Spotlight: Managing Complex M&A: Strategies For Success In A Changing Landscape

September 20, 2023 – Cody Crook, managing director and head of investment strategy of M&A advisory firm Hunt Scanlon Ventures, offers up good reasons to be optimistic. In his role at Hunt Scanlon, Mr. Crook is responsible for co-managing the investment portfolio, which includes executive search, talent acquisition, private equity, and investment firms. Leading the investment team, he spearheads all fund transactions and maintains portfolio developments. He is responsible for co-managing Hunt Scanlon Ventures’ M&A platform, which has successfully closed a significant number of industry-leading transactions across the human capital sector, including AEA Investors’ acquisition of Bespoke Partners, the True/LLR Partners’ acquisition of Hobbs & Towne, and ZRG/RFE Investments’ acquisitions of Turnkey Search, Walking the Talk, and, most recently The Registry — ZRG’s largest deal to date. In a recent interview, Mr. Crook discussed the current M&A landscape for the executive search industry.

Cody, why has there been so much M&A activity within the executive search sector?
In Hunt Scanlon Ventures’ view, the executive search sector’s best days are ahead of it. I believe the human capital sector is standing in a unique moment in time. No one doubts that we are on the cusp of
yet another period of substantial growth and expansion. I think much of that growth will be driven by M&A. In my view, buying instead of building, and selling instead of building is the fastest, easiest, and most painless way to produce big results for buyers and sellers. But there are inherent challenges in developing a proper, well thought out, and deliberate M&A strategy. Every seller should be reminded, M&A is an emotional rollercoaster ride fraught with twists and turns, disappointment, and rejection but more often than not successfully concludes with gratification, fulfillment, and a closed deal. One thing for certain is that many founders and management teams starting an M&A process will be navigating uncharted territory.

What’s driving such robust activity among search firms?
There is a distinct “market shift” underway in executive recruiting. After years of high growth and even a quick correction around COVID-19, recruiters are seeing multiple sectors softening this year. It is not the mudslide we saw in 2007-2008, far from it. But it is something the industry hasn’t really seen in at least a decade and so it is giving search firm founders pause. As they pause, they are considering next steps to transition themselves and their people.

What are their concerns, if any?
Search firm founders are most concerned about where they will be standing in five years vis-à-vis competitors who are taking on growth capital partners or merging with larger entities. We have been talking about the rise of super-boutiques for some time now, and it is finally happening. Where small, under $10 million players fit into this new paradigm hasn’t quite been sorted out yet. The recruiting sector is consolidating rapidly. It will be a few more years before all this shakes out. But we do expect a different type of industry to emerge.

Why is the recruiting sector so resilient?
The industry remains incredibly dynamic. We see search firms taking all sorts of strategic steps to maintain growth. Many are raising capital to do it or joining arms with growth partners. Search firms are developing new product offerings, entering new sectors, pruning low performing talent, and top grading where they can, acquiring rivals, and expanding into adjacencies that align with their offerings. Even as the environment shifts, the growth story continues.

Are there any business bright spots for recruiters?
Yes, many. The private equity sector has talent requirements that are insatiable. That one sector accounts for so much search activity now compared to just a decade ago. So, we see lots of continued activity across PE – particularly in areas like PE healthcare services and healthcare tech. We also like the risk management area – it’s hot; in a tightening economy managing risk is a big focus for businesses. Cybersecurity is strong. Within the tech stack we are also bullish on PE software recruiting; with the advent of ChatGPT and other AI platforms, software will run hot for years. And obviously AI will come to be a dominant sector for recruiters. VC has softened, of course, but emerging growth companies drive our economy. When the dust settles, these businesses will resurface with big leadership needs.

Do you expect M&A activity to slow?
On the contrary, as PE comes to terms with the shifted macro environment, we will see activity pick up more. Outside of the human capital sector, an acceptance of lower multiples in PE will help drive overall M&A activity. As Pitchbook reports, PE held out against lower multiples for as long as they could, but the first quarter saw the beginning of a shift in this trend. The holdout saw PE exits fall as the industry made up a smaller overall share of M&A activity. An acceptance of lower multiples in PE could cause a recovery in exits, seeing the industry reclaim its share of overall activity. It’s complicated, but that’s how we see it.

And what do you expect for executive search M&A activity?
There is no question that M&A activity in executive search is just heating up. There is so much consolidation activity that remains to be done.

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