With the ‘great resignation’ comes a thriving recruitment sector, and with a thriving sector comes healthy M&A activity. But what lies behind shifting labour trends and will recruitment M&A remain strong when things settle? Our experts share their insights in our latest quarterly review.
IN THIS REVIEW
As recruitment M&A continues to outperform, Keely Woodley and Carl Parker explain the reasons behind the sector’s long-standing appeal.
In our biannual summary of deal activity in the recruitment sector we reveal:
deal volumes over the last two quarters (Q4 2021 & Q1 2022)
why there’s an increase in UK-US activity
which subsectors are growing and why
whether the sector’s appeal is here to stay
2022 is off to a strong start with bumper deal volumes
UK recruitment targets - M&A quarterly trends
Deal volumes in the recruitment sector have remained robust since our last update in October 2021. Some 18 deals were announced in Q4 2021, followed by 23 in Q1 2022, which represents the strongest quarter since the COVID-19 catch-up of Q4 2020.
Job vacancies continued to climb to record levels – approaching 1.3& million as per latest ONS figures.Against this backdrop, investors backed new growth areas and focused on specialisms.
September 2021 - Private equity firm NorthEdge backed the primary management buy-out of life sciences recruitment company Meet, which specialises in Pharma, Med-Tech and Healthcare Comms. The deal will fund Meet’s expansion, including a more than doubling of personnel. We supported on buy-side advisory.
Private equity interest
Financial investor interest in recruitment remains strong for reasons covered in our previous update. PE/VC buyers were involved in 43% of deal completions in the sector in Q1 2022, which compares with 56% in Q4 2021.
Of the cross-border deals in the six months to April 2022, 60% involved US buyers, compared to 11% in the six months prior. We attribute the dynamics between the US and UK markets to the following four factors:
An offer letter from America
December 2021 - New York’s ZRG (backed by RFE Investment Partners) acquired London-based executive search firm Walter James, which has a focus on supply chain management. The acquisition adds another vertical to ZRG’s offering.
February 2022 -San Francisco software firm SmartRecruiters acquired UK-based Attrax which helps companies build personalised career sites.
Which subsectors are taking off?
Sector breakdown – last six months (Q4 2021 and Q1 2022)
The double: combining tech and professional services
Sector specialists accounted for 59% of UK recruitment M&A activity over the last two quarters. Digital, IT & Technology remained the favourite, accounting for 29% of sector-specific deals, compared to 15% in the six months prior. This is due to a focus on digital transformation that was accelerated by coronavirus. Interest in financial and professional services also rocketed, accounting for 7% of sector-specific deals in the six months to October 2021 to 21% in the six months to April 2022.
January 2022 – Soho Square took a minority stake in global recruitment firm Oliver James, specialists in technology, accountancy and finance, and engineering. The deal will fund international expansion and further investment in its proprietary technology. We supported on buy-side advisory.
Life science takes off
The global pandemic has raised the profile of life sciences, with three notable deals over the last six months, in addition to the Meet deal mentioned above.
November 2021 – Agathos backed a management buy-out of Hunter Healthcare, specialists in the NHS, private healthcare, and life sciences. The funding will enable Hunter to break into new and growing markets. We supported on debt advisory, financial modelling and exit-planning research.
February 2022 - Rowan Recruitment Ltd acquired life sciences recruitment specialist Claro Search and Selection, having identified life sciences as a 'key high growth market.'
February 2022 – The management team of PIR International a provider of executive search to the global life science industry completed an MBO from its founder.
Renewable energy play
Macro politics will always influence demand for recruitment.The UK Government’s 2021 Net Zero strategy has created a need for ESG recruitment specialists.
December 2021 – Dutch recruitment group Brunel International acquired Scottish firm Taylor Hopkinson, which bills itself as the biggest pure-play renewable energy team in the world.
Recruitment M&A: lasting attraction
The record rise in UK job vacancies and competitive multiples obtained by UK sellers shine a spotlight on recruitment M&A. Other factors also contribute to the sector’s long-term resilience:
Flexible working will increase job market fluidity
After a period of ‘will we/won’t we go back to the office’, the decision has fallen in favour of hybrid working. This has major implications for how companies recruit.
Talent pools are suddenly global – companies have recognised that ‘remote working works’, meaning they can cherry-pick talent from across the globe – no problem if the project manager is in Italy and the programmer in Poland. This presents opportunities for recruiters who can navigate the resulting tax and contract implications.
New normal, new opportunities
March 2022 – homeworking recruitment platform Omnipresent raised USD 120 million in its Series B funding round.
Omnipresent’s tech enables companies to compliantly onboard employees in over 150 countries, taking care of local contracts, tax, and benefits.
It's easier for employees to search for a new job while working from home – no more sneaking into a meeting room to chat with a recruiter, or 'dentist appointment' to attend an interview. This may seem a frivolous point but will provide a more than marginal fillip to the recruitment industry. The skills shortage won’t be solved soon.
One of the biggest constraints for business growth is a lack of suitable talent. The underlying drivers of this, an ageing workforce and skills shortage in growth areas such as ESG and tech, are not going away. As we mentioned in our last report, there are opportunities for recruitment companies that can expand into training or learning and development, solving the supply problem and creating an end-to-end service for their clients. Train to Deploy offers recruitment organisations a way to compete with consultancy firms and RPO providers by fixing the skills shortage for their clients.
Globalisation equals resilience
The globalisation of the recruitment sector has been accelerated by a move to hybrid working. Recruiters that serve multiple geographies can protect themselves against local market changes, driven by macro events, such as a pandemic or demand for oil and gas. For example, Asia’s recruitment market is currently impacted by high coronavirus numbers, whereas Europe has returned to pre-pandemic performance.
No sector is perfect and any investment must be based on solid fundamentals, a clear growth opportunity and due diligence.
For help with this or to further continue the conversation in this report, please get in touch get in touch with Keely Woodley and Carl Parker.
Appetite varies across the sector, with some funders more attracted to permanent placements, others better aligned with temporary or contract labour and some happy to fund a combination. With the right guidance borrowers have several options. The funders broadly fall into three groups:
1 High street and challenger banks
As the most established route to funding, banks offer a full suite of lending products to their customers at (usually) the most competitive pricing. This can include overdrafts or invoice finance to fund working capital as well as more structured lending, such as term loans and revolving credit facilities.
It's always worth checking the banks' appetite for lending due to the full service offering and low cost. However, banks are usually the most cautious when compared to other funders.
2 Asset-based lenders
As the name suggests, asset-based lenders concentrate primarily on funding against the assets of the business, which in the case of recruitment tends to be debtors. These lenders have sought to increase their competitive position by also offering cash flow loans alongside traditional facilities. While funding can be used for acquisitions, borrowers must be certain they still have adequate working capital headroom.
3 Debt funds
Although debt funds have been around for several years, they're probably the newest and fastest growing entrant to the UK debt market and in particular the recruitment sector. They can offer loans that don't need to be repaid until the end of the facility term (usually four to seven years) making it particularly attractive to borrowers who want to re-invest the cash they generate to grow the business. The product can also be ‘lighter touch’ in terms of the covenants and controls. However, the flexibility does come at a cost with this type of debt usually being the most expensive.
Speaking to the right lenders and enhancing the chances of success
We've advised recruitment clients on a full range of different types of debt structures, including combinations of the above. The prospective lender pool must be adapted in each case to enhance the chances of obtaining the right funding from the right funder. Prior to doing so, the following should be considered:
The traditional focus of transformation on quantitative outcomes surrounding strategic, large-scale initiatives: from cost reduction to legislation, is changing. Businesses are now finding value in infrastructure and skills.
On the surface the 'great resignation' certainly looks real. 33% of job-to-job movement in Q4 of 2021 was attributable to resignations, while only 2.5% was attributable to dismissals. Ipsos research shows 47% of British workers have actively searched for new roles in the last three months from February 2022, and 26% of respondents have considered quitting their job, while 13% have already applied elsewhere. At the same time, the number of vacancies has increased 112.5% in the past year.
Nevertheless, while a ‘great resignation’ implies a shrinking labour force, figures suggest quite the opposite - more of a 'great churn', as recent ONS employment figures for Q4 of 2021 are positive: unemployment shrank 0.2% further to 4.1%, only 0.1% higher than pre-pandemic.
What is driving this phenomenon?
COVID-19 is still dominating interpretations of the economic landscape. One perspective argues that workers re-evaluated their prospects during lockdowns. Experiencing their jobs differently caused workers to see them differently, and more starkly, than before. Individuals have become clearer on their values, and are willing to move to firms which align more closely to them: 26% of Ipsos respondents cite firm culture as a source of dissatisfaction. Beamery has found 74% of respondents feel their prospects have been constrained since the pandemic began. This generated a ‘time bomb’ which has shocked the labour market.
Equally, greater flexibility has granted access to roles previously unavailable to them. This has afforded greater bargaining power to an increasingly skilled labour force, who seek roles which reimburse their skills with more desirable benefits. To this end, Ipsos find 38% of workers consider work-life balance the main source of job satisfaction and 30% value flexibility most. Likewise, the Recruitment and Employment Confederation report jobs requiring four or five days in the office are less popular than those requiring two or three days at least.
However, it may be argued that there's no ‘great resignation’ and what we're seeing is (at least in part) simply a backlog of deferred job movement delayed by the pandemic. As a result, figures may only appear stark because they are effectively an accumulation of yet-to-be-tendered resignations. Backing this up, human resource director surveys show 36% of workers who planned to resign have delayed doing so due to pandemic-driven job market uncertainty. Labour movement spiked in September 2021 at the end of the government furlough scheme. Nonetheless, it's reasonable to contend that some degree of empowerment has spurred greater labour mobility on top of typical labour market cycles.
Working out the future
Recruitment firms should expect equilibration to vary across the labour market. Firstly, evidence suggests a staggered response by age demographic. Ipsos finds that 46% of 16–34-year-old say they have at least considered leaving their job compared with 37% of 35–54-year-old workers and 23% of 55–75-year-olds. Millennials are also more likely to resign compared to older colleagues. This could be attributable to sociological change and workforce empowerment in younger generations, or the greater ability to be flexible in their working lifestyle.
Secondly, low-skilled jobs will likely exhibit long-run transitory effects, as these roles typically experience higher quit rates and workers do not have new new jobs lined up as frequently as high-skilled workers. Case in point, ONS figures noteannual employment decreases are highest in accommodation and food services employment at 7.7%, yet the same sector exhibits the largest year-over-year vacancy growth. Accordingly, high-skilled jobs will exhibit more short-run transitory effects: ONS figures show 42% of job-to-job movement in Q4 of 2021 was from high-skilled jobs compared to 32% from low-skilled jobs.
Although the labour market is still off kilter, there are some reasons to argue that it will gradually return to equilibrium as the economy recovers from coronavirus-induced uncertainty. On the supply-side, people have had time to make decisions and settle into new roles. On the demand-side there is more debate. There will continue to be challenges unemployment at, or even potentially below, the economists’ natural rate of unemployment, and this is expected to hold over the medium term. However, as argued above the positive impact of a higher resignation rate for some types of workers is that more candidates exist for certain positions, and 48% of firms in the Lloyds Business Bank Barometer believe that access to a larger talent pool make skills matching much easier.
Ultimately, this suggests that for the next year there will remain an ongoing level of confusion within the labour market and different outcomes relating to different types of employee.