Travel: Holiday operators packaged and ready to fly
We expect investment in the travel sector to ramp up in 2024. Consumers continue to prioritise spend on holidays and IATA forecasts air passenger volumes to return to pre-pandemic levels this year. Given the number of assets locked in because of Brexit and Covid, we anticipate a significant number of mid-market transactions in the next twelve months.
Packaged holiday operators are attracting investor attention as they offer cautious holiday makers reassurance around costs and contingency plans in case of disruption. Assets coming to the market that specialise in increasingly attractive destinations (for example Italy, Japan, Thailand) are well positioned for growth (and many other destination markets are resilient).
However, accelerating growth can be tricky, and investors will need to carefully quantify potential share gains from investing in digital marketing (enhanced SEO, targeted behavioural advertising, influencer marketing) and discounts / loyalty schemes to maximise new and repeat bookings.
Close attention should also be paid to the traditional differentiators for these assets – customer service (friendly and knowledgeable staff, communication, organisation, pro-active etc.) and value for money (note not necessarily cheap). These can be overlooked as operators scale, and marketing them effectively is key to continued success.
Tour operators deals we’ve supported
Speak to the team about opportunities in the travel sector.
Jack HibbsEmail Jack
Professional Services: Time to look again at legal
Armstrong supports investors across a range of professional services deals including consultancies, accountancy and legal services.
In the legal services sector, we’ve worked on deals in high street legal, flexible law resource and tech-enabled law firm specialist areas like intellectual property (IP) services.
Last year we published an article on an area where we are continuing to see attractive and scalable M&A opportunities to build tech-enabled IP services, please read our article here.
Large law firms have scale, experience and capacity. However, smaller IP specialists will continue to differentiate where their senior staff build close working relationships with clients. This is based on their technical and legal expertise and understanding of their clients’ businesses. For investors, it’s knowing the key commercial questions to ask.
High street legal
There are several acquisitive models for traditional / corporate legal services firms, from vertical integrators (e.g. O’Neill), to dispersed firms akin to barrister’s chambers (e.g. Keystone, Setfords), corporate consolidators (e.g. Metamorph) and traditional acquisition / licencing (e.g. Gateley, Knights Plc, Taylor Rose). Each model has its merits, but execution of the strategy sets the best performers out from the rest.
The high street legal market remains highly fragmented, successful buy and build examples have adhered to clear criteria when assessing targets, while others have seen difficulties when pursuing size alone. Further consolidation is expected in the space due to positive market tailwinds and challenges for small firms (often <5 headcount) scaling without external support. There will be plenty of opportunities for investors to benefit from this, but selecting the right targets is key.
Technology adoption is changing the structure of the legal profession, and its market evolution is presenting attractive and scalable M&A opportunities across the value chain, from full-service tech-enabled law firms right through to pureplay software vendors. We published an article Technology Adoption in the Legal Sector with Clearwater on legal services with a useful framework, which illustrates the potential entry-points for mid-market private equity and trade buyers to access a market going through rapid change.
Speak to a member of the team about opportunities in the legal sector.
Simon HemsleyEmail Simon
Rupert CooksonEmail Rupert
Jack HibbsEmail Jack
Sectors to watch in 2024
Our sector teams share their sectors to watch in 2024. These are intended to help trigger investment ideas and discussion. If you would like to discuss opportunities in them, please get in touch.
Technology: Mike Callow & Ifan Dafydd
We’re doing lots more work in software than usual. Much of this is vertical specific, helping customers in industries such as construction, travel, financial services and the NHS to ‘digitally transform’. These tend to be (relatively) lower growth, but profitable vendors – attractive to investors in the ‘new normal’ climate.
There is an ongoing opportunity to displace manual and in-house workarounds, as well as legacy providers. These segments have specialised, complex needs. Much of the work is in understanding end market size and dynamics, is there enough to go for? Do we go deeper (adding functionality), or diversify (to another vertical), or go international?
We’re seeing developing requirements around digital twin, risk, and compliance driving spend in ‘hard’ industries. We expect to see opportunities targeting specific buyer personas (especially the CFO) and in data-heavy areas such as digital forensics and investigations.
Deal flow is still subdued in digital transformation and software engineering – only the best performing assets are trading. Across the market we’ve seen an IT budget squeeze and deferral of non-essential spend – when will it come back and how quickly? How long will the DX providers wait to come back to market? There is a continued bright spot around data, especially when it is taking customers on the journey to AI.
Counterintuitively, squeezed budgets are also being reallocated to core enterprise software, catching up with years of underinvestment through COVID. The market is facing big changes in the major channel ecosystems (e.g. S/4 HANA replacement cycle and growth of OCI), furthermore we are seeing lots of opportunities with distinctive service offerings (e.g. buy-side advisory) or addressing high growth niche products. We also expect more deal flow in up-and-coming vendor ecosystems, especially at enterprise level.
There is continued consolidation in MSP world. Overall market growth is relatively low, but it is a massive multi £bn opportunity that top quartile players continue to gain share of. Net-new growth has been hard to come by as there is less switching during a downturn, but well converged MSPs are in a good position to cross-sell. There are still more platform opportunities than you think… especially as underlying tech continues to evolve, and new specialisms emerge.
Read Ifan’s recent article The future of ISV channel partnerships.
Human Capital: Simon Hemsley & Matt McNally
Technology remains the hottest recruitment sector from a PE perspective, due to structural skills shortages, an expected rebound in demand, and the ability of tech recruiters to deeply specialise and carve out a niche in high-growth segments of the broader market.
The HTD (hire, train, deploy) model is evolving further towards providing ‘blended squads’ to deliver specific projects (possibly alongside consultancy), rather than graduates carrying out BAU work.
We see tech staffing solutions which augment, simplify or streamline the recruitment, onboarding or management processes continue to develop, but without significantly altering the fundamental nature of recruitment as a ‘people-first’ industry.
Read Matt’s article Recruitment activity above expectations.
Professional Services: Simon Hemsley & Rupert Cookson
Professional Services remains an attractive sector for many investors. We’ve seen continued interest in legal services, sustainability consultancies, and consultancies servicing the ‘Office of the CXO’. The key is having a clearly defined GTM strategy and value proposition. Understanding how businesses can hire the required talent to meet headcount growth will remain one of the key topics of diligence in 2024.
Read Rupert’s article Office of the CSO space attracts mid-market investment.
Financial Services: Simon Hemsley & Solomon Ishack
Financial services has been quieter in 2023 after a very busy period from 2020-2022, as the macro environment has slowed project activity and higher interest rates have dampened demand in wealth management. There continues to be interesting opportunities in specialist FS technology and consulting businesses, for example in regulatory compliance and monitoring. Investor demand for high-quality FS assets remains strong.
Business Services: Jack Hibbs & Peter Cookson
We expect many business services investment opportunities in 2024 with continued interest in sustainability, urban mobility, and language service providers.
Sustainability covers a broad range of services, and an even larger number of subsectors, including opportunities across consulting and civils. The fragmented landscape is attractive for investors pursuing a buy-and-build strategy, and ever-increasing public awareness of environmental issues means markets are growing at pace. Many businesses differentiate through highly sought-after niche specialism that larger generalists cannot deliver. Whilst this gives a sustainable right to win, market headroom can be limited – therefore execution of TAM expansion/M&A is often critical for success. Read Jack’s article Attracting the attention of private equity.
Digitisation is transforming urban mobility. Investor interest is abundant across the parking operator, payment facilitator, and software segments of the market. Read Jack’s article Parking sector motors on.
Language services encompasses translation, interpreting, and other less well-known segments such as localisation and transcreation. Investor interest stems from continued market growth, a large and underutilised pool of linguists/interpreters, and a highly fragmented landscape. Whist AI is often seen as a threat from the outside, most providers are well protected and, if harnessed effectively, can benefit from technological advancement in the space. Read Jack’s article Investment opportunities in a highly fragmented market.
Industrials: Matt McNally
There is continued interest in the broadly defined ‘compliance services’ sector – Infra services, FM, fire safety, TICC – where increasing regulatory stringency, greater focus from customers, and a large backlog of work in certain sectors is driving strong performance businesses and interest from PE.
We are seeing more focus on product rather than service-led businesses due to the potential for product businesses to have or develop a genuine and compelling USP. PE appetite to invest in circular economy, renewables and ‘net zero’ businesses continues, as does the relative lack of compelling opportunities.
We also see opportunities in Industrial technology and automation – sensors, predictive maintenance, asset monitoring and management – both to augment and differentiate industrial services businesses, and as solutions in their own right.
Read Matt & Brandon’s article Industrials: a variety of opportunities.
Travel: Jack Hibbs
Investment in the travel sector is expected to ramp up in 2024. Bookings are surprisingly strong despite difficult macroeconomic conditions; consumers appear to be prioritising spend on holidays and IATA forecasts air passenger volumes to return to pre-pandemic levels in 2024. Given the sustainability of demand, and the number of assets locked in because of Brexit and Covid, we anticipate a large number of mid-market transactions in the next twelve months.
Read Jack’s article Travel tour operators attracting investor attention again.
Build Environment: Peter Cookson & Brandon Matthews
We expect accelerated growth in the construction sector by the end of 2025 as the market enters an ‘expansion phase’. However, recovery will be uneven with the development of residential homeownership constrained by higher mortgage rates and availability of development land, especially outside of urban areas. Developers are instead eyeing up the build-to-rent sector with major build-to-rent developments in the early stages of the planning pipeline.
Read Brandon’s recent article Opportunities for investors to help Britain build better homes.
Tech: The Future of ISV Channel Partnerships
ISV channel partners extend the reach and effectiveness of Independent Software Vendors (ISVs) in marketing, selling, implementing and supporting their products; enabling them to scale more rapidly while focusing on their core competencies in software development. The relationship is symbiotic, and the channel partners (albeit harder to scale) capture much of the value in the ecosystem – channel revenue can be several times greater than the vendor’s software revenue.
Traditionally, most PE ISV channel deals have been rooted in the major enterprise software vendor ecosystems such as SAP, Oracle, and Microsoft. These are large, well-established markets which have long-standing partner ecosystems. Generalist channel partners are well fished, but there are plenty of opportunities for those with a distinctive offering – for example those with a specialisation in a niche product, or with vertical IP.
We are increasingly seeing ISV channel partner opportunities in less mature channels outside of these ‘major’ ecosystems. These include ServiceNOW, Workday, Hubspot, Salesforce, and Splunk as well as more niche and high-growth ecosystems.
When triaging opportunities within the ISV channel partnerships, there are a few key common considerations:
- Is the vendor / product a good horse to back?
- Is it a large growing market, and/or is there a route to taking share of channel?
- Is it complex and/or mission critical?
- Is there good professional services attach rate?
- What is the revenue profile? Lumpiness of projects concentration? Are there opportunities for on-sell, continuous improvement, own IP licensing, and managed services?
- Is the vendor channel friendly (reseller model, channel support, no direct sales)?
- Is there a strong, mutually beneficial relationship between the target and the vendor?
- What go to market support is available from the vendor (leads, co-marketing, co-selling)?
- Can the target generate its own demand with a standalone sales & marketing function?
- Does the target have visibility of vendor(s)’s roadmap and commercial strategy?
- Does the target play in complex and growing but supply constrained markets?
- Where will the talent come from? Where does it hire from? Can it grow its own talent?
- Are there specific roles which will be pinch points?
- Is there a way to increase our talent pool using near/offshore?
- How reliant is the business on contractors?
- Any risk of poaching from clients / SIs?
- How strong is the know-how and expertise (technical, vertical)? (Good)
- Does the business have any accelerators to speed delivery? (Better)
- Can the IP be productised + monetised? (Best)
- Enterprise focus client base – potentially opens up GSIs who can pay a significant premium in talent constrained markets
- SME focus client base – less clear + case by case. MSP/DX consolidators are often of interest
As well as these common considerations, different types of ISVs require distinct strategies and have different diligence questions. If you are considering investing in this sector, please contact a member of the Technology team who are happy to discuss specific opportunities and considerations.
Selected Armstrong SAP, Oracle and Microsoft Credentials
Selected Armstrong credentials in niche ecosystems….
…and we have worked on companies with some degree of ISV channel partner activity in many other vendor ecosystems
Mike CallowEmail Rupert
Ifan DafyddEmail Jack
Industrials: a variety of opportunities
We’ve seen a lot of activity and interest in fire safety over the last year and while opportunities in this sector remain, it’s not all about fire. Other areas such as TICC, infrastructure services, renewables and facilities management remain attractive for PE, and there are several other sectors that are active as well.
Here are some areas we’re hearing increasing chatter on…
- Utilities & infrastructure services: these include everything from maintenance and testing to environmental consulting and comprise of a variety of business models that vary in levels of attractiveness to private equity. Ageing infrastructure and increasing regulation is driving demand across residential, commercial and industrial sub-sectors.
- Facilities management (FM): there are several FM businesses coming to market. In a fragmented and low-growth sector, investors need to have confidence in the achievability of above-market returns, whether organic or acquisitive. To find out more, read Brandon’s recent article, Facilities Management: Growth from solid foundations here.
- TICC: interest remains high in this sector due to the compliance-led nature of the services provided, the potential for recurring revenue and the fragmented market offering opportunities for buy-and-build. However, there are few providers of scale to provide a platform for M&A.
- Automotive: there are assets on the market in areas such as bodybuilding, EV manufacturing and specialist components. Supply chain issues appear to have eased in the sector, and short-term growth is expected. However, investors need to be comfortable with long-term prospects within the specific niches served by the target company.
- Niche manufacturing: Armstrong has long been a fan of UK-based, low volume and high value niche manufacturing businesses. We have seen several over the years that have built a sustainable competitive advantage versus lower cost competition. These tend to be businesses supplying mission critical products or components into end markets such as aerospace, transportation, medical or energy.
- Energy: along with renewables, which takes up a lot of investor attention, there are businesses which operate in areas such as gensets and oil & gas products and services seeing sustainable demand. Whilst the focus is on renewables, more traditional sources of energy are a long way from obsolete, even if investors and management teams are likely to have one eye on transitioning away from these areas over the medium/long term.
Please speak to the team about opportunities in Industrials.
Matt McNallyEmail Rupert
Brandon MatthewsEmail Jack
Built Environment: Parking sector motors on
At the beginning of the year, I discussed opportunities in the parking sector: how the reservation market is changing; the pace and impact of ANPR rollout within private off-street car parks; uncertainty around penalty charge price caps; and the importance of electric vehicle charging. Read my article here.
A year on and investor enthusiasm remains. Growth is achievable across the operator, payment facilitator, enforcement and software segments of the market; with the sector continuing to digitise, investors backing management teams that are willing to adapt to new technologies could reap the rewards.
What’s changed and what hasn’t?
The online reservation market is evolving; we’re expecting nationwide rollout of the National Parking Platform by autumn 2024. This means motorists will no longer require a variety of apps to pay for parking, instead having the ability to select from any provider. This will result in increased competitive intensity amongst payment facilitators. In the longer term, additional payment services e.g. EV charging could also be integrated – providers offering multiple services, with the easiest-to-use technology, should eventually win.
We are continuing to see ANPR rollout across private off-street car parks. Operators are benefiting from significant growth in PCN issuance, and currently no downside with respect to potential price caps (see below). However, with motorists increasingly resentful of unfair charges, commercial landlords might be better placed to focus on the data and insight new technologies can provide to maximise the value of their parking assets.
Penalty charge price caps
The parking sector is still waiting to hear the government’s plans for penalty charge price caps, the team looked at three scenarios and their potential impacts on the sector. You can read our findings here.
The electric vehicle market is no longer the darling of the current government as it steps away from its goal of net zero by 2050. However, with charging times decreasing, EV ownership (and the demand for charge points) remains a long-term trend; parking market service providers would be wise to keep this in mind when investing and developing new products.
Speak to a member of the team about opportunities in the parking sector.
Jack HibbsEmail Rupert
Human Capital: Recruitment activity above expectations
Investors often consider recruitment as highly cyclical, and so they tend to stay away from the sector during times of macroeconomic uncertainty. However, recent activity levels have bucked this trend. There are several assets coming to market, and we are still seeing plenty of investor interest in well-managed recruitment agencies that have a reputation for quality candidates (temp and perm) in niche sectors.
A good agency is trusted by clients and candidates to make the right match. Their knowledge of the client and sector expertise, often built over many years, creates a degree of loyalty in candidates and stickiness in their customer base. Opportunities to move into adjacent sectors and geographically offers opportunities to create value for investors.
Hot sectors for recruitment currently include:
Sustained shortages of teachers, the need for local supply at short notice and lack of in-house resource all drive schools and colleges towards using recruitment firms. Whilst budget pressures may impact the sector and margins may not be as high as elsewhere, there is a clear roadmap to growth via organic and acquisitive strategies.
Despite the tech sector not being as buoyant as in recent years, the UK still suffers from structural skills shortages and businesses still have significant tech requirements, both BAU and to carry out transformation programmes. The opportunity for recruitment firms in tech to deeply specialise in ‘niches within niches’, which require a high level of subject matter expertise and a strong network, will always create opportunities for differentiation.
The increasing focus on renewable energy across the world will lead to opportunities for specialist recruitment firms both in the UK and abroad. Given the emergence of new technologies in the sector and businesses’ rush to reduce carbon emissions and change business models, there will be plenty of opportunities for recruitment firms to assist businesses in their resourcing requirements.
Macro drivers such as the ageing population, increasing focus on preventative healthcare, and continued public sector budget pressures all point to sustained demand for agencies in the healthcare sector, both private and public. Whilst the NHS does have an in-house recruitment function via its staff bank, this is typically viewed by clients and candidates as not fit for purpose. As such demand for recruiters to fill mission-critical or short notice positions is likely to remain high.
Recent deals we’ve supported
Speak to a member of the team about opportunities in the Human Capital sector.
Matt McNallyEmail Rupert
Built Environment: Opportunities for investors to help Britain build better homes
Demand for affordable housing is increasing, supply of that housing has stalled. Technology offers the opportunity to transform the development, construction and occupation of UK housing stock.
Construction has certainly been through a torrid time. However, the macro drivers are positive, and we expect accelerated growth by the end of 2024 as the market enters an ‘expansion phase’.
That said, recovery will be uneven with the development of residential homeownership constrained by higher mortgage rates and availability of development land, especially outside of urban areas. Developers are instead eyeing up the build-to-rent sector with major build-to-rent developments in the early stages of the planning pipeline.
Technology can help. In KPMG’s 2023 Global Construction Survey: Familiar challenges – new approaches; 81% of E&C are now adopting mobile platforms, 43% are using robotic process automation (RPA) and 40% adopting AI – although many are in the early stages.
One technology that is attracting the interest of UK investors is geospatial and location data tools. These enable surveyors / developers / construction workers to enhance decision making, improve project efficiency, and provide valuable insights on site. This improves efficiency and accuracy of data collection, project planning, design, and execution of projects.
Energy efficient homes
I recently published an article on how private equity can help contribute to the UK goal of net zero, smart energy management in homes is part of the solution.
Various businesses working closely with utilities are now reaching size and maturity and offer interesting (and rewarding) opportunities for investors who are also keen to meet ESG ambitions. Service offerings range from energy efficiency and retrofit services to integrated infrastructure offerings for Power, Gas, and Renewable energy. The market is highly fragmented with plenty of space to grow organically or inorganically through an M&A strategy.
We’ve seen a lot of focussed activity in fire safety services over the last year, please read our article here. There is the potential to think more holistically about fire safety within the broader BIM, facilities management and TICC sectors, with their various drivers coming into play such as advances in technology and shifts to preventative maintenance.
Questions for the investor
Here are some key issues and questions facing mid-market PE considering investment in the sector;
- What segments does the underlying tech focus on (e.g. residential, commercial, infrastructure, back-office or on-site)? And what functional elements? Is it pro-cyclical (e.g. with a focus on project management/ERP for new-build), or counter-cyclical (e.g. lifetime building or tenant/revenue management, ongoing certification).
- What size of end-users does the tech focus on, and how developed are the sales channels for these end-users? How does the company benefit from, and overcome the inertia in tech adoption/switching in the sector? Is the sales force tech-led or construction-led?
- What underlying platforms are used for the tech, and how do these tie-in with software and systems currently used by construction firms?
- How strong are relationships with underlying platform providers, what lead generation do these relationships provide, can the target company position itself as a key construction specialist with the platform provider?
- How practical are proposed expansion plans (e.g. by geography, sub-sector, size of end-user, functionality)? How developed is the tech roadmap, and how does this map onto likely future requirements?
Deals we’ve worked on recently
Speak to a member of the team about opportunities in the Built Environment.
Brandon Matthews, Senior ConsultantEmail Brandon
Professional Services: Office of the CXO space attracts mid-market investment
The Office of the CXO space sits across business functions, encompassing the Chief Financial Officer (CFO), Chief Human Resources Officer (CHRO), Chief Compliance Officer (CCO), amongst others.
Finance transformation is a key theme – a CFO has a lot to do with limited resources, supporting a broad range of commercial and operational needs. CFOs are expected to develop a finance function that is efficient, effective, future-proof, and interacts smoothly with the wider business; easy to say, difficult to do.
Office of the CFO tech and services
The Office of the CFO technology stack will typically consist of best-of-breed point solutions that supplement core ERP functionality. This group of tools can be used to run, improve and optimise financial reporting and operational processes. These solutions can provide ROI and improved performance as a specific point solution, and, as is increasingly the case, work across functions.
Vendors often take a modular sales approach, allowing businesses to scale up functionality (and therefore cost) based on needs. Finance departments will have a general ledger, Excel, and various separate data feeds. Competition for spend will often be against Excel + plug-ins and manual processes. Deciding which software to select will be dependent on how complex requirements are, with options ranging from “making do” with Excel customisation, to full scale EPM implementation for enterprise businesses.
Implementing a new system can be complex, time consuming, and expensive. External consultants are typically brought in for implementation to best fit the business needs, as well as ongoing customisation and support. This can be the Big Four, or smaller vendor-aligned specialist firms (these will typically be either sector, function, or vendor aligned, or a combination of the three). For these consultants aligning with the ‘right horse to back’ in terms of vendor is crucial, as demand for their services can be driven by demand for software.
A growing market
The Office of the CFO tech and services market is large and growing. With positive underlying demand drivers, there’s plenty to attract the mid-market investor:
- Multiple points of entry: Each vendor operates a different approach to its channel, but there are some common themes. The ecosystem is serviced by a) tech providers, b) implementation consultants, c) tech-enabled service providers, and d) to a lesser extent, MSPs.
- Dynamic market: Adoption of cloud-based accounting software and growth in core ERP and EPM software has caused a fundamental shift in the market towards cloud-based software adoption and best-of-breed solutions.
- New revenue streams: Businesses in the space can service the market with a) software (generating sales margin), b) services, or c) both. There’s an opportunity to cross-sell other services and/ or modules to clients, as well as offering ongoing support services. Developing the channel network is key.
- Sell-on: Software providers can extend their offering with new/ different complementary product and/or service lines to existing and new clients, though becoming a vendor/ function/ sector specialist can be a differentiator.
Do the diligence
Know-how, track record and industry knowledge are critical.
There will be constraints (this may be headcount growth, specialism, track record/ expertise, geographic coverage) that investors need to understand fully. Gaining new geographies or verticals may require new skills and capabilities outside of the business, M&A or acqui-hire could be an attractive and fast way to ‘buy’ capacity.
A deep dive into the sales process and demonstration of ROI (better, faster, cheaper) is essential. Each sale vs. in-house/ incumbent solution will be different due to pre-existing systems, processes, integration and reporting. Engaging the right consultants to understand business needs, with the requisite expertise is essential in minimising ongoing cost and difficulties associated with introducing new software or processes, and maximising utility and ROI.
Speak to a member of the team about opportunities in the Office of the CXO space.
Rupert Cookson, Senior ConsultantEmail Brandon