Spotlight: Looking Ahead: Will M&A Activity Remain Hot?

November 29, 2022 – Prais+Barnette works proactively with diverse executives, leaders, and influencers who are passionate about increasing workplace diversity to help the firm build broad referral networks across functions and industries. Top diverse prospects can be introduced to key company leaders for networking 30 to 60 days in advance of an opportunity posting.

David Barnette is managing partner of Prais+Barnette and has over 20 years of experience as an operating executive focusing
on omnichannel sales and marketing, digital transformation, and product development. Since making the shift to talent acquisition in 2017, he has led technology practices at Korn Ferry and August Leadership. Mr. Barnette recently sat down with Hunt Scanlon Media to discuss the active M&A market within the search industry.

David, would you expect deals to keep occurring in the search industry as we move towards 2023?
I would. As we all know, the market for executive search down to RPO has been on fire since late 2020 as firms emerged from a few quarters of hiring freezes with burned-out teams, facing accelerated transformation on both the digital and human capital fronts. And even with a significant amount of uncertainty around the global economy, the supply of talent across levels and functions remains far lower than the demand for it. To that point, in 2022 we’ve seen the correlation between jobs data and the stock market defy anything we’ve seen to date with record low unemployment perched alongside a tumbling Dow and Nasdaq.

What do you see looking even further into the future?
Some projections even have the talent wars raging on into the 2030s. It’s not that hard to look back and see a perfect storm of a large and aging generation having realized astronomical gains in the stock market being finally enticed into retirement by a pandemic. Leaving us with a serious gap of senior to mid-level talent that just cannot be replaced anytime soon. In sum, we don’t have enough people and firms skilled at attracting talent to meet the current level of demand for placing it and there’s nothing to indicate that hiring is going to get easier anytime soon. Meaning that ours is going to remain an attractive sector to invest in for some time.

What’s driving buyers/investors to our sector?
Solid returns that are relatively simple to understand. Compared to others, the investment thesis for our sector looks pretty compelling and it’s not a super hard case to get your head around: There’s no fancy IP that has layers of global dependencies in being scaled and brought to market, there’s no complex supply planning across channels and continents that can make or break profits, it’s a very clear, very clean services model that you can look everywhere around you and see the need for. And in some cases, the buying case is as simple as acquiring new or incremental talent acquisition capabilities to feed a portfolio of companies that lacks enough of those to create the value committed to investors. One great way to get a leg up on the competition in this market is to have a truly differentiated, scalable approach to recruitment and acquiring that externally is certainly an attractive option that can be easily cost justified. In the end there are very good returns from investing in talent acquisition across multiple case types that compare favorably against other investment options right now, and likely for the foreseeable future.

What’s driving sellers?
I can’t speak universally of course, but the smarter ones know that we have this amazing window of opportunity out in front of us this decade. We have all wished that we had more capacity from execution to operations to marketing to help us fully capitalize on the last two years at different points since things heated up after the pandemic. So I think a lot of it is about seizing the ability to scale, and do that faster than organic or debt-fueled options can offer. I also think there are a lot of people trying to challenge the status quo in executive search as well – we’re seeing millennials reach the point in their careers that they are becoming decision making buyers and the way they want to engage with us is noticeably different than the way things have been done in the past so there’s a clear and emerging opportunity with this contra positioning. We certainly fit into this challenger mindset and approach in the way that we have built our firm from the ground up. While it’s exciting to be disruptive and see that positioning get embraced in the market, it also takes extra time and resources to cut through the established order in a sector and realize success at scale as a challenger brand. You get excited about all the ways you can shake things up and evolve the space which also gets you excited about avenues that could allow you to do that even faster. Finally, I am sure there are some sellers approaching the twilight of their career that see this market as pretty nice exit opportunity!

Do you feel the potential economic slowdown will hurt deal flow to the market or would it accelerate deal flow?
A recession will slow deal flows across sectors regardless. I do believe that the deal flow in executive search will be less affected by a downturn than many other sectors but it’s impossible to say to what extent. It’s a relatively easy to understand value proposition with a simpler income statement than many other businesses. But we all know that there’s a segment of investors that is more sensitive to macroeconomic conditions and looking for positive NPV on a shorter horizon with little to no risk over that period.

So do recessions always slow down deals?
There is no doubt that recessions make it much harder to get potential deals to conform to usual deal parameters, and the assumption sets – particularly the top line piece – are always going to have to withstand greater scrutiny than they do in periods of economic growth. But the added challenges in getting deals across the line in a recession will be a fabulous thing for the more strategic, long-term thinkers in the arena.

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