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M&A activity in the recruitment sector continues apace, against the backdrop of a heated job market
The number of UK job vacancies is still increasing, albeit the rate of increase is slowing. This has been due to increases particularly in accommodation and food service sectors as hospitality and travel industries bounce back after Covid-19, but countered by a decrease in wholesale and retail vacancies, against a backdrop of fragile consumer confidence and inflationary pressures.
However, the unemployment rate is still low and falling, resulting in a shrinking pool of labour looking for work, and thus fuelling high demand for services in the staffing sector.
A HEATED LABOUR MARKET
The BDO FTSE Recruitment Index has continued to follow the wider market trend, but as we have seen before, the Recruitment tracker has greater sensitivity to market direction. Both the Recruitment index and the FTSE 250 Index have continued to fall from FY21, with the Recruitment index falling to c.30% below January 22 levels, compared with the FTSE 250’s c.22% drop.
There was a significant drop in the wider market tracker around the time the conflict in Ukraine broke out, from which it has not recovered, and the Recruitment index, reflecting its exposure across the market, has continued to echo this reaction.
BDO FTSE Recruitment Index
Click for chart:
H1 2021 sub-sectors
Recruitment tech remains the greatest area of deal interest, as a result of the general trend towards digitisation.
What is also notable is the rise in transaction numbers for generalist recruitment businesses, which comprise 28% of deals in the period, compared to 15- 20% in the previous three years, perhaps reflecting the value perceived in having a diversified portfolio amidst challenging times.
THE RISE OF THE GENERALIST
WHO ARE THE BUYERS
Private equity interest in the sector remains active, with 20% of UK deals involving PE.
PE interest is particularly apparent in the rec tech sub-sector, where companies are operating in an attractive niche or with proprietary technology. Given the changing dynamics driven by the increase in home working and geographical flexibility, it seems PE are looking to tap into this growing market.
A couple of interesting deals that demonstrate this trend are BGF’s investment in Odro (Video interviewing and engagement software) and recruiting CRM company Beamery’s investment from EQT (a Swedish investor) in June.
A high proportion of deals have been made by trade buyers. Drivers for this activity include a buoyant recruitment market in certain sectors and therefore businesses are looking to grow (and access wider candidate books), a desire for consolidation to achieve efficiencies in a more stressed sub-sector, or diversification into new industries to reflect the new shape of the economy post-pandemic.
Private Equity
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Click for chart:
BDO FTSE Recruitment Index vs FTSE 250 Index
Click for chart:
UK employment 2021-22
JAMES FIELDHOUSE
M&A MANAGING DIRECTOR,
BDO LLP
+44 (0) 7854 278 307
james.fieldhouse@bdo.co.uk
CONTACT
The pandemic has tested the flexibility and responsiveness of the recruitment industry, with firms not only having to take decisive action around using the furlough scheme but also adapting to longer term trends which have been brought forward. These include the switch towards remote working and the proliferation of video and other mobile software to allow for remote appointments. The ongoing trend to digitalisation in the sector is sure to be accelerated by these new working practices, creating corresponding interest in deal activity, for example Adecco’s recent investment in Tempo, reflecting its focus on digitising the recruitment process.
Those recruiters who have fared better have been those who have retained a level of staff/support throughout the crisis so they have been quick to mobilise as the market dynamics shift towards a post-crisis world. We have also seen recruiters local to areas where recovery from the pandemic is well underway bouncing back, with larger multi-nationals whose global operations include regions where the effects of pandemic are still working through recovering more slowly. We are optimistic that as the UK moves further along the curve, the industry’s recovery will follow suit.
Adapting to new market conditions
Number of deals
0
1
4
3
5
2
6
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
Dec
2021
2022
deal activity - Year on year comparison
Number of vacancies
-35.00%
BDO FTSE Recruitment Index
FTSE 250 Index (^MCX) - index value
BDO FTSE recruitment INDEX vs
FTSE 250 index Dec 2021 to June 2022
02/01/2020
% of deals
2020 YTD
2019
0%
INVESTORS EYE THE
SECTOR WITH INTEREST
- uk deals by type
Year on year comparison
20%
30%
40%
50%
60%
90%
100%
70%
80%
10%
After what has been an extremely buoyant time for investors up and down the country it feels like the extreme heat (note that it’s almost 40 degrees outside as I’m writing this) of the market has started to simmer down to more sustainable levels. Indeed, following the initial shock of the pandemic we saw a huge spike in deal activity during 2021 which has had deal teams across the country scrambling for resource. However, we’ve now started to see a return to more ‘normal’ levels of activity within the wider M&A marketplace, as it takes stock following another macro-economic shock from the Russia/Ukraine conflict, alongside other pressures in the economy coming from high levels of inflation, a cost of living surge and, believe it or not, yet another Tory leadership contest.
For the recruitment sector however, M&A activity continues apace in the first six months of 2022, at levels only just below the same period in 2021, when deal volume exceeded the previous peak we saw in 2018, pre-pandemic. Factors at play include the slowing but continued rise in job vacancies, whilst latest figures show the unemployment rate has fallen again since the start of the year, leading to a shortage of available labour. The jobs market is heated, albeit patchy, with workers with certain skills experiencing double digit pay rises, while others suffer a real-terms pay squeeze. As such, we are talking to many business-owners who are keen to either seek investment and grow, or alternatively
de-risk, on the back of a positive trading performance.
It’s always difficult to draw too many conclusions during the first half of a calendar year, however it’s pleasing to see a higher proportion of overseas interest in UK recruitment than in previous periods. Notably the US and China have been the key protagonists during the first half of 2022, as overseas investors source fast growing recruitment companies with strong management teams here in the UK, and we look forward to seeing whether this trend continues into the latter half of 2022 and beyond.
The private equity community continues to back high quality and entrepreneurial leaders of recruitment companies who have a vision for further growth, either organically or via acquisition. During the first half of 2022 private equity accounted for almost 40% of (a high volume of) transactions, indicating a strong interest in this sector for PE investment at the moment.
From a sub-sector perspective, we continue to see software and technology companies dominating the M&A league tables, however it’s interesting to note that the multi-sector recruitment companies (or “generalists”, to coin a colloquialism) are showing their appeal to buyers and investors. From our discussions with CEOs and CFOs across the country it’s clear that having a diverse mix of sectors in a disrupted market has proved to be a successful strategy in maintaining a sustainable level of income.
So aside from being all hot and bothered, how are we feeling about the months to come? As noted the deal environment remains buoyant, with the UK still regarded as a good place to ‘do deals’ and plenty of interest from investors. Once again, it would take a brave person to predict anything in this ever-changing marketplace, however, despite some of the clear challenges there are definitely lots of reasons to be positive, and we envisage that staffing and recruitment companies will continue to play a vital role within a UK economy grappling with fragile consumer confidence.
Source: BDO Analysis
Source: BDO Analysis
Source: Capital IQ
Source: ONS
Number of vacancies 000s
May-22
Dec-21
200
400
600
800
1000
1200
0
UK job vacancies - total services
Unemployment rate (aged 16 and over, seasonally adjusted)
A HEATED LABOUR MARKET - UK employment 2021-22
-25.00%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
01/02/2020
LOGISTICS & SUPPLY CHAIN MANAGEMENT
UK & Ireland M&A Update – Q1 2021
-30.00%
02/03/2020
02/04/2020
02/05/2020
02/06/2020
02/07/2020
02/08/2020
02/09/2020
02/10/2020
02/11/2020
02/12/2020
02/01/2021
02/02/2021
02/03/2021
02/04/2021
02/05/2021
02/06/2021
Jan-07
Jun-07
Nov-07
Apr-08
Sep-08
Feb-09
Jul-09
Dec-09
May-10
Oct-10
Mar-11
Aug-11
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Mar-16
Aug-16
Jan-17
Jun-17
Nov-17
Apr-18
Sep-18
Feb-19
Jul-19
Dec-19
May-20
Apr-22
Mar-22
Feb-22
Jan-22
Jan-21
Nov-21
Oct-21
Sep-21
Aug-21
Jul-21
Jun-21
May-21
Apr-21
Mar-21
Feb-21
Unemployment rate %
0.0
1.0
2.0
3.0
4.0
5.0
6.0
700
800
Source: BDO analysis
HY22 deals by sub-sector
Year on year comparison
Recruitment platform/Software
Engineering/Construction/Industrial
IT
Generalist
Education
Legal
Transport & Logistics
44%
5%
6%
28%
The private equity community continues to back high quality and entrepreneurial leaders of recruitment companies who have a vision for further growth, either organically or via acquisition. During the first half of 2022 private equity accounted for almost 40% of (a high volume of) transactions, indicating a strong interest in this sector for PE investment at the moment.
From a sub-sector perspective, we continue to see software and technology companies dominating the M&A league tables, however it’s interesting to note that the multi-sector recruitment companies (or “generalists”, to coin a colloquialism) are showing their appeal to buyers and investors. From our discussions with CEOs and CFOs across the country it’s clear that having a diverse mix of sectors in a disrupted market has proved to be a successful strategy in maintaining a sustainable level of income.
So aside from being all hot and bothered, how are we feeling about the months to come? As noted the deal environment remains buoyant, with the UK still regarded as a good place to ‘do deals’ and plenty of interest from investors. Once again, it would take a brave person to predict anything in this ever-changing marketplace, however, despite some of the clear challenges there are definitely lots of reasons to be positive, and we envisage that staffing and recruitment companies will continue to play a vital role within a UK economy grappling with fragile consumer confidence.
it’s evident that M&A activity within the recruitment sector is alive and well and starting to gather some real momentum as we move through 2021
During the first half of 2022 private equity accounted for almost 40% of (a high volume of) transactions
Trade
Private equity
MBO
EOT
17%
39%
39%
5%
Click for chart
HY22 deals by sub-sector
INVESTORS EYE THE SECTOR WITH INTEREST
Click for chart:
Deals by type
Private equity interest in the sector is currently at a high level, with 39% of UK deals involving PE investment in the first half of the year.
This interest is showing across the market, with deals in subsectors including recruitment tech, education, logistics, IT and also generalists. Private equity tends to invest in businesses swimming with the tide in areas of the market where there is growth as well as positive macro-economic dynamics, such as the current demand in labour markets.
A couple of examples during the period under review include Soho Square’s investment into Oliver James, and the data & analytics recruiter Harnham Search which secured investment from BGF. The minority investment into Oliver James will help to accelerate its ambitious international expansion strategy. Harnham’s partnership with BGF will support plans to scale further into the US and Europe, as it seeks to accelerate the growth of both the Harnham and Rockborne brands to meet the growing demand for a high-quality, global data & analytics workforce.
Click for chart:
Year on year comparison
Deal activity was comparable with the same period in 2021, with a total of 18 deals in HY22, against 19 in 2021.
2021 experienced the highest level of sector transactions in a decade, exceeding the
pre-pandemic peak in 2018, and deal activity is continuing at a similar rate.
HIGH DEAL LEVELS MAINTAINED
During the first half of 2022 private equity accounted for almost 40% of (a high volume of) transactions
Click for chart:
UK vacancies 2019-2021
During the first half of 2022 private equity accounted for almost 40% of (a high volume of) transactions
7
30/12/2021
19/01/2022
08/02/2022
28/02/2022
20/03/2022
09/04/2022
29/04/2022
19/05/2022
08/06/2022
28/06/2022
18/07/2022
5%
6%
6%
1400
Click for chart:
Global recruitment deals
Of the deals involving a UK target, 41% of transactions were concluded with an overseas acquirer or investor, with the US being the most represented (33%)
A third of the H1 deals involved UK business acquiring an overseas recruitment target.
An example during the period under review includes Bradford-based SPS Group, the recruitment group which includes the transport & logistics recruitment specialist Driver Hire. SPS gained investment from Pricoa Capital (part of Prudential Financial Inc.). This investment not only provides an exit for SPS’s incumbent private equity investor (LDC) but also provides capital to support the organic growth plans of the group in the UK & Australia alongside the ability to consider strategic acquisitions including international expansion.
GLOBAL INTEREST IN THE UK RECRUITMENT SECTOR
Source: BDO Analysis
Year on year comparison
UK
US
China
8%
35%
59%
Global interest in the uk RECRUITMENT SECTOR
During the first half of 2022 private equity accounted for almost 40% of (a high volume of) transactions
Click for chart:
Deals by type
Source: BDO analysis
Year on year comparison
Recruitment platform/Software
Engineering/Construction/Industrial
IT
Generalist
Education
Legal
Transport & Logistics
6%
6%
6%
28%
5%
5%
44%
HY22 deals by sub-sector