KPMG Acquires IPA 25 Firm Enhancing Alternative Investment Practice

Betting on growth in alternative investments, Big 4 New York-based KPMG LLP (FY12 revenue of $5.7 billion) is acquiring Roseland, N.J.-based Rothstein Kass (FY13 net revenue of $202 million), which serves more than 2,000 hedge funds.

The move will take KPMG, previously No. 5 in terms of number of hedge funds audited, to No. 1, says Scott Marcello, who heads KPMG Financial Services. The acquisition of Rothstein Kass, expected to close in the coming weeks, is designed to round out KPMG’s financial services capabilities in alternative investments, an area that is attracting strong interest and is expected to experience “significant growth” over the next few years, Marcello tells INSIDE Public Accounting.

While KPMG is strong in private equity, real estate funds and infrastructure funds, it needed a large investment to grow the hedge fund part of the business. Rothstein Kass is the third-largest hedge fund auditor, surpassed only by Ernst & Young and PwC, so the acquisition is seen as a major catalyst to position KPMG as the premier professional services provider for U.S. hedge funds.

Terms of the deal weren’t disclosed, and Marcello says an acquisition of this magnitude – a Big 4 firm acquiring a Top 20 firm – has not taken place since 1995 when Los Angeles-based real estate accounting firm Kenneth Leventhal & Co. (FY95 revenue of $195 million), ranked No. 10 on the IPA 100 list, merged with New York-based Ernst & Young (FY95 revenue of $2.5 billion), which was ranked No. 2 on the IPA 100 list.

Rothstein Kass which IPA ranked at No. 19 last year, can benefit from the acquisition as well, Marcello says. Many advisors and managers are looking to expand, not only across the range of alternative investment options, but overseas. “It’s very hard to build that footprint on your own.” In addition to its global presence, KPMG also has strong SEC experience, which can help clients manage the growing complexity of regulations.

Marcello says Rothstein Kass and KPMG complement each other. “They have a great culture. Their brand is very strong, and we share a lot of the same values.” The firm’s senior staff are closely involved with clients, the firm prices itself competitively and offers “a high value proposition.”

Steven Kass, CEO of Rothstein Kass, who had previously said that the firm was “not for sale,” said in a statement, “This is a game changer, and we are truly excited by the expanded global opportunities that this combination will present for our clients and our people.” Rothstein Kass has more than 1,000 principals and professionals in 10 offices across the U.S.

The “vast majority” of Rothstein Kass partners and employees will join KPMG, although Marcello says “a few small pieces of the business” were not considered a good fit for the merged firm. The entire alternative investment business will join with KPMG.

Industry observers were not surprised by the announcement, as rumors have been circulating for years. Marcello acknowledged as much, but says that the firms wanted to share information so that all employees were comfortable with the agreement.