The beginning of the quarter saw the Recruiter Fast 50 published, detailing the fastest growing, privately-owned recruitment companies in the UK calculated by revenue compound annual growth rate across three years. Whilst the report reinforced that several UK agencies have individually had their best ever years post-Covid, it also highlighted that total annual compound rate was lower as a whole in comparison to previous years. This year’s cohort demonstrated a 26% compound annual growth rate against 35% in recent years and yet M&A activity continued to thrive, with the UK reinstating its position as the largest recruitment market in Europe and third largest globally.
In the agencies which featured, three sub-sectors prevailed with professional services identified as the strongest performing vertical, followed by construction. This pattern can be explained through the rapid bounce back experienced post-Covid as the hardest hit sectors. Inevitably, Healthcare & Life Sciences also continued to surge in light of exacerbated waiting lists, staff shortages and scientific advancement in the release of the Covid-19 vaccine. At Connect, we have seen first-hand these evolving acquisition trends, working in the last quarter on a mandate which required a full market map of the US to identify the major players in the Healthcare & Life Sciences space.
According to the Recruitment & Employment Confederation (REC), job vacancies emerged at a record high in August for 2022, reaching 2.08 million, with new postings up 47% against the previous month. This is largely the result of recruitment kickstarting again following the holiday period, combined with seasonal demand for manufacturing & logistics labour supply in the lead up to Christmas.
Historically, a rise in job vacancies is synonymous with the staffing market’s buoyancy, which should have a positive impact on the M&A landscape. And yet, we’re navigating a market largely affected by rising interest rates, geopolitical tensions, and prolonged labour shortages which naturally heightens the risk of investment for any type of buyer. These shifting variables inevitably impact the multiples & deal structures we see across all transactions and at Connect we have experienced that bridging the gap between buyer and seller expectations is becoming increasingly challenging amidst these macroeconomic factors.
Experiencing a strong revival post-Pandemic, whilst paired with a hot labour market, it is undeniable that the recruitment sector has played a large part in the substantial deal volume witnessed in 2022. A notable shift has occurred regarding the type of buyer completing these transactions, with Grant Thornton identifying that private equity involvement made up 43% of UK recruitment deals in Q1 2022. This was up in comparison to the 28.6% average share between 2015-2019, demonstrating that the strong underlying performance of the recruitment space has not gone unnoticed by PE players.
Interestingly, unlike the trends seen by trade buyers who typically favour agencies with a larger contract & temporary offering, PE houses have not been adverse to looking at permanent heavy agencies. This is reinforced by the deals closed early on in the quarter, with Further Global closing in the professional services space, purchasing a majority stake in Phaidon International, a permanent agency employing over 1,500 consultants, as previous PE partner Quilvest Capital sought to exit. Omni Partners LLP also backed Fortes Partners acquisition of DMJ Recruitment Ltd to facilitate growth plans in establishing a large multi-disciplinary professional services staffing business.
September has seen the sharp decline of the pound reach a record low and it will be interesting to see whether this impacts the previous PE interest in recruitment investment opportunities. Interestingly, the acquisition of UK opportunities could become more attractive amongst overseas PE houses and overseas trade buyers looking to capitalise on this decline. However, the uncertainty in the UK economy may also stimulate a freeze on recruitment across various businesses as UK businesses begin to tighten their belts. This will naturally impact the profitability of agencies as they begin to see a shrinking demand for their services so it will be interesting to see how this impacts the M&A landscape.
Connect Corporate Finance has developed a strong network of Private Equity relationships identifying the most active houses within the recruitment space whereby, even given the economic landscape, there still remains a large amount of dry powder to be deployed, but only at the right price.