By James Local, director, Livingstone Partners – A market in a growth phase, with numerous high-performing businesses run by hungry entrepreneurs who are receptive to the idea of taking investment, and a good history of secondary buy-outs and trade exits. What’s not to like about the recruitment industry?
The recruitment industry is in a buoyant state right now. With the size of the UK workforce at an all-time high, that’s not surprising.
Hays plc, which we regard as a bellwether for the recruitment industry in the UK and globally, recently reported its first quarter results. Growth in the UK, it said, was solid and broad-based, especially in the private sector. Elsewhere around the world, its CEO Alistair Cox reported, “17 countries grew by 10 per cent or more and eight delivered all-time record quarterly performances.” Similarly, Michael Page International posted a ten per cent rise in its quarterly profits. Demand is definitely up, said its CEO Steve Ingham, “and there is wage inflation.”
According to the Recruitment and Employment Confederation (REC), 2013/14 recruitment revenues were back to pre-recession levels at GBP28.7 billion – an 8.2 per cent rise on the previous year. While more than 90 per cent of this revenue came from temporary and contract recruitment, greater levels of business confidence were reflected by a healthy 8.7 per cent increase in turnover from permanent placements.
October data from the REC signalled a further increase in permanent staff placements, with growth at its fastest in four months. Temporary/contract staff billings also continue to rise.
Professional recruitment firms now have eight per cent more vacancies on their books than this time last year, according to recent survey data from the Association of Professional Staffing Companies (APSCo).
Growth is widely forecast to continue. According to the APSCo UK Recruitment Index 2015, 83 per cent of professional recruitment firms surveyed reported an increase in net fee income over 2014.
Spotting the gazelles
Within the 8,000 or so recruitment businesses in the UK is a cohort of high-growth firms that were founded in the difficult times of 2008 and 2009 – and which have grown dramatically and now generate high levels of profit. While most firms are benefiting from the broadly positive economic outlook, these are the gazelles of the sector.
Within each niche of the recruitment industry, there are high-performers. Their growth is being fuelled by the war for talent and skills in sectors ranging from IT and finance to construction, education and healthcare. These are players that are capable of increasing profits and riding out the economic cycles. The Microsoft recruitment specialist firm Nigel Frank International is a good example. Established in 2006 in Newcastle, the firm has rapidly grown into the global leader in this specific sector and has established offices in London, New York, San Francisco, Singapore and Melbourne.
Plenty of active players
It’s fair to say that most mid-market private equity houses have had a human capital/recruitment business in their portfolio at some point. This is a sector that private equity understands – a clear business model and entrepreneurial management teams who are receptive to equity investors. Private equity houses such as Baird, Graphite, Inflexion and Sovereign have done several deals in this sector over the years. We think that there’s room for more.
In the past couple of years, we have seen transactions such as Graphite’s substantial investment in the management buy-out of HCIG and its sale of Education Personnel to ICG for £300m.
Secondary buy-outs include Sovereign Capital’s acquisition of education specialist Synarbor from Baird, and Towerbrook's purchase of healthcare specialist ICS from Blackstone.
More deals to be done
We believe there is potential for many more deals to be done in the sector. An added attraction for private equity is that a number of key trade buyers are currently strategically focused on acquisitions outside the UK market, reducing competition for targets.
With a positive outlook for the UK and the REC forecasting that the recruitment market will grow by more than nine per cent over 2015/2016, there’s plenty more upside in this sector for the private equity investor.
James Local joined Livingstone in 2014 and has a particular focus on the Business Services sector. He qualified as a Chartered Accountant at Ernst & Young. Prior to joining Livingstone he gained nine years’ experience in M&A working at UBS Investment Bank and Kinmont Advisory on a range of public and private company transactions.
