Spotlight: What is Fueling the Surging M&A Sector?

November 29, 2022 – Ghada Sousou, CEO of Sousou Partners. She conducts senior management recruiting assignments for clients globally and is responsible for managing and building Sousou Partners’ clients, who consist of general partners and limited partners, among the largest and most successful real estate, hospitality, and infrastructure investors globally. Ms. Sousou is also responsible for the firm’s board practice. In addition, she runs the company’s management consulting solutions business including succession planning and deal/operating platform introductions. Ms. Sousou recently sat down with Hunt Scanlon Media to discuss the surging M&A market and what to expect looking forward.

Tell us why M&A activity in the executive search sector is so prevalent in today’s market
It’s likely to become a tougher environment especially for non-competitive firms. There will be a flight to quality and anyone who doesn’t represent or deliver quality will be vulnerable. This creates a natural environment for M&A as the stronger firms benefit and the weaker ones can be interesting targets. In addition, scale is important. The environment over the last decade has lent itself to allowing strong institutions to scale up and add product, and as they do so the infrastructure and HR capability within those institutions has also grown. The complexity of running larger product offerings has meant that it is easier for institutions to work with fewer executive search service providers. This generally means that the wider the offering of a service firm, the stronger their proposition is. Also, relationships for search firms have always been and continue to be crucial and it can be difficult to expand your network of relationships in a very competitive market. It can be tough to forge relationships in new sectors or new markets. Furthermore, M&A allows for the ability to leverage existing relationships into new verticals within client firms. Consolidation mainly through M&A activity has been a feature of our industry for a while now. We expect this to increase given the overall downturn in the economy, increasing costs and the resultant increasing number of distressed opportunities this will create. We believe M&A activity is a fundamentally a good thing for the sector as it tends to drive both value and scale.

What impact did the COVID pandemic have on M&A activity?
COVID caused two quite different reactions in M&A activity in executive search. The first and immediate reaction was a very natural curtailing of M&A activity. Initially, firms battened down the hatches, focusing on their own individual company challenges. Thoughts of expansion went down on the priority list in favor of staying in front of clients and top talent. And COVID also made it harder to connect with new firms to explore potential acquisitions. But this was very much the first initial reaction. When the dust settled and the recruitment market strengthened, many firms began to actively focus more on scale and exploring the M&A option. Now that COVID appears to be lessening, the longer-term impact will be a significant ratcheting up of M&A activity. Because labor markets have tightened hugely since the pandemic – with plenty of people leaving the market, changing the way they work or downsizing their workloads – the need for people has exploded. Many sectors are feeling a real pinch now in available people and there is a real fight for talent going on. Acquisitions are a way of addressing this labor deficit.

Anything else you want to add?
For many organizations the most efficient way of gaining new relationships is to buy them in as part of an acquisition, the same way search firms will often be asked to identify and recruit whole teams to build capability rather than via individual hires. Buying a firm delivers this in spades. Also older, more mature firms are starting to think of their exit-creating opportunities and looking for other firms to possibly step in. So, the impact of COVID on M&A activity has really come in two waves with the initial “withdrawal” followed by intensifying activity. This activity doesn’t seem to be slowing down.

Why can this be a good option for search firms?
Acquisition is a good way to expand into new relationships. There are significant hurdles and barriers to entry in the executive search sector and expanding via an acquisition can be the best way of entering a new market or adding new sector expertise. Search firms, like many organizations, are coping with significantly more regulation around personal data these days. For example, GDPR (General Data Protection Regulation) in the European Union and similar legislation in certain states in the U.S. broadly limits what information can be stored about a person without their express consent. The infrastructure you need to cope with increased regulation and expand your database is a major investment cost. Buying another firm gets you access to these new relationships and information very quickly. It is a very efficient way of entering a new market.

How important is culture?
As everyone knows, acquisitions are very challenging from a culture point of view. Culture is paramount. Getting culture right is the difference between success and failure. And you need to be careful with the communication of why you are making the acquisition, keeping it simple so that it makes sense to all the interested parties. You don’t want to upset any critical business processes and you need to be vigilant in minimizing any conflicts. There is a lot to learn from our own industry in terms of failed businesses and deals that just didn’t work out. A core goal in an acquisition must be retaining key talent and the producers of value. And appreciating local differences is hugely important. What works in London does not necessarily work in Germany. So, understanding the labor market, retaining the drivers of value and ensuring you have the right culture are key success factors. Culture is what makes the search business – in our case it is our prime differentiator.

How can private equity firms help grow and support a struggling search firm?
Private equity firms can play a key role in helping support and grow search firms by funding rollups – that is helping a well-managed search business acquire multiple business and scale-up to one, larger business. This would entail consolidating, centralizing costs, and increasing profitability etc. They can help in identifying value, driving efficiency, and putting firms together. They can create the engine behind the firm, the impetus to grow, and provide a pool of funding. We have seen this kind of activity become much more pronounced over the past four years as consolidation has continued across the sector. Lots of mid-market and smaller firms have been rolled up. With smaller firms the multiple gained once consolidation has happened, might improve two or three times. But if this firm, with private equity backing and funding then went on to make a series of consolidations or bought a much larger firm – a multiple of 10 or 15 times could be realized, with much improved profitability.

Do you foresee continued consolidation in the executive search industry in coming years? If so, why?
Yes. We are still only at the beginning of this story. The macro-economic situation has meant that increased consolidation is inevitable and a normal by-product of the natural cycle of growth. Clients are expecting consolidation to continue and search firms have learned a lot in terms of needing to deliver quality in a consistent manner. A lot of mistakes have been and will continue to be made and the market still looks super fragmented. Researching our peers, we’ve been surprised at the number of firms that are operating below the radar. There are a lot of firms out there and not all of them will continue to exist in the next five to seven years. In this kind of landscape, brand is important – your reputation and what you are known for. We’ve been building our brand for 20 years as a global player specializing in sovereign wealth funds, multiple family offices, private equity, among other client groups, but above all for the quality of our relationships, our service offering, and our people-first approach. We are excited about the activity that this environment has brought into our industry as it will only strengthen the fundamentals and make for an environment where quality wins.

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