Figures for the first half of 2023 show that M&A activity in the recruitment sector remained resilient despite the various economic headwinds. Our mid-year market snapshot monitors deal activity and market conditions in the recruitment industry.
Despite ending 2022 in some turmoil, following the mini budget in Q4, transaction levels during the first six months of 2023 have held firm. This has been driven by a multitude of factors including continued investment from overseas counterparts and private equity. Technology continues to be the dominant sub-sector within the industry. However, there have been significant activity levels within energy, education and engineering.
Private equity is a consistent and growing theme within the sector and economy more widely. We continue to see PE investment seeking high quality management teams with a growth strategy and vision. We are also seeing capital being deployed into platform assets in order to execute ‘buy and build’ strategies or funds utilising capital for corporate carve outs from UK companies.
With the macro-economic shock from the Russian invasion of Ukraine still having an influence, alongside other pressures such as high inflation, interest rate rises and other cost of living pressures. Making predictions in this ever-changing marketplace is tough, but we are confident that staffing and recruitment companies will continue to play a vital role within a UK economy grappling with fragile consumer confidence.
2023 Annual Recruitment M&A Report
BDO's latest M&A review of the recruitment sector looks at deal activity and industry trends in the recruitment market in 2022. The latest report shows a healthy interest in UK deal activity in a sector operating against a backdrop of a challenging economic climate coupled with labour shortages.
What are the headlines?
The sector reached 35 transactions during the year, down from the dizzy heights of the post pandemic bounce of 2021 (40 transactions), but similar to the previous decade high of 36 transactions during 2018, so still very much a conducive environment for deal activity.
Globally, deal volumes recovered by an impressive 50%, having been slower to recover after the pandemic. This has contributed to an influx of overseas buyers and investors into the UK recruitment sector, also implying reduced uncertainty around Brexit.
Despite macro-economic challenges, high and stable levels of employment as well as historic high levels of vacancies have demonstrated the resilience of the UK labour market.
Deal activity drivers
Private equity has played an increasingly important role within the UK recruitment sector, with 39% of deals involving a PE bidder, up from 25% in 2021.
M&A activity around generalist firms has increased by 50% from 2021, with 26% of UK deals having a target within the generalist category.
Investor interest remains high in STEM sector specialist recruiters sourcing highly skilled, scarce or difficult to fill roles, and innovative technology and software businesses have been receiving attention from overseas acquirers, particularly from the US.
The adverse macro-economic factors of 2022 have impacted listed valuation multiples within the sector, as is the case across the market. Nevertheless our experience shows that recruitment companies with strong underlying growth prospects or a track record of delivery continue to attract strong multiples.
What is in the immediate future for the recruitment industry?
The next 12 months is again tricky to predict, given the ongoing uncertainty around the economy and inflation affecting business confidence and staffing decision-making. Yet the continued labour shortages imply that the need for recruitment activity will remain, keeping revenues buoyant provided that recruiters can identify candidates willing to change roles despite the economic climate.
In our report, alongside a review of 2022 UK and global deal activity, we also cover:
- An industry overview and investment sentiment
- Considerations for recruitment businesses around IR35, ESG and recent case-law on holiday pay entitlement
- What to think about when preparing your business for a sale or investment
- Alternative structures for private equity investment
- What is driving the rise in the recruit-train-deploy model?
If you would like to discuss any of the content further, contact our team: Michael Jennings or David Warnock.