Case Study 


Riding the cycle

By Lewis Gray 

What's next for UK recruitment

In terms of strategic buyer interest, recent increased M&A activity has been in part supported by the emergence of Asian counterparties as credible acquirers – particularly from Japan. The Japanese government has actively encouraged its corporates to deploy their capital outside of their own borders and, despite uncertainty around the UK’s current political position, it still remains a safe haven both financially and culturally, and a natural interim step for international groups with wider ambitions to expand into the US and Europe. This has seen the emergence of the likes of Recruit, Out-Sourcing and Human Group emerge as relevant counterparties for UK recruitment assets.

Taking a closer look at sub-sectors within the staffing industry, much of the ongoing appetite has also been sustained in sectors that exhibit underlying long-term structural drivers that shelter them from the cycle or where there are significant structural skills shortages.

So where are we now? In the decade since the most significant financial crisis in living memory, economic conditions have remained benign – even the ‘double dip’ in 2012 has subsequently been revised to be shown to be less severe than thought at the time. While the crisis was undoubtedly painful at the time, peak to trough the slowdown and subsequent contraction only lasted for four quarters, with growth returning to pre-crisis levels three quarters later. 

This highlights the importance of avoiding short-term decision making and, within reason, retaining and incentivizing consultants to make sure the firepower remains to capitalize on the recovery when it comes. Most importantly following a liquidity led crisis, government fiscal policy and low interest rates designed to drag the UK out of recession have provided sustained access to affordable capital for serious acquirers. This has fueled unprecedented fundraising by private equity investors and the emergence of the credit funds to fill the vacuum left by the high street lenders as they have retrenched or moved upmarket. 

Both strategic and private equity appetite for the recruitment sector have returned to pre-crisis levels and have grown progressively – but when will the music stop? The Brexit referendum vote led to little more than a short-term blip in M&A activity - although now the onset of Brexit malaise is prevailing whilst the UK government fumbles over a solution. While the uncertainty is unhelpful, an attitude of ‘we can’t wait forever’ has seemingly won over and deal volumes have in fact continued to creep upwards. It remains to be seen if the increasingly possible reality of a ‘No Deal’ Brexit may become the final straw that applies the brakes on M&A activity generally.

Given that valuations have remained robust, it is still a surprise that private equity have transacted more frequently in the recruitment sector than ever before over the course of the last two quarters.

Undoubtedly this has been influenced by their desire to deploy capital in what has been an extremely competitive mid market over the last five years, but there may be more to it. The industry has matured considerably over the last decade and many operators that may have previously been perceived as collections of individual consultants have now professionalized as compensation models have evolved and knowledge has been institutionalized to overcome the ‘little black book’ culture – making them more investable propositions.

The recruitment industry has long been perceived as being inextricably linked to wider economic conditions – there is no escaping the fact that for recruiters, less corporate demand for people makes placing candidates tougher. Greater political and economic uncertainty makes the hiring decision an easy one to defer for all but the most resource-constrained companies. At the very least, it may drive demand for temporary or more flexible staffing solutions to the detriment of permanent positions.

Historically this has flowed through to investor and strategic acquirer appetite, with a tailing-off in transaction volumes as concerns over an impending downturn crystallize. Over the last decade, Livingstone’s analysis of M&A across the recruitment sector demonstrates this with a clear link between economic conditions and M&A transaction volumes across the sector.

Most notably, the sector reached an all-time low during 2008 and 2009 with just 27 publicly reported deals completed in those eight quarters compared to 37 in the subsequent eight quarters as green shoots of recovery started to emerge – and remarkably 72 deals in the last 24 months as economic growth has been sustained.

Private equity investors in particular attempt to hedge against cyclicality by investing at lower valuations as momentum in the sector stalls, thereby locking-in ‘gold in the ground’ for subsequent value growth, as well as providing the runway to ensure a successful exit prior to the next sector downturn. This opportunistic attitude and simple investment thesis goes some way to explain why the toughest economic period from 2008 to 2011 was the only time in the last 13 years where private equity were more prolific transactors in the recruitment sector than their strategic counterparts.

IT, digital, data, cyber-security and compliance feature large and are also all sectors that lend themselves more to the theoretically more robust contract/temporary staffing model due to the volume of project-based work. Taking the digital sector as an example, in recent times of slower growth, valuations of digitally-focused listed recruitment businesses have remained robust (not dipping below 8.0x EBITDA since 2010) and have consistently outperformed those of general recruiters. They have also been less volatile than those operators at the mercy of employment conditions and the wider macro-economic fluctuations – some of which have seen multiples reach lows in the mid-single digits.

In the current climate crystal-ball gazing is unwise as there is little precedent for the UK’s current predicament. However, looking back over a longer period, a decade of relative economic prosperity is lengthy by any measure. While there may be a growing sense of impending doom and gloom, the surfeit of capital globally seeking superior returns in a low interest rate environment is likely to continue to insulate mid-market M&A from the volatility traditionally associated with this late stage in the recruitment cycle.

In the absence of a liquidity-led crisis, there is plenty of evidence to suggest that, even in the face of a downturn, the UK’s reputation as the most evolved recruitment market remains attractive for acquirers looking from east to west for cutting-edge expertise and access to deep pools of talent globally and that firms focused on the right end markets can continue to prosper in all but the harshest of economic climates.
Chart Sources: Mergermarket, Livingstone analysis

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After graduating from Nottingham University with first class honours in 2009, Lewis qualified as a Chartered Accountant with PwC. Lewis joined Livingstone in 2014 where he works across the business services sector. 

Lewis Gray

Associate Director, LONDON

+44 (0)20 7484 4704