Recruitment - why is it a hot sector for PE?

In recent months Armstrong has seen increasing activity in the recruitment sector, including both sector/functional specialists (e.g. energy, technology) and generalists.  This may seem surprising given the (supposedly) late stage of the economic cycle.

However, Armstrong’s view is that;

Candidate short markets will continue to be intermediated by recruiters – they add value to both candidates and employers.

In the right market, growth prospects are strong and likely to be relatively downturn protected – For example, employers’ appetite for certain tech roles is not going away. Similarly, locum healthcare staff will always be in demand.

Sticky customer base for differentiated service drives repeat revenue – If an agency is providing specialist sectoral knowledge, customer understanding and high-quality service.

There are attractive margins in certain sectors – Growth in salaries allied with stable/increasing rates of commission lead to strong and growing margins in ‘hot’ sectors.

It is simple (but not easy) to scale in a fragmented market – There are several well-trodden paths to growth; adding headcount, new geographies, new industries, new roles, acquisition, and by adopting new technologies. However, simple does not mean easy!

Increased investor interest makes exit attractive – Good opportunities to exit via secondary buyout and trade.

Identifying the right recruitment business

There are over 3,000 UK recruitment agencies with revenue of £2m+. Given the relatively undifferentiated nature of most recruiters, how can PE set about identifying the most attractive opportunities?

Armstrong believes that the key factors to assess are;


  • Is the end market candidate-short?Is demand growing, particularly for specialist skills or within sub-sectors?

  • How will end markets be impacted during a downturn?

  • Is the recruiter a specialist, and how niche is this specialism? Is it small enough to be specific, and large enough to fuel PE-style growth?

Competitive environment;

  • Does the business have sufficient incremental differentiators? Are they sustainable? Recruiters are unlikely to have a USP, but the best agencies will have a series of areas where they perform slightly better than the competition, which together create a defensible position.

Customer relationships;

  • How close are relationships with clients and candidates? Is the business a transactional supplier, or a true partner? The best agencies will be both client and candidate focused.

  • Can the business leverage relationships to grow nationally or internationally?

Internal business analysis;

  • How high is staff churn? Can the business retain the best consultants by providing better conditions than they could enjoy by going solo?

  • How concentrated is net fee income (NFI) amongst clients and consultants?


  • Has the business demonstrated that it is able to grow by adding headcount, expanding into new sectors/geographies, or by acquisition?

  • How well developed is the plan? Does it go deeper than just ‘adding headcount’, and can management articulate and quantify growth expectations at a more granular level (e.g. by sub-sector)?

Opportunities for PE in recruitment

There will continue to be opportunities for PE to identify high quality recruiters with a strong set of incremental differentiators and a scalable model in candidate-short, downturn-resilient markets, regardless of the economic cycle. However, the majority of recruiters do not merit investment.

Separating the former from the latter requires full analysis of market and business fundamentals, and – in particular – a high quality customer referencing programme, along with a bottom-up business plan assessment. Armstrong has extensive experience of doing this – we have completed over 30 transactions in the recruitment sector over the last 15 years, including several deals in the last few months.

If you would like to discuss the themes in the article and investment opportunities in recruitment in more detail, please contact:

Simon Hemsley

Head of Business Services, +44 7957 340 534,

Matt McNally

Head of Industrials, +44 7894 736 523,