Human Capital: Recruitment heating up again for Private Equity

Workforce is at the top of every board agenda. A recent McKinsey report, The Future of Work after COVID-19, suggests 3 million people in the UK may need to change their occupations by 2030, an increase of 14%. The adoption of automation and digital has also accelerated and is changing the skills businesses need.

Just over a year ago, we published the article, Recruitment – why is it a hot sector for PE? At Armstrong, we think that recruitment is starting to heat up again as businesses address how they are going to succeed in a post-pandemic, post-Brexit world of distributed work.

The market drivers that applied in early 2020 have returned in mid 2021

  • Businesses in candidate-short markets rely on recruitment firms to identify and source the talent needed to deliver business plans.
  • High quality service and specialist knowledge drive repeat business, and mean specialists can outcompete generalists and bigger players.
  • It is a challenge to scale recruitment businesses in complex, fragmented host markets which have evolved as the pandemic has changed business models.
  • Renewed investor interest in the sector makes exits attractive for current investors, and provides interesting M&A opportunities in new geographies, sectors, and service lines.
  • Brexit is still not completely over, at least for services businesses, but businesses have had time to move operations and staff, and there is now some certainty around rules.

These drivers which we highlighted a year ago still apply and we are now seeing increasing activity in the recruitment sector, including in both sector/functional specialists and generalists. The question now is not “why is it a hot sector for PE?”, but rather how can investment teams continue to create value in this sector based on the underlying business and the performance of its underlying markets.

Prospects for 2021 and beyond

Our view is that there will continue to be opportunities for PE to identify high quality recruitment operators with a strong set of incremental differentiators and a scalable model operating in candidate-short, downturn-resilient markets, regardless of where we are in the economic cycle.

However, there will also be large numbers of low-quality agencies which do not merit investment. Separating the former from the latter requires extensive analysis of market and business fundamentals and a high quality, detailed client referencing programme, along with a structured review of internal data to assess the achievability of the business plan. What to look for in a recruitment business? There are over 3,000 UK recruitment agencies with revenue of £2m+. Given the apparent surface similarity of recruitment firms, identifying the most attractive opportunities can be challenging.

Some areas to consider are:

  • Quality over volume: Recruiters that are able to quickly deliver a shortlist of quality candidates from a deep candidate pool for a specialist role, will continue to differentiate themselves against slower-moving, generalist firms. Differentiation against other boutique, specialist firms can be more difficult – so it’s vital to understand a firm’s performance through detailed customer referencing and KPI analysis/benchmarking.
  • Understanding clients and sectors: The quality of candidates is a function of how suited they are to specific client needs – both technical ability and cultural fit. Recruiters that can demonstrate a superior ability to understand and apply these factors vs. their competitors are likely to succeed. Sector specialism and knowledge enable recruiters to understand client and candidate requirements better, and source the right candidates from the right companies.
  • Speed: A key differentiator is the speed at which recruiters are able to source and supply candidates, particularly in specialist markets and the contract market where competition for the best candidates is high.

Attractive end markets

Recent conversations in recruitment and staffing have covered;

  • Data science: Attracting digital talent remains a challenge for UK businesses. Job postings for data science and analytics roles increased by 35% over 2013-18, and the AI sector alone is worth c.£15bn, employing over 35,000 people.
  • Life sciences: A large end market with growing numbers of drugs in development and an increasingly fragmented client base requiring specialist knowledge and skills. Opportunities for international expansion, particularly to the USA.
  • Hire/train/deploy: Recent deals have shown the continued resilience and attractiveness of the hire/train/deploy model provided by training academy/flexible workforce businesses, with clients increasingly using providers to bridge in-house capacity and capability gaps in a cost-effective way, particularly in niche sectors like banking software, data, and AI.

Armstrong has completed over 30 transactions in the recruitment, staffing, and training sector over the last 15 years, so has broad experience across end markets and business models.

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

Matt McNally

+44 7894 736 523
[email protected]

Email Matt

Simon Hemsley, Partner

+44 7957 340 534
[email protected]

Email Simon