Will Hot M&A Recruiting Market Cool and Reset Valuations?

November 29, 2022 – Acquisitions made big news in the recruiting industry this year, and for good reason. Outside investors finally 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 looking for platforms they could accelerate. Hunt Scanlon Ventures was at the center of much of the consolidation activity, having closed nine deals in its first 24 months of operation. Hunt Scanlon’s M&A business has another 11 deals in the pipeline for 2023.

Diversified Search Group (DSG), a leading search firm backed by private equity firm ShoreView Industries, acquired Alta Associates, a Flemington, NJ-based search firm founded by Joyce Brocaglia specializing in cybersecurity, IT risk management, and data privacy earlier this year. “This is a strategic acquisition that will add significantly to our business offering in a key field that touches every client we serve,” said Aileen Alexander, CEO of Diversified Search Group. “Cybersecurity, data privacy, and resiliency are top priorities for boards and senior leadership across every sector of our economy. Joyce Brocaglia has been a pioneer in this field, and we are delighted to welcome Joyce and her talented team who bring a shared sense of purpose along with deep expertise, insights, and knowledge of talent that will be valuable to our clients.”

“There could not be a better match between our companies who share a mission for advancing diversity and cultivating new leadership, and fits with our strategic growth goals,” said Judith M. von Seldeneck, the founder and chair of Diversified Search Group. “Joyce Brocaglia is a highly regarded leader in the industry, and I am delighted to welcome Alta Associates to our firm and look forward to joining forces to build upon our successes.”

“We are thrilled to join Diversified Search Group and share our deep, trusted network with a firm that shares our mission and commitment to making a difference,” said Ms. Brocaglia. “Alta Associates’ expertise, combined with Diversified Search Group’s stellar reputation and purposefully different approach to cultivating executive talent, creates a powerhouse that will deliver diverse and exceptional leaders in cybersecurity, risk, and transformational technology at a time when it’s needed most.”

PE Firms Buying In
Private equity firms continue to pair up with executive recruiters at a blistering pace. High growth rates, new layers of incremental revenue streams, and AI-powered talent intelligence tools aimed at revolutionizing the recruiting sector are creating a perfect storm for PE investors who now view search firms as an investment of choice. Crescent Cove Advisors recently took an investment stake in Kingsley Gate Partners.

The equity partnership is expected to fuel the search firm’s growth through global expansion and accelerate a push into talent acquisition AI-enabled software. “The partnership with Crescent Cove Advisors is a testament to the value that Kingsley Gate Partners has created in just a little over six years. This partnership will ensure that we will continue to disrupt this industry through innovation, continuous improvement of the search process and further attracting world-class talent,” said CEO Umesh Ramakrishnan.

Kingsley Gate marks the first private equity investment for Crescent Cove and expands the firm’s capital solutions for founder-led technology companies. “As organizations are reshaped during and post-pandemic, we are excited to partner with the Kingsley Gate Partners team and support the company in redefining executive recruitment through the use of technology-driven solutions,” said Jun Hong Heng, founder and chief investment officer of Crescent Cove.

“The global executive talent management industry is large and growing, yet little has changed in how companies approach talent acquisition,” said Andrew Holmes, partner and head of private equity at Crescent Cove. “Umesh, Nancy, Buster and the talented team at Kingsley Gate Partners are recognized leaders in developing proprietary and differentiated technologies to help its global client base improve the speed and accuracy in their hiring processes. We cannot think of a better time to make this investment given today’s global talent shortage and the premium companies place on talent acquisition. We are honored to join as partners in this exciting mission.”

Investing in search firms is not just limited to private equity buyers. Arthur J. Gallagher & Co., one of the world’s largest consulting and risk management companies, acquired global HR search firm Frederickson Partners in 2022. Frederickson Partners has locations in a dozen cities across the U.S., including San Francisco, New York, Dallas, Chicago, Los Angeles and Nashville, and also serves global tech hubs in London, Berlin, Paris, Mexico City, Bogota, Seoul, and São Paulo. Founder Valerie Frederickson and her team continue to operate under the direction of Scott Hamilton, global managing director, human resources and compensation consulting for Gallagher’s employee benefits consulting and brokerage operations.

Opportunities for Growth
“Frederickson Partners will expand Gallagher’s executive search capabilities across all industries and offers us significant opportunities for collaboration and growth,” said J. Patrick Gallagher Jr., chairman, president and CEO. “I am very excited to welcome Valerie and her team to our growing, global company.”

Private equity firm The Acacia Group recently acquired The Baer Group – a full-service provider of contingent staffing in support of technology solutions for industry leading enterprise technology projects – as part of a strategy to address the growing shortage of skilled talent to lead and support digital transformation initiatives. The acquisition is seen as central to Acacia’s strategy of building businesses adept at helping government and commercial organizations access the agile technical talent and services they need to deliver digital transformation. The Baer Group will form a new platform business within the Acacia portfolio.

“Global demand for the best technical talent is at an all-time high and will only continue to grow,” said Craig Dawson, co-founder and partner with Acacia. “The team at Baer, who are exceptionally well regarded by their clients, oversees an expansive network of consultants and developers highly skilled in enabling clients to exploit the full commercial and mission potential of digital transformation.”

“As a new platform within the Acacia portfolio, we’re creating new possibilities for our company and new opportunities for our people,” said Peter Aaron, president of The Baer Group. “Together we have ambitious plans that will enable us to grow in scale and boost our value to clients. We will be expanding and diversifying our technical capabilities and product partnerships, growing our team and strengthening our ability to deliver on an international scale. Acacia shares our commitment to building teams of highly skilled and motivated people around a culture of innovation. That shared philosophy will serve us well as we continue to grow Baer as a destination employer for the best talent in the industry.”

The rationale for Acacia’s acquisition of Baer stems from its direct experience of the growing challenges organizations face in attracting and retaining the best technical talent in a post-pandemic world, according to the company. “Skilled people are seeking greater career opportunity, diversity and flexibility,” Acacia said. “These dynamics, combined with the shortage of experienced engineers and developers, make it more challenging and costly for large organizations to sustain in-house technical teams. Such organizations are increasingly turning to businesses like Baer for specialist support.”

Continued Interest in Search Firms
The interest of outside investors in executive search firms will continue for the foreseeable future, according to Tim Russell, managing partner of The Tolan Group. “There is extreme value in having an executive search firm in one’s portfolio. Though I don’t believe the multiples seen in recent transactions could be to the same degree they were, I do think that interest remains high in the executive search arena as a viable portfolio investment,” he said. “Predictable revenue streams and market mastery of certain verticals can create a strong return on investment for those willing to invest in the sector. The other dynamic seen in the M&A activity is that of search firms acquiring other search firms. This strategy allows for expanded market share and the combination of cross selling among verticals that have noncompeting but similar service lines. For example, a firm with experience in hiring manufacturing executives could be well served joining forces with a search firm that specializes in hiring logistical executives. Combining these two firms could produce significant revenue but also be appealing to a PE suitor who might be interested in purchasing the firm down the road.”

Mr. Russell explains that the number one factor that makes executive search firms a viable investment is the fact that recruiting assistance will always be needed. “The recruitment industry is a billion dollar industry 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. As long as there are people employed to do a task…there will be a need for recruiters.”

Mr. Russell thinks sellers are motivated by a number of things. “This past year the M&A activity was robust,” he said. “I think there were some search firms who not unlike homeowners wanted to test the market to see what kind of price they could get for their company. Valuations seem to be inflated and there were a few examples of high dollar transactions that netted the search firm founders a significant windfall. Some firm founders wondered if they could experience a similar kind of fortune. I think there were some sellers that were more testing the market than were intent or serious about actually selling. When valuations are high, it’s human nature to wonder what you could get for the asset you own.”

After taking a hit with the onset of COVID-19, the high-end recruiting sector has come roaring back over the past two years, culminating in the recent flurry of M&A activity, according to Dominic Lévesque, president of Tatum. Will that continue? “Looking ahead, all signs suggest that this level of heightened activity should carry over into Q1/Q2 2023, and potentially beyond,” he said. The underlying reasons for that are multifarious. For one, voluntary turnover is at an all-time high at all levels of the workforce — and the C-suite is no exception. Meanwhile, even as the job market gets reactivated, job seekers themselves remain firmly in the driver’s seat, and many are keen to identify opportunities and companies that align with their own values or sense of purpose. Faced with key vacancies at the top, organizations will likely become more reliant, not less, on executive search partners. If that comes to pass, M&A activity should follow.”

What’s driving buyers/investors to our sector? Mr. Lévesque explains that when there are a significant number of vacancies on the job market, that translates to stronger financial returns for executive recruiting firms, which in turn generates interest in M&A activity. “From a productivity standpoint, executive recruiters themselves may be benefiting in surprising ways from the rise of mass remote work,” he said. “Gone are the days when you might have spent 70 or even 80 percent of your time traveling to meet with candidates and clients, for example. Now, you can pack in more meetings in less time on the client side. And on the candidate side, with digital meetings flattening geography, it’s easier to build more diverse pipelines as well, which means we can contribute more value when clients approach us with a huge backlog of searches.”

For sellers, there’s the broader economic landscape to keep in mind. “PE firms continue to have tremendous strongholds of dry powder, and they’re fueling most of the M&A activity in the executive search space,” Mr. Lévesque said. “Meanwhile, the accelerating pace of digital transformation initiatives is fueling growth across multiple sectors. And even if there have been notable fluctuations in the stock market in the past few months, investors by and large remain bullish. Businesses are showing solid cash flows and robust balance sheets. As a result, capital is available to fund deals.”

“Regardless of what happens in the broader macroeconomic context, it seems unlikely that demand for the services of executive search firms is going to decrease dramatically in the near- to mid- term future, which is also to say that the current deal flow probably won’t lose momentum,” Mr. Lévesque said. “No one knows what the future holds, obviously. But if you’re operating with the right mindset, however, a certain amount of market volatility can be exciting, as it often calls attention to the things you do best — and points the way to new opportunities.”

Search Firms Acquiring Search Firms

Korn Ferry acquired two executive search firm in 2022 that specialize in providing interim recruiting services. The firm acquired Patina Solutions Group and Infinity Consulting Solutions (ICS). The acquisitions are expected to be immediately accretive to Korn Ferry’s adjusted earnings. “This combination presents real, tangible opportunity for Korn Ferry and our clients looking for the right talent, who are highly agile, with specialized skills and expertise, to help them drive superior performance, including on an interim basis,” said Gary D. Burnison, CEO of Korn Ferry. “Patina offers ideal solutions for today’s nomadic labor market. “Infinity Consulting Solutions will be a great fit, with interim professional placement offerings and expertise that are highly relevant for the new world of work.”

“Today, Boomers are retiring and career nomads are looking for change – early and often,” he said. “Our clients have entered a new reality where shortages of skilled labor are projected to persist, particularly in high-demand areas such as IT. Korn Ferry’s acquisition of ICS echoes our commitment to scale our solutions and further increase our focus at the intersection of talent and strategy – wherever and however the needs of organizations evolve.”

ZRG Partners, a leading search firm backed by private equity firm RFE Investment Partners, acquired Terra Search Partners, an executive search firm exclusive to the real estate industry in 2022. “The team at Terra Search is a great addition to our real estate practice,” said Larry Hartmann, CEO of ZRG. “Our data-driven approach to talent plus their deep expertise in the real estate sector is a boon for our clients across the globe. Real estate expertise is required in all sectors of the economy and all functional skill-sets are required within the real estate industry, which is ideally suited for ZRG’s cross-sector, interdisciplinary approach to human capital.”

Since 2006, Terra Search has advised real estate businesses throughout the U.S. on positive transformation through human capital. “We’re looking forward to joining the ZRG family, and I am excited to partner with Kevin Jones to lead the ZRG real estate practice,” said Matt Slepin, founder of Terra Search. “Real estate has become increasingly institutional where human capital is at a premium, and the power of the ZRG model can make a significant impact on the business. We are thrilled to be able to leverage the breadth of the ZRG platform to grow our practice.”

M&A Activity Could Slow
Despite ZRG Partners growing with several acquisitions over the past few years, Mr. Hartmann things this activity could be slowing. “M&A is slowing down across sectors with more cautious buyers and resetting of valuations,” he said. “I believe there will be deals done but less of them and at more muted valuations and structures in 2023.”

“The market is a fragmented market with thousands of smaller firms competing against five major players, creating opportunity for scale through acquisitions,” said Mr. Hartmann. “The positive trends around human capital creating more value in recruiting platforms is also providing winds at the back of investors who see the sector having long term opportunity with the aging baby boomers retiring, more frequent job changes across the C-suite, a focus on DE&I on virtually every senior level search engagement creates more need and revenue growth.”

Mr. Hartmann also explains that sellers are being driven by an awakening in sorts that there is value in their boutique platforms beyond just the annual income being derived. “Five years ago, there was not much M&A activity in the retained search sector and today there is a velocity of transactions with even more buyers entering into the discussions,” he said.

“A potential economic slowdown will slow down deal flow and reset valuations, according to Mr. Hartmann. “2021 was a record year for most executive search firms and net income was at all time highs but we see a leveling off of revenues and net income, as firms now have to invest in the infrastructure to sustain the growth they experienced, while at the same time, battling for what looks like less business in 2023,” he said. “I believe there will be deals done and certain private equity backed buyers and some of the Big Five may sense value in the deals they pursue, so certainly activity but not sure it will be at the same pace as 2021 and 2022.”

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