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Human capital M&A unprecedentedly busy

Author: ICAEW

Published: 03 Jan 2022

New skills are needed in this dramatically changing world of work. Recruitment and training expertise is in demand. Along with a a push in some countries for increasing equality, diversity and inclusion, M&A is reshaping companies across the human capital sector. Jason Sinclair reports.

COVID-19, and the government and business response to it, has accelerated how technology and automation is reshaping the world of work. As all deal-makers will attest, disruption creates opportunities and that applies now in the ‘human capital’ sector, which covers not just recruitment consultancies and headhunters, but also training companies, well-being providers and diversity and inclusion specialists.

If human capital is something of a soulless phrase (an economist’s term, reducing people to balance sheet assets), it disguises what the sector is increasingly concerned with. Human capital not only aims to provide the best-suited personnel for companies, but also to ensure these employees are in the best position to develop and contribute happily to the performance of those companies.

In addition, some industrial sectors in the UK are experiencing skills shortages because of Brexit and there is a huge demand for expert help to address those issues. That demand is then fuelling growth in the young ventures with the relevant expertise. This is leading to a private equity feeding frenzy that seeks to both ride on and add to that growth and expansion, when established companies look to diversify the sectors and geographies they serve.

New focus

Keely Woodley leads Grant Thornton’s corporate finance team in the UK. Much of her experience lies in human capital M&A. She says after deal-making had stayed in a ‘holding pattern’ through Brexit, followed by a strong first quarter of 2020, the pandemic saw a rapid and significant slowdown. 

“The majority of human capital transactions we were working on just stopped in their tracks because nobody was hiring. We saw hiring freezes globally and a sense of panic ensued, and an understandable knee-jerk reaction to the circumstances,” she says.

There was also a pause for thought because people wanted to preserve cash. Then, in the later stages of the first wave of the pandemic, “there was a realisation that companies need to do things differently from a people and talent perspective”.

But the sector has bounced back. According to statistics published by Refinitiv, the first 10 months of 2021 have seen the highest value of deals for the past seven years – with $19.8bn completed globally.

“Well-being and mental health came into really sharp focus,” explains Woodley, “and that caused a lot of companies to re-evaluate what skills they needed within their organisations to stay relevant in the future. Also, because there was a fundamental shift to different ways of working, the skills that organisations needed to keep their own businesses running, and also to stay relevant to their clients in the field, saw surges in requirements for talent in certain sectors.”

Waiting list

James Fieldhouse, an M&A director at BDO who specialises in the recruitment sector, sees “technology, life sciences and anything associated with STEM [science, technology, engineering and maths]” as being the recruitment fields that will experience increased demand, with the former being driven in part by the shift towards digital transformation. BDO’s report about the human capital sector in early 2021 predicted deal activity would be fairly flat over the coming year, but Fieldhouse admits: “As ever, being an accountant, I was probably overly prudent. We had just seen a release of pent-up deal activity and entered another extended lockdown – I think the words I used were ‘cautious optimism’, which turned out to be overly cautious!”

Now, he sees pent-up demand coming out of the pandemic, where “companies that have probably been sitting on a bit of cash, some of which they stored up during COVID-19, are emerging thinking they’ve traded pretty well and aren’t generating much return on cash on their balance sheets, so they might as well seize the opportunity to use it.” 

Private equity dry powder is also driving the dynamic, with Fieldhouse citing greater deal activity up to September 2021 than in the whole of 2019, which was itself “a pretty buoyant year”.

Putting his cautious hat back on, however, he warns the market could have become overheated. “I’m trying to get due diligence providers on a deal currently, but people are stacked up for six weeks. It’s hard to know whether that’s a continuing environment, or a Brexit or COVID-19 bounce.”

Of the deals in motion, Fieldhouse says: “Pure consolidation has probably been the mainstay, with PLC recruiters and the private equity-backed recruitment platform businesses wanting to grow and get scale, accessing new geographies or new sectors. But with private equity raising bigger and bigger funds, they’re getting drawn to the best assets, which is creating a sort of feeding frenzy.”

Jonathan Wade, a transaction services partner at RSM, echoes the general sentiment: “Human capital M&A has been unprecedentedly busy.” He agrees it has been so hectic that there is effectively a waiting list “longer than it’s ever been in my working lifetime” for due diligence specialists in the sector.

And due diligence really is vital in this sector. Companies have to make difficult decisions and judgement calls, in a very competitive market, for the most valued assets. Wade sees companies that have footprints in both the UK and US markets as particularly attractive. “Last year, human capital deals were heavily impacted because there was so much business uncertainty. But now we’re past that and if you’ve demonstrated resilience and come through that with good management teams, proven business models and improved efficiencies, then there are new investments and there are great opportunities for further growth.”

Going global

Niraj Patel, head of corporate finance at Saffery Champness, has longstanding experience in human capital, starting with advising Empresaria Group in its AIM listing in 2005 and subsequent UK and European acquisitions. He says trade buyers are either well-funded themselves or can tap into other sources of funding, including private equity and various forms of debt financing, such as challenger banks and debt funds. “That’s making great competition for assets. Increased scale leads to higher multiples,” he adds.

Contrasts in how COVID-19 impacted various sectors means diversification has become an essential strategy for human capital businesses. Patel points out the importance of spreading risk geographically: “Cross-border has also become important, with companies expanding in the US, East Asia, the Middle East and certain European territories. You’ve got to find the people and the right partners and clearly a sensible M&A plan can accelerate that process.”

Woodley says that British companies are on the hunt. “The UK is such a sophisticated market from a recruitment perspective, we’re getting people who want to spread their brand values and go and start offices in Germany or the US. Those two markets specifically are very attractive for acquisitions, both for their vast geographies and because they’re less sophisticated and enjoy higher fee rates.”

Part of the general activity Woodley has seen has been recruitment companies buying other companies “to gain access to different industry verticals”, but she’s also witnessed PE become hungrier for deals. “Probably for the next two years at least, we’re going to have skill shortages – really quite acute ones – and so, from a private equity perspective, if I invest in a company that’s doing well in this sector now, I’m going to benefit from that natural surge in the market, in addition to whatever the company might be doing right.

“Private equity wants access to a fast-growth market and, ideally, a fast-growing specialist recruitment company that’s following a sector where all the underlying dynamics are really strong.”

Note of caution

A skills shortage resulting from Brexit, combined with the tech-led arrival of the ‘jobs-you-don’t-know-exist-yet thinking’, will change the market long term, says Wade. Some jobs will become obsolete and the need for retraining will be intensified. “Companies will come up in that space that are going to take advantage of that dynamic.”

According to Patel: “High vacancy levels currently being seen in the market would normally create obvious benefits for recruitment businesses, but actually the key challenge facing the UK market is a skills shortage and therefore labour supply. There’s increased demand, but the challenge would be which recruitment firms have the best access to supply, in which specific sectors and jurisdictions.”

And there is a big consequence. Woodley warns: “Pricing is very high at the moment. If the economy does suffer a downturn, talent solution businesses are very exposed – with reduced training budgets and potential hiring freezes. If a lot of private equity firms are going into these companies and paying high prices that means a lot of bank debt if a less prudent approach is taken.”

There is potential then for corporate challenges or even failure because structures designed to fund acquisitions are not sustainable if the company performs less well. “Our job is to try to ensure people invest responsibly and don’t over-leverage hyper-cyclical companies,” she says.

Equality, diversity and inclusion

Explaining why his digital learning and talent management firm LGT Global acquired training and consultancy firm PDT (The People Development Team), which specialises in equality, diversity and inclusion (ED&I), Chief Strategy Officer Piers Lea says: “ED&I has become so key to recruiting and retaining good employees. Boards are putting pressure on senior executives to deliver on those targets and show evidence that they are moving the dial.”

PDT, which is being rolled into LGT’s workplace compliance arm Affinity, helps executives understand the targets and how to achieve them – with the ultimate aim being improved financial results.

For human capital corporate finance experts, deals like this could be a growing feature in years to come, as there is sharper focus on the ‘S’ in ‘ESG’ (environmental, social and governance), and more investors look for companies that specialise in this. 

“There are more social impact funds in the market,” explains RSM partner Jonathan Wade, “and it’s a growth area both commercially and ethically. Also, when deals are done, that relationship between investor and management team is crucial. So we’ve seen examples where the winning bid isn’t necessarily the biggest because the cultural fit – particularly in people businesses – is really important.”

“The Black Lives Matter movement put ED&I in the spotlight globally,” says Grant Thornton’s Keely Woodley. She expects to see more focus from a seen and unseen disability perspective, and adds: “Huge amounts of consulting work in this area at the moment are done by many, many very small players, but there are some huge moves into those businesses that support a broader societal agenda.”

Pension funds now ask about inclusion and sustainability policies. “That sentiment is trickling down and there’s a growing range of social impact investors looking for companies that do good and make a positive impact, while doing well financially,” says Woodley. “That is driving a lot of investment into the talent solutions and consulting space.”

BDO’s James Fieldhouse adds: “Particularly with remote workforces, people are coming under pressure with respect to culture. Ensuring the right team is in place is absolutely key and that necessitates an increased focus on supporting the inclusion of people from different backgrounds.”

Niraj Patel of Saffery Champness sees ED&I as part of a wider shift in the recruitment and HR industries: “It’s becoming one of the key differentiators making your business stand out from the crowd. Training and talent management are becoming more important in terms of what clients will increasingly want as a service, as opposed to just traditional staffing solutions.”

This increases the possibility of corporates looking for bolt-ons to improve their own training and talent management processes. “That is clearly a driver for M&A at the lower end of the market,” says Patel. “You’ve got larger players, but actually, if you’ve got smaller companies that can get a foothold in the market place, M&A is a key part of that.” 

Meet requirements

In September, NorthEdge Capital backed a buyout of Meet Recruitment, an international ‘talent provider’ in the booming and competitive life sciences sector. Meet Recruitment serves pharma, medtech and healthcare companies with offices in London, New York, San Francisco and Berlin. After the new investment, the company is expecting to double its headcount by 2025, while delivering double-digit year-on-year growth. NorthEdge will support the business in expanding its global office network and client base, as well as accelerating growth through M&A.

“It was important to us that our private equity partner had the same vision and values as we do,” says Meet’s CEO and Founder, Hannah Donaldson. “NorthEdge places huge emphasis on people, culture and sustainability, which aligns with how we do things.”

While the size of the deal was not disclosed, the investment came through NorthEdge’s Fund III, which targets equity investments in the £10m-£50m range. The transaction was led by NorthEdge’s managing partner, Ray Stenton, and director and head of North West, Phil Frame.

NorthEdge received corporate finance and banking advice from DC Advisory, and legal advice from DLA Piper. Candesic carried out commercial due diligence. HSBC provided debt facilities to support the deal and was advised by Addleshaw Goddard.

Meet’s adviser list was extensive, too: Clearwater International provided corporate finance advice, RSM carried out financial due diligence, CIL commercial due diligence and Osborne Clarke provided legal advice. 

Up not down

In October, BetterUp, a US West Coast-based mental fitness coaching platform founded in 2013 – and where Prince Harry is Chief Impact Officer – closed a $300m Series E fundraise, bringing the unicorn’s valuation to $4.7bn and total funding to $600m. This made the company the biggest player in the wellness sector. 

Wellington Management, ICONIQ Growth and Lightspeed Venture Partners led the round, with participation by existing investors Salesforce Ventures and Mubadala Investment Company, Sapphire Ventures, Morningside Group, SV Angel, and PLUS Capital.

The app is used by blue-chip companies to improve the mental well-being of their employees. The products, which include one-to-one, group and on-demand coaching on topics such as diversity and inclusion, parenting, nutrition and sleep, use AI technology and human interaction. The business recently opened offices in Munich, London and Amsterdam, and acquired the platforms Motive and Impraise. 

Alexi Robichaux, CEO and co-founder of BetterUp, says: “This funding will continue to accelerate our mission to bring the most comprehensive and powerful suite of tools to individuals.”

Talk the talk

Bridges Fund Management has backed the management buyout of Oxfordshire-based Talking Talent, which helps organisations to build ‘more diverse, inclusive and equitable work cultures’, with a focus on the retention and career progression of under-represented employees.

Founded in 2005, the company has grown and now has operations in the UK, US and Asia. It employs more than 60 staff supporting the likes of PwC, Boeing, Siemens and Unilever.

The investment will enable Talking Talent to develop its platform and support more clients across more geographies.

Emma Thorne, investment director at Bridges, describes the business as “a pioneer – Talking Talent is a great example of a business that has identified a growth opportunity by addressing a clear societal need: to build more diverse and inclusive workplaces.”

Grant Thornton advised the vendors, while KPMG was corporate finance adviser to Bridges, with Addleshaw Goddard providing it with legal advice. Shoosmiths was the legal adviser to the vendors.