and neighbouring sectors. Their involvement takes the form of providing financing, indirect shareholdings, and detours such as the legal form of the EU holding company. They are accelerating the reorganisation of the market for tax consultancy and auditing in Germany, which has up to now been fragmented, and well insulated from change.

One example of investments by financial investors in consulting companies such as tax firms is KKR. The US private equity giant in involved with Essen-based ETL Group, which comprises more than 1,000 tax firms in Germany and Europe and also unites auditors under its umbrella.

The financial investor Silver Lake is also active in the same area of consulting, having acquired the German accounting software company Sevdesk from Offenburg with the French portfolio company Cegid, which in turn mediates tax consultants.

And the Swiss asset manager Partners Group, with its Afileon group of companies, now has 20 major tax firms in Germany. The umbrella brand „Afileon“ is intended to offer tax advice, auditing and legal advice much more efficiently than the competition. Turnover of 500 million euros is targeted for 2027.

The investments are often not immediately transparent: KKR actually notified the SEC of an indirect financial investment in Essen-based ETL AG in its mandatory Form 10-Q disclosure to the US Securities and Exchange Commission (SEC) on 30 June 2024. On page 27, a list of new KKR investments states: „ETL AG Steuerberatungsgesellschaft is a German tax consultancy group and is based in Essen, Germany.“ The Form 10-Q is a quarterly financial report that listed companies must file with the SEC. It is an interim report that provides information to investors and other stakeholders.

But it's not that simple. „KKR does not have a stake in ETL AG,“ says KKR manager Laura Schröder. „We made a succession solution possible with our financing in 2019. In principle, tax firms and auditing companies are among the areas in the services sector that we are monitoring.“

KKR reported the ETL financing to the SEC when a portion of this financing was transferred as an investment to the Private Wealth Strategy division within KKR. The volume of the financing was not publicly disclosed.

Martin Lehmann, COO of ETL AG, also confirms that „KKR has not invested in ETL AG. Rather, KKR provided financial support for the succession plan when the founder Franz-Josef Wernze left the company. The acquisition of the majority of the shares was financed by five of the leading managers.“ A minority stake belongs to the Wernze family foundation.

ETL is now a group of 1,000 largely autonomous units with a turnover of around 2 billion euros and a total of around 19,000 employees, most of whom are tax consultants and mostly work for smaller self-employed individuals. The purchase of software, recruitment of employees and training are bundled and coordinated centrally. In addition, jointly developed AI increases the efficiency of employees. Processes are automated so that more clients can be looked after in the same amount of time.

KKR is therefore not violating the „third-party ownership prohibition“ by financing the succession plan at ETL. In any case, the term „’third-party ownership prohibition‘“ is misleading. „It means that only certain legal and natural persons may be shareholders of a professional practice company and that these persons must be active in the company,“ explains lawyer Dirk Uwer, Partner at Hengeler. „While German law does not impose any restrictions on the debt capital ratio of companies providing legal and tax advice, equity investments by non-professionals are still restricted for historical reasons that are now largely considered outdated and not in line with the market.“

According to Uwer, the legal framework, which has been fundamentally changed as of 1 August 2022, differs for professional practice companies that are subject to the Federal Lawyers‘ Act or the Patent Attorneys’ Act on the one hand and for tax consulting companies and auditing companies on the other. Under current law, only licensed professional practice companies may hold shares in law firms in addition to freelance professionals. The „’third-party ownership prohibition‘“ is therefore strict here.

In contrast, according to Uwer, partners in a tax consultancy firm may also be auditing firms authorised in Germany. For them, the Auditors' Code allows a more extensive shareholder structure: individuals who are not themselves auditors or auditing firms may hold a minority stake (up to 49.9%). German audit firms can also be owned by EU or EEA audit firms and, finally, only half of the shareholders need to be actively involved in the company.

This results in legally permissible room for manoeuvre: „A certified German auditing firm in which an EU or EEA auditing firm holds a majority stake may acquire tax consulting firms,“ explains Uwer. „The recognition regime for its parent company is determined by the law of the country in which it is based.“ The acquisition structure must take into account the fact that the Auditors Act and the Tax Consultancy Act prohibit holding company shares for the account of third parties (in other words, non-shareholders). In addition, third parties may not participate in the profits of the tax consultancy firm. If a tax firm is also authorised to practice as a law firm, this business must be separated out and outsourced to an independent law firm whose shareholder structure is subject to the stricter „third-party ownership prohibition“.

According to Uwer, financial investors will still have a wide range of legal investment opportunities even after the European Court of Justice has confirmed the „third-party ownership prohibition“ for lawyers. „Their implementation requires special professional legal expertise in a highly regulated market environment,“ says the lawyer. „The keen interest of many market participants, especially SMEs, to include financial investors in their circle of shareholders contrasts with the traditionally negative attitude of the German Federal Bar and the German Federal Chamber of Tax Consultants.“ Overcoming this attitude is the task of legislators in the new legislative period.

When making acquisitions as part of a buy-and-build strategy, tax consultancy groups usually target firms with a turnover in the single or double-digit millions and merge them into larger groups of limited liability companies under a common umbrella company, which in turn takes on central tasks such as recruiting, software and IT, compliance and branding. By standardising processes and software, the costs of the group are reduced, thereby increasing the value of the investments. There is also the potential offered by generative artificial intelligence. This requires extensive investment in AI training and corresponding data.

However, critics fear conflicts of interest if financial investors own auditors. This scepticism is fuelled by past scandals. In light of Wirecard and Cum-ex, this does not appear to be completely exaggerated. Many tax advisors consider it a taboo that KKR is financing the owners of ETL.

Direct participation in auditors remains illegal in Germany. According to the Institute of Public Auditors in Germany (IDW), „the direct participation of pure financial investors in auditing companies is permitted within certain limits under European law“, as the professional association explains. „However, this is not permitted in Germany,“ says IDW Board Spokeswoman Melanie Sack.

According to Section 28 of the German Auditors' Code (WPO), only members of the profession, auditing firms, EU auditors or other individuals with whom auditors are authorised to practise their profession jointly can be shareholders in Germany. The IDW is in favour of expanding the group of shareholders of auditing firms to at least include so-called collaborating experts. These could be specialists in sustainability or digitalisation, for example.

„In the future, digitalisation using artificial intelligence will significantly change the consulting industry,“ predicts lawyer Christian Alexander Mayer from the law firm Noerr. „On the one hand, management consultancies will need to invest heavily in AI in order to remain competitive. On the other hand, the boundaries between consulting and software business are becoming increasingly blurred.“ One example of this is the flight compensation service provider Flightright, which could use AI to provide legal advice.