Q1 2024 Rec-View

Rec-View

In 2023, Recruitment agencies faced significant challenges amidst a tough macroeconomic backdrop, with many having to navigate the new normal following the record revenues achieved in 2022. However, the M&A activity we’ve already witnessed in Q1 of 2024 underscores the sector's ongoing resilience. The stabilisation of interest rates and the opening up of debt markets have sparked a more positive outlook for Recruitment M&A. Already, we are witnessing signs of a more buoyant landscape, particularly in the high-growth niche verticals within Recruitment, mirroring the uptick in business confidence.

Resurgence of Mid-to-Upper M&A Activity

One of the most significant indicators of a more positive outlook has been the emergence of mid-to-upper M&A deals this year. Activity in the US included INSPYR Solutions’ acquisition of Advantis Global IT which is expected to provide a broader range of technical solutions to INSPYR’s existing client base. The acquisition of Advantis, as the 62nd largest IT staffing firm in the States, is expected to expand INSPYR’s market share, given it already ranks at the 30th largest according to SIA data. IT/ Tech deals consistently feature in Recruitment M&A due to the sector’s substantial growth, driven by the global economy’s reliance on IT systems and push to integrating digital solutions into business models. As a result, the IT sector consistency faces significant skills shortages, which is why agencies operating in niche specialisms such as digital transformation, ERP, Cloud and Cyber are highly sought after.

This has been a focus area at Connect, where we facilitated the transaction between Mobeus Equity Partners and Ellis Recruitment last year, a specialist in the contract SAP and Oracle markets. The minority investment will see Mobeus commit ￡9.5m to accelerate Ellis’ geographic expansion into Europe and North America.

Other sizeable transactions included Headfirst’s acquisition of Impellam Group, at a valuation of ￡483.2 million. Whilst we eagerly awaited developments throughout H2 of last year, the deal officially completed in March 24, combining the two organisations to form one of the world’s premier STEM talent and MSP providers. With the combined entity reporting €8 billion spend under management, and comprising 2,100 employees worldwide, the transaction reflects considerable market consolidation in the STEM portion of the market.

Further engagement within the STEM sector in the UK comprised a deal between Morson Group, the 6th largest staffing firm in the UK, and Onex, a private equity fund headquartered in Toronto. This announcement shortly followed after Morson acquired Interquest Group, a UK based technology recruitment firm.

It will be interesting to examine how Morson’s strategy for non-organic growth will develop with the added firepower from Onex’s latest investment. Indications of this trend have been notably positive in Onex’s other UK-based portfolio company, Acacium Group. The Healthcare staffing firm acquired Favorite Healthcare Staffing in 2022 (constituting the 10th largest US healthcare staffing firm).

There was also sizeable activity in the UK healthcare sector, highlighted by Aya Healthcare's acquisition of ID Medical in Q1. Aya Healthcare, the largest US healthcare staffing firm, holds an estimated market share of 16.3% and generates annual revenues of $11.2 billion. The company has experienced substantial growth in recent years, partly fuelled by the advancement of its proprietary staffing platform, which has reshaped the healthcare staffing landscape in the States. It will be interesting to observe how this technology is integrated into the NHS staffing system, an institution renowned for facing difficulty when implementing cohesive technology advancements across the various Trusts.

Moreover, the recent investments by both Onex and Aya in UK assets indicate encouraging developments for the UK recruitment sector. While the UK ranks as the third-largest staffing market, it is saturated in nature with less favourable margins, particularly for US buyers. The occurrence of sizeable transactions and a renewed interest in high-value UK assets signals a positive trend.

Executive Search – Renewed Interest

Overseas interest was also evident in the UK executive search market, demonstrated by ZRG Partners' acquisition of Ignata Finance Group. The strategic move will expedite ZRG’s European expansion, particularly among its private equity and shared global clientele. For Ignata, the deal is expected to bolster its C-Suite talent advisory capabilities and broaden its international footprint.

Additionally, ZRG demonstrated its commitment to growth in the domestic market through the acquisition of Wiser Partners. This transaction marked ZRG's second acquisition of Q1 and highlights its aggressive non-organic growth strategy to become a truly global talent advisory firm. The buy & build approach has been a key component of their growth in recent years, as evidenced by the completion of seven transactions between 2022 and 2024.

Other notable transactions seen in the retained space included Hudson RPO’s acquisition of Dubai headquartered, Executive Solutions. The acquisition is expected to strengthen the group’s presence in Middle Eastern markets and leverage the combined client base. Whilst both organisations offer a different recruitment capability, the synergy lies in the acquired client base, with opportunity for Hudson to pivot new clients to its RPO model.

It is encouraging to note the increasing interest in the executive search model in Q1, as we did see a slight decline observed last year. In executive search, maintaining robust permanent candidate pools can be challenging, particularly due to lower job cyclicality among executive positions.

In volatile trading conditions, this challenge is exacerbated as individuals are less inclined to make career moves amidst uncertain trading conditions and concerns about job security. The M&A activity witnessed in executive search during Q1 is a promising indicator of market recovery.

Education – Continued Resilience

Q1 also demonstrated increased interest from private equity buyers in the UK Education sector. The ongoing acute skills shortages have resulted in strong demand for recruiters serving the sector, with institutions increasingly reliant on agencies to bridge the talent gap. This coupled with the consistent Government funding available to these institutions has positioned the sector as relatively stable and resilient.

At Connect, we have been actively involved in this area, assisting PE backed, Operam Education Group, with its expansion into the Further Education staffing market through the acquisition of Provision Recruitment last year. This continues to be an area of focus, where we currently have two deals in due diligence.

Wider M&A activity in the sector included Pricoa Private Capital’s investment into TeacherActive at the beginning of the year. With 6% market share of the education recruitment market, TeacherActive operates as one of the largest Education Recruitment agencies in the UK, offering solutions to c.3,600 schools nationwide.

Another significant player in the market, Now Education, underwent a Management Buyout (MBO) which was backed by Prefequity and included a ￡14million investment. As part of the deal, Gary Redman, the previous majority shareholder & CEO, transitions to the role of Chair whilst Alex Westwood assumes leadership. Now Education has grown consistently since its inception with forecasted EBITDA of ￡3.9m for FY23, which is expected to double by FY27. The recent investment is expected to accelerate growth plans in the company’s shared equity model, which allows successful consultants to be fully supported in launching their own Now Education offices in new regions across the UK.

Conclusion

As we assess the M&A outlook for the rest of the year, we anticipate the upcoming general election may cause a shift in market dynamics. Many owners may need to contend with potential changes in capital gains tax, prompting shareholders of recruitment businesses to reconsider their exit strategies and timelines.

Additional factors expected to influence M&A consolidation include the integration of technology into traditional recruitment models, a heightened emphasis on specialisation in niche verticals, and a focus on ESG initiatives and DE&I practices. The level of activity demonstrated in Q1, especially in mid-to-upper transactions, indicates optimism in the market, setting the stage for further developments in staffing M&A throughout the remainder of 2024.