The Big 4 Dominate Alternative Investments

March 19, 2020

We decided to take a look at the auditors servicing the multi trillion-dollar private fund industry. Alternative investments have historically only been available to institutional investors and ultra-high net-worth individuals given their minimum investment requirements, regulations and high fee structures. Increasingly, we see private funds marketed to the mass affluent through investing platforms that have received a lot of attention.

With the broader appeal or private funds, their auditors are now more important than ever. Given that these funds still operate with minimal regulatory oversight, investors rely on auditors to ensure that fund net asset values (NAVs) are struck in-keeping with accounting standards and performance reporting follows industry best practices.

For our research, we utilized Form ADV regulatory filings which require investment advisers to share information regarding their investment practices and advisory affiliates. This includes their service providers. Our aim was to see if certain auditors specialize in a specific fund type.

We gathered data for all auditors across four fund types – Hedge Funds, Private Equity, Venture Capital and Real Estate. The data was divided into two sets: Tier 1 firms, which are the top 4 firms for a given fund type, and Tier 2, which are the next four firms in line i.e. ranks 5 to 8.

Here’s what we found –


Ernst & Young (EY) significantly dominates hedge fund audits while PricewaterhouseCoopers (PwC) is the leading auditor for private equity, real estate and venture capital funds.


Total GAV by Auditor

The Pie

By Gross Asset Value:

The Big 4 auditors, namely EY, PwC, KPMG and Deloitte, were the top four auditors for the fund types we examined, capturing close to 95% of the market share in terms of Gross Asset Value (GAV) while the Tier 2 firms roughly account for the remaining 5%.

GAV

By Funds Serviced:

Almost half of all funds are serviced by PwC (27%) and EY (23%).

KPMG (19%) has a slight edge over Deloitte (18%) but the Big 4 round up 87% of the market share. 

In terms of fund type, private equity funds account for 39% while hedge funds 38% of funds serviced.

Funds Serviced

The Disparity

To gauge the extent of disparity between the market share of Tier 1 and Tier 2 funds, we compared the aggregate GAV of all Tier 2 firms with that of the lowest ranking Tier 1 firm. We found that in 3 out of the 4 fund types, the aggregate was lower, with the only exception being venture capital funds. Their leading Tier 1 auditor is PwC with $298 billion in GAV and the top Tier 2 firm is BDO with a GAV of $53 billion – that’s a difference of $245 billion!

The Leader

If we split the GAV based on fund type, hedge funds attribute more than half the total.

Fund Type

The starkest difference between both the tiers is also within hedge funds, where the Tier 1 (or Big 4) auditors service close to $10 trillion in funds while Tier 2 service just $46 billion.

EY is the leading auditor in this category with a total GAV of approximately $3.5 trillion.


Within hedge funds, EY's total GAV is 18 times higher than the leading Tier 2 auditor, Grant Thornton.


Private Equity

Now turning our attention to private equity, we find that while PwC is the leading auditor by total gross asset value, their gross assets audited is only half that of EY's hedge fund gross assets audited. This might surprise some as private equity funds have performed better than hedge funds in recent years and now receive more attention and positive press.

Why Do The Big 4 Dominate?

From our analysis, it’s evident that the Big 4 have a strong foothold in the auditor market space. And additionally, but not surprisingly, hedge funds and private equity are the most popular fund types.

Tier 2 firms such as RSM and BDO have some stiff competition if they want a bigger piece of the pie. But the question arises, how did the Big 4 establish such a dominance in the industry? Is this a reflection of their capabilities, industry reputation, or simply because they were there first? Do the other auditors offer similar services at more competitive rates? Perhaps it's time to take a look.

Head over to RADiENT Form ADV to explore more such cases.

RADiENT Form ADV


About the Author

Ada Rangi

Ada is a product manager for RADiENT Analytics working on conceptualising and developing new features. She also leads the UI and UX for the platform. She has previously worked with the Confederation of Indian Industry (CII) in New Delhi, India as a Research Consultant and with Liazon Corporation as a Systems Analyst in Buffalo, New York. Ada holds a Masters in Quantitative Finance from University of Buffalo, SUNY and a Bachelors in Mathematics from the University of Delhi.

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