Sector trends 2023: mid-market opportunities

We thought we’d share some of the top-tips from our sector teams. These are intended to help trigger investment ideas and discussion.  If you would like to discuss any of them, please get in touch.  

Technology

2022 marked the year that we began to see mainstream corporate adoption of some advanced technologies. We’ve advised on deals for high growth specialists in cloud native app modernisation, hyper automation, SDWAN/SASE and even AI/ML. These technologies are far from new but have been languishing in Gartner’s ‘trough of disillusionment’ whilst the necessary foundational transformations (cloud, data, process digitisation) have been addressed.  

At the more ‘meat and potatoes’ end of the sector, a renewed investor appreciation for contracted recurring revenue (provided you can maintain your margins in the face of cost inflation) continues to drive interest in connectivity, hosting and comms led service providers. These can benefit from uptake of gigabit fibre and IP telephony to extend the runway of the customer book and enhance margins, and private cloud remains cost efficient for many (sticky) workloads. Many are looking to SDWAN/SASE as a way to move up the value chain and make a play in the security domain. 

Talking of which, every man and his dog is looking to play in the security space. The number of players with credible Security Operations Centre (SOC) /Managed Detection & Response (MDR) offerings is growing (thanks in part to lower entry costs of cloud native Security Information & Event Management (SIEM)). Whilst this offering might not be right for all businesses (SMEs in particular) right now, there are plenty of opportunities to build offerings around the Microsoft stack including end-point protection and identity management. 

Finally, we expect 2023 to be another good year for software deal flow, especially for niche, mission critical applications underserved by the international majors. Look out for an Armstrong thought piece in early 2023 exploring software and how to sort the wheat from the chaff in the mid-market.

Speak to Mike
Financial Services

Wealth management businesses continue to be popular despite high multiples and (in some cases) even higher EBITDA adjustments. Despite plenty of activity, the financial advice and platform subsectors are still fragmented, so consolidation and vertical integration offer interesting opportunities. A difficult market for retail investors has meant that new business inflows have been choppy, so a careful analysis is needed to pick the best investments. 

Read our article Wealth Management: Lots of deals, but are there still lots of opportunities? 

Technology and services into financial services remain hot – think regulatory compliance, change & transformation consultancy, technology & implementation services, and hire-train-deploy (HTD)/consultancy. 

Read our article Financial Services Consulting: Opportunities and challenges for PE  

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Business Services

Professional services (particularly accountancy and legal firms) have been a key target sector for many investors, particularly where there is a tech angle. Understanding the scale of the tech opportunity (and the difficulty/cost of delivering it), plus how these businesses can access talent to grow, will remain a key focus of our diligence work in 2023. 

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Human Capital

Hire, Train Deploy (HTD) remains popular, with the “origin story” of these businesses driving where they can be taken. The opportunity is similar for all HTD firms, but management teams will have a different view of their expansion strategy, depending on the roles/sectors they target and where they are starting from – e.g. tech or data analytics recruitment, consultancy, or on a standalone business. We’ve seen a lot of activity in this sector over the last eighteen months, and it remains popular with investors (and, more importantly, with buyers of HTD services and the management teams who service them). This feels like a sector with an increasing number of businesses coming to market in 2023 and more traditional recruiters wanting to move into this space. 

There are opportunities in HR consulting including employee experience, HR transformation and software as organisations continue to focus on people given talent shortages (retention of talent is critical), but questions remain over how resilient these businesses will be during a recession.  

Traditional recruitment is quieter now than it has been in last 2 years given macro environment, but talent shortages in some sectors/functions persist. There will always be opportunities for high quality recruitment firms with deep knowledge and expertise in candidate-short markets. 

Speak to Matt
Built Environment

Increased environmental awareness and more stringent ESG targets are driving a rapid increase in demand for players in the environmental services space; the long-term outlook is very strong. 

However, staffing shortages are a concern for many, and will have to be carefully managed. Any potential investors should consider whether management teams have implemented sensible strategies to cope; training and career progression, alongside hybrid working for support staff, are seen as strong mitigants against the recruitment challenges that exist. 

In many segments within environmental services, the landscape is fragmented, and consolidation is expected to continue in 2023.  

Read our article Environmental Services: Attracting the attention of private equity

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Industrials

There is continuing interest in Testing, Inspection, Certification, Compliance (TICC), although the makeup of the market (dominated by either behemoths or sub-scale firms) makes finding attractive mid-market targets hard. A number of infrastructure services assets are also rumoured to be coming to market in 2023, so watch this space….

Read our article Finding the value in TICC

Given the interest in ESG and climate change, it’s no surprise heritage energy businesses are pivoting towards renewable sectors and the macro trends remain positive. However, understanding the micro (e.g., short/medium term demand, competitive position and ecosystem etc.) is crucial; invest up front in 2023 in robust due diligence.  

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Events

The rebound of the events sector – especially in H2 2022 – is expected to lead to greater interest in events organisers in 2023. The rebound still needs to be proven and organisers must be able to demonstrate recent attendance figures and rebook rates etc.  We’re also seeing interest in the supply chain for the broader ‘events’ market e.g., corporate events, live events, concerts etc. in addition to B2B tradex style events. Continuing digitalisation of events is leading to a shift in the makeup of the sector and more focus on alternative growth strategies rather than simply growing attendance/geo-cloning etc. 

Read our article Events: A sector worth revisiting

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Consumer

Demand for ethical and sustainable products is growing rapidly; on average sales growth of sustainable goods has been significantly higher than other products. Consumers are also increasingly demanding brands that act ethically – investors seeking growth through enhancement of profit margins should be aware that such activity often gives companies greater pricing power, with buyers seemingly more content with hikes from ethical traders. 

Delivery is more important than ever and is now executed in a wider number of industries (a trend clearly accelerated by the pandemic). Consumers are also more open to monthly subscriptions, with many businesses exploiting this trend – for example, companies in the motor, gaming and fitness industries are increasingly seeing the benefits of subscriptions versus outright payments. There may be opportunities for investors in this space to accelerate revenue growth by adding delivery and subscription offerings.  

Read our article Retail – Taking stock of the supply chain

Influencers are still having a significant impact on buying decisions; influencer marketing remains a growing industry and is relied upon by many brands. However, businesses and those investing in them should be aware of the changing dynamics; consumers are now often less influenced by large accounts (with followers in the millions), but greater engagement is often generated by those with a smaller following (less than 5k). Customer acquisition could therefore be accelerated by tweaking influencer marketing strategies. 

Speak to Jack
Travel

Investment in the travel sector remains somewhat subdued. There are signs of recovery, and businesses that offer a bespoke experience for travellers are likely to be attractive. Technology is a differentiator, particularly in the current climate; those businesses that have acknowledged this and spent appropriately are likely to be well placed when investment returns. Another trend is environmental impact; promoting electric vehicles, resorts with a sustainable energy focus and the use of carbon credits are all on the rise. 

Travel businesses that embrace these changes are likely to be more attractive to investors. 

Read our article Bumpy Take Off: Opportunities in the travel sector

Speak to Jack