Recruitment M&A and Trends Review Q3 2021

With UK job vacancies at a record high, skills and talent is a hot topic. Recruitment businesses across all sectors have told us they’ve never been busier, and this on-the-ground activity has been mirrored by healthy deal volumes. Here are the key highlights from our 2021 Recruitment Insights report.

M&A in recruitment rebounds strongly from the pandemic

Quarterly Trends - Number of deals in UK recruitment M&A/Annual Trends - Number of deals in UK recruitment M&A

The year to September 2021 was strong for UK recruitment M&A, with 80 deals completed. This makes it the third-best performing comparative period in the past decade.

Delayed transactions were picked up again, leading to a particularly busy Q4 2020 (27 deals). Following the changes to Entrepreneurs’ Relief in March 2020, there was the threat of an increase in capital gains tax in the March 2021 Budget. This also boosted activity in Q1 2021, and although adverse changes to the tax environment for entrepreneurs are currently on hold, rightly shareholders are still nervous of future changes.

Global recruitment quoted comparable companies EV/EBITDA mean multiples

Public market confidence signifies that the recruitment sector is expected to grow. Comparing quoted company multiples against last twelve months (LTM) and next twelve months (NTM) trading shows they were closely aligned in recent years at c.8-c.9x. This changed at end of Q3 2021, as LTM multiples grew to c.13x whereas NTM multiples remained at c.9-c10x. This was as share prices recovered more quickly compared to LTM COVID-19-hit trading results. However, we expect LTM/NTM multiples to normalise over the next 12 months as trading catches up with current valuations.

Public market confidence also bodes well for the valuation of private companies in the sector, particularly in specialist sectors servicing skills-short markets of IT, digital transformation, engineering and life sciences.

The above figures back up anecdotal evidence from our clients, who tell us that the market remains buoyant. So how did the sector manage to bounce back so quickly?

More job vacancies, more recruitment, more M&A

UK recruitment M&A quarterly trends

In early 2020, lockdown placed large numbers of UK businesses into a holding pattern. The government introduced measures to protect employment, and job vacancies dropped from 701,000 in Q1 2020 to 304,000 in Q2 2020. Deal volumes followed suit, decreasing from 20 to 10.

In the year to September 2021, the reverse was true. Deal numbers strengthened as job vacancies increased, creating demand for recruitment and talent solution services.

The number of job vacancies in July to September 2021 reached a record high of 1.1 million, according to the latest ONS figures.

To understand what’s driving deal activity, it is important to understand what’s driving the uptick in job vacancies.

Skills shortages and the 'Big Quit'

UK manual labour shortages hit the front page in October due to the HGV driver crisis. A shortage of foreign workers following Brexit has exacerbated vacancies across a number of blue-collar sectors.

Professional sectors are also experiencing skills shortages. Data from the Association of Professional Staffing Companies (APSCo) shows that recruitment revenues for both permanent and contract placements were up 2% and 16% respectively in September 2021 from August 2021 (source: APSCo report).

In addition, UK recruiters are keeping an eye on data from the US that shows people leaving their jobs at a higher rate than before the pandemic. The so-called ‘Big Quit’ isn’t just the reserve of professionals wanting a better work-life balance after a period of working from home. Rather it is being driven by low-paid workers upgrading to better opportunities in a market that favours job seekers.

Private equity seizes an opportunity

Increased financial investor activity was another key driver of deal volume in the year to September 2021, accounting for 46.3% of deals. This is nearly a 20-point increase on the 28.6% average in the five years before the pandemic (2015-2019).

Number of deals in UK recruitment M&A by type of investor

This is partly because private equity still has record amounts of dry powder – $2.286 trillion in August 2021, according to S&P. This made it well positioned to seize opportunities while the market was depressed, and also make acquisitions driven by the expected change in capital gains tax earlier in the year.

More fundamentally, however, the pandemic has meant that business at large has had to accelerate the pace of change in their organisations to remain relevant to an online in-person hybrid world. Talent that drives this change is in short supply and investors want to place a 'bet' on those sectors that are most skills short to benefit from those underlying fundamentals.

International activity in recruitment M&A

While UK recruitment M&A remains dominated by domestic deals (UK firms buying other UK companies), cross-border activity remained stable at 13.8% of all deals in the 12 months to September 2021.

North American interest in UK firms remained high. In Q4 2020, for example, US-based Premier Healthcare Professionals (PHP) acquired the London-based international nurse recruiting business Field Health Ltd, which operates under the Adevia Health brand. At the time, PHP commented that the deal would provide a solution to help US hospitals with their critical nurse staffing needs.

In Q1 2021, US-based CEO advisory firm Teneo acquired Ridgeway Partners, a London-based executive search firm. Interestingly, Ridgeway Partners has strong diversity and inclusion (D&I) credentials (see ‘three big trends to watch’, below).

Anecdotally, we’ve seen particular interest in the UK and Ireland from countries such as Japan, where the domestic growth is flat. They are looking for higher returns for faster-growing markets, such as the UK.

In Q4 2020, Outsourcing Inc, the third-largest staffing firm in Japan, announced that it has agreed to acquire Irish recruitment firm CPL Resources. The move is expected to help Outsourcing Inc expand its scale in the European market.

Investors target sector specialists

Last twelve months in UK recruitment M&A – top sectors

Sector specialism continued to drive M&A activity in the 12 months to September 2021 accounting for 65% of transactions.

The pandemic had a clear influence on the attractiveness of different sub-sectors. Unsurprisingly, IT, healthcare and logistics respectively accounted for a higher percentage of deals than sectors such as financial services and energy.

Technology

Digital, IT and technology accounted for 17% of deals in the year to September 2021, against a 10-year average (2011-2020) of 15.5%.

The move to work from home shone a stark light on the efficacy of companies’ IT systems, creating demand for more specialists. And many roles here could be hired in and performed remotely.

This geographical freedom was a driver in a deal we advised on – K2 Partnering Solutions’ Q3 2021 acquisition of international recruiter Marlin Green, which places highly-skilled niche technology consultants into Europe.

Technical recruitment specialist Morson also sought to capitalise on the growth in the technology sector through its Q3 2021 acquisition of Cornwallis Elt. The deal enhances Morson’s scale and specialism in technology, digital and transformation experts. Bringing London-based Cornwallis Elt into the group also enables Morson to further expand and strengthen its geographic footprint in this particular sector.

Healthcare and Life Sciences

Healthcare was one of the most active sectors for recruitment M&A in the year to September 2021, accounting for 17% of deals. The combination of Brexit and the sector’s reliance on an overseas workforce exacerbated existing staff shortages. The King’s Fund charity estimates there is a shortage of 84,000 full-time equivalent staff in the NHS alone.

In Q3 2021, nGage, a specialist recruitment group backed by Graphite Capital, strengthened its capability in this area. We advised on its acquisition of Holt Doctors, a medical recruitment agency specialising in finding temporary locum, fixed-term and permanent work for doctors. The deal takes advantage of operational synergies between nGage and Holt, and provides a robust infrastructure to support the group’s continued growth.

Supply chain and logistics 

The UK lorry driver shortage and resulting supply chain issues were a loud and public demonstration of the sub-sector’s importance.

Transactions involving supply chain and logistics accounted for 5.7% of deal volume in the year to September 2021, across both blue-collar and professional staffing.

Transactions include Challenge-trg Group’s acquisition of temporary labour expert PMP Recruitment.

TPA Capital also backed this sector with an investment in Bis Henderson, a leading provider of supply chain professional services.

Executive search

Executive search transactions continued to make an impact on recruitment M&A activity, accounting for 17.5% of deals in the year to September 2021 (up from 12% for the same period a year prior).

Key transactions include Elysian Capital’s acquisition of Eton Bridge Partners, a high-quality talent solutions firm, which was ranked the number-one provider of executive interims by the Institute of Interim Management (IIM) survey. 

Building out CEO advisory capabilities was also a key driver behind CVC-backed Teneo’s acquisition of Ridgeway Partners in January 2021 (and subsequent acquisitions by Teneo outside of the UK).

We expect international buyers to really invigorate this area of the M&A landscape as functional and sector specialism, rather than a generalist approach to Executive search, becomes ever more prevalent. In particular, the rise of those providers who specialise in placements for private equity-backed businesses is driving significant cross-border recruitment activity, which will in turn become an area of keen focus for those consolidators in the Executive search arena.

M&A outlook – three big recruitment trends to watch

1 Skills shortage creates opportunities for recruiters offering integrated training

More holistic talent solutions providers that can offer companies trained employees will be well placed to meet the demands of the skills shortage. This is certainly what Challenge-trg set out to do with the acquisition of HGV driver training specialist Phoenix Training and logistics recruitment specialist TRG Logistics. These deals enabled Challenge-trg to extend its end-to-end solutions to the logistics, warehousing and distribution sectors.

2 Super specialists will serve the post-pandemic candidate

Traditional ways of working have been upended by the pandemic: some candidates reluctantly commute while others want the buzz of city life. APSCo has warned that employers will need to be more creative to attract talent amid skills shortages. Recruiters will get increasingly involved with the communities from which they are hiring to learn what their candidates want. This might involve hosting online communities or retreating to a super-specialism. International recruiter Marlin Green, for example, focuses on contracts for system applications and products (SAP), big data and business change.

3 Demand will rise for recruiters serious about equality, diversity and inclusion (ED&I)

SmartRecruiters’ State of Diversity Hiring Report 2021 found that many companies are still only paying lip service to ED&I. For example, 50% had no strategy in place for setting and calibrating diversity hiring goals. As ED&I becomes increasingly important to employees and candidates, recruitment, training and coaching firms that can help drive change will be in much demand. A company already leading in this area is Audeliss Executive Search, which seeks to “level the playing field for diverse leaders in executive and board appointments”.

We expect that societal pressure will encourage these considerations to become the norm rather than the exception in hiring decisions.

We are also expecting the RPO model to take more prominence in corporate talent acquisition strategies as the cost of large-scale specialist recruitment becomes untenable. Winners in this area will be those businesses who can deliver deep sector specialist talent solutions at scale, rather than generalist RPO providers who do not have the requisite depth of expertise.

There has never been a more exciting time to be part of the recruitment sector, as exhibited by these trends.

To discuss this report further, contact Keely Woodley or Carl Parker.

_{Source of M&A data: Data compiled from a variety of generalist M&A databases (Mergermarket, Zephyr, Capital IQ) and the specialist press and trade journals.}