M&A Activity for Recruiting and Talent Platforms Expected to Heat Up In 2023
January 17, 2023 – Acquisitions made big news in the recruiting industry this past year, and for good reason. Outside investors caught on to the sector’s expansion potential and long growth runway ahead. Top search leaders also found ways to maximize profit (cutting back on office space helped every search firm achieve a better bottom line in 2022). That made them highly attractive to private equity firms seeking platforms they could accelerate, and scale.
The big question has been: Will M&A activity within the talent sector continue its robust march forward in 2023? Generally-speaking, M&A across global business markets slowed significantly last year – a result of numerous factors. “For the second half of 2022, firms broadly adopted a ‘wait and see’ approach to M&A,” said Cody Crook, the newly installed chief strategy and investment officer at Hunt Scanlon Ventures. “Volatile market conditions, rising interest rates, and historic levels of inflation led to a significant M&A slowdown as uncertainty loomed large in the minds of would-be acquirers and sellers,” he added.
For most sectors there was a precipitous drop in total deal value in 2022 (a 37 percent decline from what was a record year in the M&A market in 2021 at $3.61 trillion which equates to the largest decline since the early 2000s). In addition, multiples for strategic deals (based off EBITDA) decreased to 11.6 times versus 15.5 times within the last year.
Related: Will Hot M&A Recruiting Market Cool and Reset Valuations
Notwithstanding, many dealmakers are confident that a rebound for M&A is in the offing this year. “I remain quite bullish, maybe not on the first quarter, but certainly as we go forward,” said Stephan Feldgoise, global co-head of M&A for Goldman Sachs. Indeed, said Mr. Crook, “many experts predict that when the financing market rebounds in 2023, based on the amount of liquidity in the system, transaction volumes will recover.”
M&A Activity Will Strengthen
According to industry statistics, some 67 percent of business decision-makers forecast that the U.S. M&A market will continue to strengthen over the coming year. Almost counter-intuitively, while 70 percent of M&A dealmakers believe a recession will occur in 2023, over 50 percent of them expect a recession will positively impact deal volume. “For now, economic conditions are unlikely to spur a further dramatic slowdown in deals, but instead shift activity toward more promising sectors,” said Frank Ballantine, a partner with Dykema.
One of those sectors, according to Hunt Scanlon analysts, is the one they make deals in: executive search. Mr. Crook said that he believes the frenetic M&A activity Hunt Scanlon has witnessed over the last two to three years is at the cusp of picking up again.
“In many respects, it never let up,” he said. “As firms in this sector continue to diversify and move into AI-based platforms and online coaching and leadership assessment, for example, we believe PE firms will continue to see substantial investment opportunities here.” Mr. Crook said Hunt Scanlon is working on five tech-based, AI-talent focused deals that all could become market leaders and game-changers in their respective verticals. “We are partnering with them to make introductions to the VC and PE community,” he noted.
Bespoke Partners Receives Strategic Investment from AEA Growth
Bespoke Partners, a leading provider of executive search and leadership advisory services for enterprise software companies, has received a strategic investment from AEA Growth. “We are excited to collaborate with the team at AEA Growth to enhance our services and deliver even greater value to our clients,” said Bespoke founder Kristie Nova. “The investment team brings deep expertise in technology-enabled professional services and retained search that will help us continue to grow and scale while continuing to deliver unparalleled client satisfaction.”
As the push into 2023 begins, search firms are likely to reignite their inorganic growth efforts as the uncertainty of 2022 fades, said Mr. Crook. “University of Chicago economists recently noted that they expect interest rates to peak at around 5.5 percent and inflation to drop year-over-year in 2023,” he said. Additionally, record levels of dry powder in private equity and venture capital are ready to be deployed, he added.
Buy Vs. Build
“Moreover, as unemployment remains low and demand for talent remains high across sectors, search firms will look to ‘buy versus build’ to expand their offerings and geographical reach to quickly scale up and meet growing client needs,” he said. “With a clearer sense of what to expect in terms of market conditions paired with billions of dollars ready to be invested and a strong appetite for rapid growth, we expect firms to sharply increase M&A activity in 2023,” he said.
Supporting this view is Bart Molloy, a partner at Monumental Group. “There is a widespread belief that times of economic turmoil also produce some of private equity’s best vintages.” He, therefore, sees a shift happening. “A small but not insignificant portion of institutional investors are making room for more private equity in their portfolios. I wouldn’t say that’s across the board, but it’s meaningful enough if it’s 25 percent of the folks we talk to saying they’ll have a little bit more room this year.”
Mike Silverstein, managing partner and healthcare technology practice leader of Direct Recruiters, said that the ramifications of having so much dry powder available may have investors wondering if the market has become saturated. However, Mr. Silverstein noted that the amount of dry powder is relative to total assets. “As both dry powder and total assets grow, the private equity industry has shown itself capable to assume more capital.”
Why Recruiting is a Good Investment
Scott A. Scanlon, CEO of Hunt Scanlon Ventures, is also forecasting bullish market conditions in 2023 for the executive search and human capital markets. “In 2022, Hunt Scanlon Ventures was at the center of much of the consolidation activity, having closed nine deals in our first 24 months of operation,” he said. “We came into 2023 with 26 deals in the pipeline, all now at various stages, and we are receiving inquiries weekly to add more. If anyone believes there is not a capacity problem in the human capital space, just take a look at us.”
Mr. Scanlon said his primary focus is to lean on the firm’s vast Media business network, which he and co-founder Christopher W. Hunt have built over three decades, to bring parties together. “We are introducing some of the best blue-chip investors to the best boutiques in our sector. That is good news for everybody,” said Mr. Hunt.
Transactions Will Continue to Drive Transformations
According to the just-released U.S. CEO Outlook survey, significantly more U.S. chief executives plan to pursue deals compared with their global chief counterparts. A full 63 percent reported they will pursue an M&A deal in the next 12 months, much higher than the 46 percent of CEOs globally who plan to pursue M&A. This fairly robust U.S. number may in part reflect a recent easing in asset valuations and may also reflect pent-up demand.
Private equity firms, which have slowed their deal pace in recent months, are even more likely to pursue an acquisition, with 69 percent of private equity portfolio company CEOs saying they would pursue M&A. Across U.S. sectors, a majority of CEOs in financial services, consumer products and retail, advanced manufacturing and mobility (AM&M), and technology, media and telecoms (TMT) plan to pursue M&A. Interestingly, joint ventures are very high on the U.S. CEO agenda: 73 percent plan to pursue JVs or strategic alliances, arguably the more recession-proof options.
You can find the U.S. CEO Outlook survey linked here, along with a letter from Mitch Berlin, EY Americas Vice Chair, Strategy and Transactions, which further analyzes the survey findings.
Top-end recruiting, said Mr. Hunt, lies at the heart of every growth plan – whether it be for a startup, a large conglomerate, or a PE firm and their portfolio companies. “The right people drive growth. The right people add value,” he said. Search firms and new AI-based talent platforms that bring speed and that bring efficiencies to bear on hiring strategies, that’s where the action is today. That is why these firms are attracting the investment money. The runway ahead is long, margins are expanding. There is nothing better than placing down a bet on this sector right now,” he added.
Billions in Fees
The interest of outside investors in executive search firms will continue for the foreseeable future, said Tim Russell, managing partner of The Tolan Group. “There is extreme value in having an executive search firm in one’s portfolio,” he said. Mr. Russell noted that the No. 1 factor that makes executive search firms a viable investment is the fact that recruiting assistance will always be needed.
“The recruitment industry is a multi-billion-dollar sector for a reason,” he said. “The cost of hiring is exorbitant and the cost of hiring again is more exorbitant still. Having a recruiting firm whose sole focus it is to procure, screen, vet and select top-tier talent can considerably reduce hiring spend. The more specialized in a market, the more valuable the recruiter is to the company needing a top performing executive. An appealing aspect of search to investors is the long term sustainability of the industry. So long as there are people employed to do a task, there will be a need for recruiters. That’s the inherent value.”
The bottom line, according to experts across the investment sector, is that the talent business is ripe for investors. “There has been a monumental shift in this field that has been unfolding for the better part of two decades now,” said Mr. Scanlon. “We have seen the phenomenal rise of boutiques that offer specialized expert recruiting guidance. Clients rely on them more than ever to find just the right leaders and investors are deploying capital their way,” he noted.
And like their large firm rivals, the smart boutiques with a growth mindset are pushing into building integrated talent solutions platforms. “ZRG is a perfect example,” said Mr. Scanlon. “Under the leadership of CEO Larry Hartmann, that firm has gone from roughly $9 million when we started working with them to $210 million today. Interim talent solutions, culture transformation consulting, RPO, leadership consulting … these are just some of the many verticals we will now see this firm mature into. That creates larger revenue streams, yes, but more importantly it makes platforms like this so attractive to investors.”
ZRG Closes Secondary Equity Investment
ZRG, a global talent advisory firm and portfolio company of a global talent advisory firm and portfolio company of RFE Investment Partners, today announced that it has secured a new secondary equity investment from a consortium of new and existing institutional investors led by Timber Bay Partners. “We see tremendous opportunity to acquire great businesses in the recruiting and talent advisory areas that will augment our organic growth across all of our business lines,” said Larry Hartmann, CEO of ZRG. The new equity capital and expanded credit facility provide ample dry powder for our organic and acquisition growth plans, Additionally, we will continue to invest in our disruptive Zi technology platform and grow our interim and consulting businesses in tandem with our core executive recruiting deliverables.”
Justin Pinchback, who serves as chief revenue officer at ZRG and sits alongside the firm’s deal team, said he sees “strong positive activity and opportunity in M&A markets as we kick off 2023.” He said all indications are that “the consolidation trend in executive search and the broader talent solutions space will persist, as business owners and founders look for opportunities to grow, enter new markets and scale with platforms that have enhanced solutions.”
As an acquirer of these businesses, he noted, “ZRG’s leadership team believes that offering broader solutions, combined with expanded geographic reach and local market expertise, creates an increasingly compelling value proposition to our clients, our colleagues and our private equity partner RFE Investments.”
A big uptick in human capital M&A activity in 2023, said Mr. Scanlon, may surprise everyone.
Related: LLR Partners Makes Equity Investment in True
Contributed by Christopher W. Hunt, president, publisher, co-founder; Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media
