The year of 2021 brought record breaking statistics for transactions completed across all sectors but has 2022 successfully managed to continue this trajectory? As we look at this year’s annual Rec-View, we bring you some key industry insights, highlighting the topical factors which have been affecting recruitment buyers & sellers throughout the year.
What Sectors were the most attractive in 2022?
As outlined by BDO’s 2022 Mid-year Recruitment market snapshot, transactions in H1 continued momentum to match the statistics, or fall just slightly below, the record number seen in H1 of 2021. Of course, we did see this taper off slightly in the second half of 2022, but the question remains the same – what verticals sparked the most interest amongst acquirers?
One theme we saw across target remits this year was the preference amongst larger players to diversify away from the light industrial space. Blue collar work is not to be diminished given how it has become the bread and butter for various agencies, as the foundation for how they have achieved such impressive growth. However, many players are wishing to diversify into higher margin, white collar work, in order to compete and remain agile in the marketplace, whilst improving margins. We saw this in two substantial deals completed at the beginning of the year, with both BGSF and Impellam Group disposing of their light industrial divisions in light of new objectives. Of the white-collar work, sectors of particular interest right now include life sciences, healthcare and energy/renewables.
Both macroeconomic factors and industry trends play into the attractiveness of these verticals. For example, the aftermath of the Pandemic and the introduction of the Covid-19 vaccine has naturally highlighted the importance of the Life Sciences sector. Similarly, the healthcare system in the UK continues to experience a lack of resource, with cause for concern in the growing reliance on locum alternatives, staff are needed now more than ever. Additionally, the energy crisis has caused many to consider renewable alternatives moving forwards. All combining factors make these types of recruitment agency ever the more attractive for investors, shortages in the talent pool will inevitably increase the demand for good quality recruiters.
US markets – How Many are Hoping to Make it Across the Pond?
With higher margins and a less competitive landscape, a key theme we saw this year was UK recruitment owners wishing to enter the US recruitment space either via acquisition or greenfield state-up. The staffing industry in the United States is the largest worldwide and has experienced continuous growth in recent years, reporting a revenue of nearly $177 billion in 2022. In comparison, the UK market is the third largest globally, generating revenues of $51 billion in 2022.
Despite America’s economy being almost 8 times the size as the UK’s, there still only remains to be half the number of recruitment & staffing agencies operating in the US when compared to the number trading in the UK. This presents a lucrative opportunity for UK owners and has been a prevalent theme in our conversations with recruitment buyers & sellers this year. For those wishing to expand their global footprint, North America is an extremely favourable market presenting ample opportunity to gain market. This is coupled with the fact that fees and margins are substantially higher across the board for permanent, contract and temporary placements made. As a result, agencies with an established US presence will likely drive a higher multiple in deals closed so this is certainly a trend to look out for across deal momentum in 2023.
The Solutions Piece – Innovating Typical Recruitment Practise
Naturally, acquisition criteria amongst large players in the recruitment space will evolve and pivot depending on newfound industry developments. A model that we have noticed has generated considerable interest this year is that of the ‘solutions piece’ provider, which is centred on outcome-based statement of work solutions and has been viewed as increasingly attractive across the board of buyer investment remits.
The solutions piece turns traditional recruitment on its head by essentially creating a model that delivers end to end solutions of a transformational client goal. The role of the consultant is to become embedded in the client’s organisation to deliver a 360-hiring model, from identifying, procuring and complete management of a bespoke team, to dealing with the performance, IR35 and payroll considerations throughout.
The reason this type of agency is beginning to spark serious interest among investors is because of the significant demand for technology/digital transformation that can be deployed quickly. For clients using MPS, it is typically a more faster and cost efficient process and allows flexibility of access to a diversified talent pool. This offering is differentiating MPS providers vs your normal Contractor focused agency and is certainly seen to be more attractive.
Unusual climate – Record Job Vacancies
2022 saw record job postings for the hiring market, with the Recruitment & Employment Confederation (REC) highlighting that the last week of July showed 1.85 million active job postings, which was its highest figure for the UK in 2022. On review of December, although there has been some slow down, it has not been as sizeable as you might expect with the REC highlighting that active postings have remained relatively stable following the July spike, with 1.39-1.5 million active job adverts recorded since mid-August.
So what does this mean for the recruitment industry and wider M&A landscape? Historically, an environment which has been characterised by high inflation, increased living costs and reduced consumer spending has often been met with downward hiring trends and lower staff-counts. However, with new vacancy postings remaining fairly stable this does create an unusual environment for the job market. Depending on how severe the labour shortages continue to be, arguably there will still be a need for talent even amidst a global recession. Close monitoring of these sliding variables will be necessary to determine the recruitment M&A outlook for 2023. Where labour shortages could maintain demand in the continued number of job vacancies, a tightening of band width across many organisations could reduce the need for recruitment outsourcing, making these types of business less attractive for investors.
From the Great Resignation to the Great Return
As a result, the year of 2022 has seen a shift in narrative regarding the Great Resignation, where initially the effects of a post-Pandemic world very much created a candidate led job market. In the spring of 2021, we saw elevated volumes of individuals quitting their jobs due to multiple contributing factors which were spurred on by the Pandemic. Notable mistreatment from employers was highlighted, there was inflexibility for a hybrid working model when restrictions were lifted, as well as heightened competition in record job vacancies and simply an inner reassessment on personal career direction for many.
But is this previous leverage now transitioning to an employer-orientated market in The Great Return, or in more cynical terms, The Great Regret? There is certainly indication that recent economic uncertainty and heightened costs of living have caused many to reconsider their decision to change roles or retire completely. Where previous conditions were characterised by a constricted labour market and unusual competition for talent, we are now questioning how the recession might cause a redundancy spike.
This has already become apparent in the tech space, with a predicted 120,000 tech layoffs occurring in 2022. Amazon, Meta & Twitter are highlighted in the media amongst those that have been responsible for substantial cuts in staff numbers, instead prioritising the need to reduce overheads and stay agile in a competitive landscape.
This naturally shifts the employee-centric market, where economic uncertainty will lead people to hold on to what they have and instead seek stability in their roles. Whilst 2023 will present new challenges in recruitment, the reintroduction of people from retirement back into the workforce, combined with lower competition in the labour market, will make hiring easier for employers. However, it will also be more important for them to maintain flexibility with regards to working conditions, in order to hold onto top talent and create a more long-term stable workforce, so you can see these factors will continuously shift the power between employee and employer.
2023 M&A Outlook
Amidst such fluctuating economic factors, many are wondering what lies ahead in 2023 for the recruitment M&A landscape. As we navigate arguably the most challenging environment for M&A since the financial crisis more than a decade ago, it is important to keep in mind the heightened risk factors that could affect deal volumes for 2023. Deal activity in 2021 and H1 of 2022 was arguably increased by expansionary macroeconomic conditions that made capital plentiful and inexpensive for many investors. However, in recent months, what’s become abundantly clear is the tightening of deal financing in the lending market, impacted by the looming recession, energy crises, labour shortages and fluctuating government policy. Whilst companies may become less expensive to acquire, how useful is this when buyers ultimately have less capital to act on?
Nevertheless, Connect’s outlook remains optimistic, most of the fundamentals for dealmaking will remain attractive for buyers in the months to come. The favourable sectors seen in 2022’s transactions including Tech, IT, Life Sciences, Healthcare & Renewables, will still likely generate substantial interest in the new year. Additionally, whilst acquirers will be exercising more caution in their approach to targets, they will also be looking ahead in M&A terms, by using their bargaining power to capitalise on a lower purchase price amidst such unfavourable market conditions. Downturns can often create an exciting climate for deal making and it will be interesting to see how this plays out.