Recruitment companies are on a good run, and dealmakers are eager to invest in a sector that has enjoyed a strong post-COVID-19 bounce and is benefiting from a hot labour market.
In the UK, between March and May, job vacancies reached a record high of 1.3 million, according to Office for National Statistics figures. Candidates already in positions, meanwhile, have been increasingly willing to shop around for a new role, with significant salary increases and joining bonuses on offer when switching jobs.
Recruiters have been ideally positioned to capitalise, with listed headhunters including Robert Walters, Hays and Page Group all reporting large double-digit earnings rises in their most recent financial results.
“This is a candidate-driven market and recruiters are securing attractive fees per placement,” says Philip Olagunju, partner and head of corporate finance at PEM Corporate Finance. “There’s been a shrinkage in the labour market following lockdowns and there’s been the ‘great resignation’ through the pandemic, with more people becoming self-employed, so there’s a real premium on securing talent.”
Keely Woodley, UK head of corporate finance advisory at Grant Thornton, adds: “Despite market volatility and recession concerns, which do not point to a buoyant jobs market, there’s been a significant acceleration in skills and labour gaps facing businesses. There shouldn’t be any recruitment companies out there that aren’t doing well against this current backdrop.”
Deal deluge
The strong underlying earnings performance across the recruitment space has spurred dealmaking across the industry.
“M&A activity in a sector tracks earnings growth and we’ve seen that play out in recruitment,” Olagunju says.
According to Grant Thornton analysis, there were 23 recruitment deals in the UK alone in Q1 2022, making the quarter the strongest since the COVID-19 ‘catch-up’ of Q4 2020, as well as the joint third-busiest quarter for recruitment deal activity going back to 2018.
Trade buyers and private equity firms have all contributed to the high deal volumes. Trade buyers have turned to M&A to buy in new capabilities and adjust to changing labour market dynamics.
Following lockdowns, corporates have adapted to remote and hybrid working, which has made talent pools global and spurred investment in digital platforms and infrastructure to facilitate new staffing models. “Digital transformation has been a key driver of deal activity.
Trade buyers are looking for assets that can enhance their video interviewing, customer relationship management and remote candidate management capabilities,” Olagunju says.
Woodley says this has opened up opportunities for recruiters to broaden their offerings. Instead of only placing candidates, recruiters are also helping clients with onboarding employees from other countries and managing contract, tax and benefits administration across different jurisdictions.
Homeworking recruitment platform Omnipresent, for example, which gives companies the tools to onboard employees in more than 150 countries, secured a $120m Series B funding round in March 2022, illustrating the strong investor appetite for companies in this recruitment niche.
The traditional strategic value of M&A as a tool for expanding into new geographies and building scale has also remained relevant in the recruitment space. Cross-border deal activity in recruitment has been robust, with bullish recruiters looking abroad to break into new markets and establish new verticals through deals.
Transatlantic activity has been particularly notable, with New York-based recruiter ZRG acquiring UK management recruiter Walter James and San Francisco software group SmartRecruiters buying Attrax, a British firm that helps clients design and build personalised career sites.
“Building economies of scale and expanding into new geographies have been key drivers of recruitment M&A,” Olagunju says. “In a market where there’s a scarcity of candidates, you’ll also see trade buyers pursuing deals to simply buy candidate books.”
Private equity interest
For private equity players, meanwhile, growing recruitment earnings have made the sector an attractive option for deploying the large sums of dry powder sitting in private equity war chests.
According to Grant Thornton, private equity players were involved in 43% of UK recruitment deals in Q1 2022, significantly up on the 28.6% average share in the five years before the pandemic, from 2015 to 2019.
“Private equity firms investing in recruitment have followed expansion in underlying end markets,” says Woodley. “The growth in technology enablement and digitalisation and huge investment in drug development, for example, have driven significant growth in the life sciences and technology sectors. Demand for candidates in these sectors has been high as a result and private equity has picked up on that.”
Deals such as Agathos’s management buy-out of healthcare and life sciences recruiter Hunter Healthcare; NorthEdge’s buy-out of life sciences headhunter Meet; and the Business Growth Fund’s backing of Odro, a provider of advanced interviewing, sales messaging and video content tools to agencies, are examples of how private equity firms are tracking recruitment businesses exposed to fast-growing industries.
Looking ahead
Despite a busy recruitment M&A market, however, trade and private equity buyers are keeping an eye on building macro-economic headwinds that could impact the sector down the line.
“We’re in an unusual situation. There’s volatility and uncertainty in the economy, but companies are still eager to grow and want to hire. That’s supporting a very strong recruitment market, but everyone is looking ahead to see if that dynamic will shift,” Olagunju says.
Central banks are forecasting drops in GDP for later in the year, as well as above-target inflation. These indicators usually correlate with higher unemployment, reduced wage growth and lower labour churn, which in turn point to a tougher recruitment market.
Factors such as labour shortages following Brexit – particularly in the hospitality, air travel, road haulage and logistics industries – and reskilling workforces for technology-driven economies could well counterbalance any macro-headwinds. However, dealmakers are increasingly focused on investing in recruitment assets that offer a degree of downside protection should activity slow.
Woodley says the most sophisticated recruiters are now specialising in niche industry areas, or looking for ways to make their customer bases stickier by layering consulting and training services over the core candidate placement business.
“Recruiters are working to build out a more holistic service offering that joins up staffing advisory, candidate placement and training,” Woodley says. “The ‘train-to-deploy’ model, where a company trains candidates then places them, is a very interesting area. There’s this convergence between training and recruitment that provides an end-to-end solution for a client and positions the recruiter as a key skills consultant.
“We’ve seen firms such as FDM and Sparta deploy this model with great success, so it’s not new, but it’s gaining more and more traction. We’ve never seen the market as busy as it is now. But if there’s a slowdown, the winners are going to be the companies that have diversified their service offering.”
Going green
Private equity and trade dealmakers have focused much of their activity in the recruitment sector on specialist agencies dedicated to finding talent in fast-growing verticals.
One of the fastest-growing niches within the industry is the environmental, social and governance (ESG) space, as well as adjacent areas such as renewable energy and diversity and inclusion. “ESG is on every recruitment dealmaker’s radar,” says PEM corporate finance partner Philip Olagunju. “ESG has become a badge of distinction and a key differentiator for recruitment businesses.”
Grant Thornton’s head of corporate finance advisory Keely Woodley adds: “Diversity and inclusion are high on the boardroom agenda. All organisations are working hard to meet diversity targets. There’s a premium for agencies that can support this transformation, especially with proposals coming down the track for listed companies to report on board diversity metrics in annual reports.”
