UK recruitment sector M&A remains buoyant in an uncertain economy

The past two years have turned the recruitment sector on its head, with the chaos of the COVID-19 pandemic followed last year by the “great resignation”, as huge numbers of UK workers took stock of their career paths in the wake of the pandemic.

Along with the general increase in M&A that occurred during 2021, as dealmakers returned to the marketplace en masse, this helped drive M&A activity in the UK recruitment sector to a 10-year high by the end of 2021, according to a year-end report on the industry by BDO.

Factors including an influx of overseas buyers, growing private equity interest in recruitment and a heavily disrupted jobs market meant that sentiment was high going into 2022.

In spite of mounting challenges and an expected decline in M&A activity from the inflated figures seen in 2021, this optimism has largely been borne out. At the halfway point of 2022, figures show that dealmaking in the UK recruitment sector was only marginally below the corresponding period in 2021.

In its report for 2021, BDO expressed quiet confidence that M&A in the recruitment sector would continue, with the firm’s M&A Managing Director James Fieldhouse writing in the introduction: “The optimist in me anticipates that the M&A environment will continue to thrive, with many factors pointing towards this being the case.”

Despite adding that BDO “trust that 2022 promises to be another ‘boom’ time for M&A”, Fieldhouse also sounds a note of caution, writing that “external events and influences” - including the recent downgrading of recruitment stocks, the IMF reducing the UK’s growth prospects and rising inflation and interest rates - “might come into play to derail this activity in future months.”

As we look forward and the M&A market, both within recruitment and more broadly, adjusts to yet another new landscape, it is crucial to look at the factors that have been driving recruitment sector M&A and the headwinds that it is currently facing (and may face in future) in order to gauge dealmaking’s future prospects and determine whether optimism in the sector is justified.

Recruitment M&A at the end of 2021
Before delving into the factors that have driven such active M&A in the recruitment sector, it is worth examining the figures within the UK market last year, a year in which it rebounded strongly from the chaos of 2020.

At the end of 2020, the economic slowdown engendered by COVID-19 had pushed employment placement revenues down 18 per cent year-on-year to around £13.4 billion, following years of unbroken revenue growth.

Business confidence understandably plummeted as a result of the pandemic and, despite more people seeking work (with unemployment reaching a peak of 5.2 per cent in November 2020), companies paused their hiring plans en masse, with job vacancies falling to a low of approximately 300,000 in May 2020.

However, at the outset of 2021, despite the adjustment of the furlough scheme (which many predicted would dent business confidence further), unemployment began to rise consistently, perhaps spurred on by the end of the drawn-out Brexit process.

By the end of last year, this recovery saw revenue in the recruitment industry surpass pre-pandemic levels, hitting £16.8 billion, according to BDO figures. As the economy recovered, job vacancies did likewise, with figures from the end of 2021 showing a near total reversal from the state of affairs at the height of the pandemic.

This was likely exacerbated by the “Great Resignation” that occurred during 2021, as millions of workers – prompted by the upheaval of COVID-19 – adopted shifting attitudes towards work and their priorities.

The key finding of consultancy firm PwC’s Global Workforce Hopes and Fears Survey of more than 52,000 workers in 44 countries and territories, carried out in March 2022, was that one in five workers planned to quit their jobs this year.

Whilst pay was the main factor, of almost equal importance to people considering a job change were the intangible aspects of their employment - relating to fulfilment, self-expression and how the company or team is concerned for their well-being.

Many left their current roles in order to pursue avenues of work they were more passionate about, leading to a rise in self-employment and a reduced talent pool for employers.

With businesses increasingly struggling to attract skilled workers amid the UK’s growing skills gap and a post-Brexit shortage of migrant workers, UK job vacancies had risen from record lows to a record high of 1.2 million, more than 400,000 higher than prior to COVID-19.

Unsurprisingly, M&A in the recruitment sector followed a similar trajectory (as seen in many other industries), with dealmaking activity stalling in 2020, before a dramatic recovery in 2021, as confidence rose and pent-up demand was unleashed.

In 2020, deal volumes for UK firms in the global recruitment sector fell to just 21 deals from 27 in 2019, as buyers across the board paused their dealmaking plans in order to wait out the turmoil of the pandemic. However, in 2021, this was followed by a huge reversal, as deal volumes increased 90 per cent to 40 deals completed, 11 per cent higher than the previous high for the past decade (36 deals in 2018).

In terms of deal values, 2020 predictably ended with firms registering low multiples, with the average EV/EBIDTA for BDO FTSE listed recruitment firms standing at an average of just over 10x at the start of 2021. While these figures remained steady for the first two months of 2021, March saw valuations begin to ascend rapidly.

By June 2021, a sudden increase in job vacancies and a fall in the unemployment rate to around 4.5 per cent pushed EV/EBITDA multiples up to a record of around 23x, with economic uncertainty easing and COVID-19 restrictions beginning to lift.

Perhaps unsurprisingly, this trend couldn’t last and, amid renewed concerns about COVID-19 towards the end of the year and the IMF cutting UK growth forecasts due to rising inflation and supply chain disruption, valuations dropped towards the end of 2021. However, despite these challenges, valuations still ended the year in a far stronger position than they began it, with the average at the end of 2021 standing at 13.42x EV/EBITDA.

It is worth noting the current differential between US and UK valuations in this sector, with US recruitment companies only achieving just under 11x EBITDA multiples in the 2021 fiscal year and 8x EBITDA in the year to June 2022, according to Valuanalytics. One of the primary drivers for reduced valuations across the pond is the correlation of values with lower growth expectations. Major recruiters in the UK are currently more optimistic about future prospects than their US counterparts.

State of play at the midpoint of 2022
Despite M&A overall returning to more “normal” levels during 2022 so far, M&A in the recruitment space has continued strongly. During the first half the year, UK recruitment firms were involved in a total of 18 deals, down only slightly from the 19 deals seen during the first half of 2021, with dealmaking continuing at a similar rate.

This has been driven by job vacancies continuing to rise, albeit at a slower rate, while there is an ongoing shortage of labour as the unemployment rate has continued to drop since the start of the year. The skills gap has also resulted in what BDO’s James Fieldhouse calls a “heated, albeit patchy” jobs market.

What is driving M&A

A diverse pool of buyers
M&A within the recruitment sector has been, and in many cases is continuing to be, generated by a range of buyer types, as well as numerous trends within the UK jobs market and economy more generally.

During 2021, overseas buyers were among the most active parties in UK recruitment sector M&A, as inbound dealmakers targeted fast-growing UK recruiters during last year’s rapid recovery. Of the 40 UK-involved deals completed last year, 93 per cent featured a UK firm being acquired, but just 83 per cent involved a UK buyer, demonstrating a considerable degree of global interest in the UK recruitment industry.

In November 2021, US cloud-based recruitment software provider Bullhorn Inc acquired UK-based cube19, a company providing analytics and reporting solutions for the global staffing market. cube19, a long-time partner of Bullhorn, uses its analytics to provide insights on staffing across all levels up to C-suite and is part of a wave of emerging technology transforming the recruitment sector.

Announcing the acquisition, Bullhorn said: “The acquisition of cube19 comes at a pivotal moment in the trajectory of the industry as a whole and addresses a critical need among senior staffing leadership."

Bullhorn added that its research had shown that staffing agencies “unanimously voiced a desire for truly real-time, actionable business intelligence and reporting that could help them connect their financial decisions to operations and delivery optimization and connect functions and business units towards improved service levels and growth. The combination of cube19 and Bullhorn provides exactly that.”

BDO’s mid-year report for 2022 shows that this has continued to be the case. 41 per cent of deals completed in the first half of this year involved an overseas buyer, with acquirers from China and, in particular, the US (33 per cent of inbound deals featured a US buyer) the most active.

Private equity more broadly has been another key player in the recruitment sector M&A boom, moving to acquire UK recruitment firms with an appetite for growth through buy-and-build. One quarter of deals last year involved a private equity buyer and, while this share was down from one-third in 2020, deal volume for private equity acquisitions was up 43 per cent.

Again, this is a trend that has continued to the midpoint of 2022, with private equity buyers accounting for 39 per cent of deals so far this year. As noted by BDO, private equity interest in the recruitment market in 2022 has ranged across numerous sub-sectors, including tech, logistics, IT and education.

In April 2022, private equity firm Pricoa Private Capital, part of Prudential Financial, announced a significant investment in SPS (Specialist People Services), a UK recruitment firm providing labour solutions for the UK and international logistics market.

The investment will see Pricoa support SPS’s organic growth plans in the UK and Australia, as well as opening the possibility for the firm to target acquisitive growth in the UK and internationally.

Significantly, 2021 saw trade buyers within the recruitment industry resume their acquisitive activities, as confidence in acquisition-led growth strategies returned following the pandemic.

Some trade buyers completed numerous acquisitions and, overall, 23 of 2021’s deals involved a buyer from within the recruitment industry (a rise of 188 per cent on 2020). One such buyer was MCG Group, which completed a pair of acquisitions in Q4 2021, which it followed up with a further deal in January 2022.

Fluctuation within industries
Industry specific trends have also been driving dealmaking, including fluctuating demand for candidates across a range of sectors. Likely spurred on by the implications of the COVID-19 pandemic, deals for healthcare recruitment firms comprised 20 per cent of all UK deals last year, a figure that only marginally declined in 2022.

As business confidence soared in the UK during the first half of 2021, so did investment into firms in the engineering/construction/industrial sub-sector. Despite all deal activity in this space occurring during the first half of the year, it still accounted for 12 per cent of 2021’s deal volume.

However, the most active sub-sector for M&A activity was recruitment technology, as the digitisation of the recruitment industry saw the market claim a 25 per cent stake of all UK-involved deal activity in 2021 (up from 14 per cent in 2020). This trend, which is poised to carry on as the industry continues to digitise, proved particularly attractive to private equity buyers, who were involved in half of the ten recruitment technology deals completed last year.

BDO has also identified “generalist” recruiters as a key factor in the ongoing M&A wave and a trend that has increased during 2022. Last year, generalist recruiters were involved in 15 per cent of deals, a figure that has increased to 28 per cent thus far in 2022, with BDO commenting that deals for general providers may reflect “the value perceived in having a diversified portfolio amidst challenging times”.

A challenging jobs market
Finally, but perhaps most significantly, the sector is being driven by a jobs market that has been in a near-constant state of flux since the pandemic hit. Plummeting job openings during COVID-19 were followed swiftly by the “great resignation” and a huge rise in vacancies.

So far in 2022, job vacancies are continuing to rise, albeit at a slower rate, as vital, public-facing sectors such as hospitality, accommodation and food-service bounce back from the COVID-19. This state of affairs could perhaps come under threat, however, as the cost-of-living crisis impacts consumer confidence and the hiring activities of companies in sectors such as retail.

Overall, though, the UK unemployment rate is currently low (slightly over 4 per cent), meaning that – alongside rising vacancies - demand for recruitment services is high, something that will continue to drive dealmaking into the UK recruitment sector.

Headwinds
There are, however, several potential factors currently affecting the UK, which could have a knock-on effect on recruitment activity in the UK and act as headwinds to the recruitment M&A boom continuing throughout 2022 and into 2023.

The UK, like most other countries, is being hit by soaring inflation and persistent supply chain issues. Last year, this caused the IMF to cut the UK’s growth forecast to around 4.7 per cent and these issues have only intensified since then.

Amid rising interest and inflation, both business and consumer confidence is set to be severely affected, as companies struggle under higher costs and people tighten their purse strings as the cost-of-living crisis bites.

In such economically difficult times, it seems likely that many businesses (particularly those most vulnerable to rising costs and diminished consumer sentiment) will slow or even pause their hiring activities entirely, something that would severely temper growth in the recruitment sector (as seen during the COVID-19 pandemic).

On top of this are a raft of political and social uncertainties, such as the war in Ukraine, the Conservative leadership race and the associated possibility of a general election in the near future. These factors could all impact the state of the UK economy and, potentially, the state of recruitment in the UK.

Conclusion - What is the outlook from here?
Despite the headwinds that UK recruitment faces and the overall slowdown that M&A is seeing during 2022, the prospects for ongoing dealmaking in the recruitment sector continue to be strong. Driven by trends such as recruitment technology, private equity investment and the interest of overseas buyers in the UK sector, M&A this year has continued to perform at levels close to those seen in 2022.

As BDO’s James Fieldhouse writes in the firm’s 2022 mid-year review: “As noted the deal environment remains buoyant, with the UK still regarded as a good place to ‘do deals’ and plenty of interest from investors.”

“Once again, it would take a brave person to predict anything in this ever-changing marketplace, however, despite some of the clear challenges there are definitely lots of reasons to be positive, and we envisage that staffing and recruitment companies will continue to play a vital role within a UK economy grappling with fragile consumer confidence.”

The question moving forwards is whether the uncertainties that the industry currently faces will be enough to derail an M&A market that has so far proven highly resilient.

Also read:
Acqui-hiring: M&A strategy to boost talent pool and enterprise value

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