M&A activity in the recruitment sector

Q1 2023 saw a relatively high number of completions at 21 (44% of the annual total).

This peak largely reflected the finalisation of deal activity from the previous year prior to the onset the onset of toughening trading conditions towards the end of Q4 2022.

However, few new projects were launched during this period of economic transition, leading to a low in Q2 completions of only 10.

Encouragingly, the quarterly completion trend improved consistently in both Q3 and Q4 as both trade, and increasingly PE, returned to the market. The 15 deals completed in Q4 were in line with the average run rate for the year.

This trend suggests that the number of completions in 2024 may achieve a similar level to 2023, supported by a broadly consistent run rate in the first two months of 2024. We would expect underlying project activity to start to increase in the second half of the year, and continue into 2025, as momentum in profitability across the industry rebuilds.

Of the 58 deals completed in 2023 involving UK assets, 40% (23 deals) were acquisitions by either a PE house making a primary investment, or add-on acquisitions by existing PE-backed portfolio companies. This has remained largely consistent with the 42% observed in 2022.

Trade buyers remained a key exit route, representing 27 (47%) of transactions. This compares to 35 transactions in 2022 but is broadly consistent in percentage terms (46%). UK trade buyers contributed to the most completions within this category, accounting for two-thirds of trade deals, with overseas trade buyers making up the remaining third.

The market also attracted interest from listed clients in 2023, such as the acquisition of Vercida Consulting by Hays in May 2023. 

The number of debt or non-PE backed MBOs (Management Buyouts) and acquisitions made by private individuals rebounded following a relative low in 2022. In 2023, there were eight MBO, EOTs (Employee Ownership Trusts), and private individual transactions (14%), an increase from five in 2022. This reflects tougher economic conditions than during the post-Covid boom, with vendors more open to exploring alternative or partial exits.

In 2023, PE showed a strong focus on tech, healthcare, and education. Collectively, including acquisitions of tech platforms in the space, these represented approximately 75% of PE deals in the sector (or two-thirds if excluding tech/software platforms).

Out of the 23 PE deals, five were acquisitions of technology recruitment specialists, and three were recruitment platforms/software. This compares to six and eight deals respectively out of 32 PE deals in 2022. PE still wants its portfolio companies to have a strong digital and AI strategy, focusing on niche verticals, international reach, and an expanding focus on tech consulting or SOW (Statement of Work) based propositions.

PE also demonstrated a strong interest in healthcare (26% of 23 deals) and education (17% of 23 deals) verticals. This is indicative of the structural staff shortages faced by the UK healthcare and education sectors, despite cost control pressures and political uncertainties.

In 2022, approximately 50% of PE transactions were via ‘secondary’ add-ons rather than new, stand-alone ‘primary’ acquisitions into the industry (see chart above). However, this trend changed in 2023, with ‘primary’ PE deals accounting for 74% of completed PE deals. 

This could mean that we see an increase in add-on acquisitions again in 2024 as PE houses focus on buy-and-build strategies for their most recent acquisitions. However, sometimes the distinction between primary and secondary acquisitions are not clear-cut.

Although listed firms wanted to reduce gearing and focus on core activities, this presented opportunities for PE.

A good example of this is Twenty20 Capital, a London-based PE firm specialising in the sector, which made four acquisitions into the UK recruitment market in 2023. Notably, these included the acquisition of Impellam Group’s healthcare division in May 2023, and the acquisition of Global Group, a healthcare staffing specialist, in January 2023. These verticals represent key areas of interest for potential bolt-ons in 2024.

Additionally, Inspirit Capital acquired Capita plc’s resourcing division as part of the Group’s wider divestment plans.

UK technology recruitment business, Jumar, received its second investment from Aliter Capital, aligning with Aliter’s strategy to develop a leading technology resourcing and solutions group. 

LDC invested in the talent data analytics platform Horsefly in March 2023. This highlights the increasing interest in recruitment platforms from the PE market. 

The UK recruitment sector also saw investment from Mobeus (Ellis – tech), Three Hills Capital (Kernel – multi-niche), Maven Capital (Castleview Group Training), BGF (Bridge Education and Provision UK – both education), among others. 

Literacy Capital’s partial exit of Kernel Global to Three Hills Partners was a rare example of a PE exit in 2023, with this part of the market generally being more subdued.

UK vs overseas bidders

When excluding the EOTs/MBOs from our analysis, we see that the proportion of overseas buyers of UK assets decreased from 29% in 2022 to 26% in 2023. This decline appears sharper on a nominal basis, with 26 deals completed by overseas PE or trade buyers in 2022, compared to the 13 completed in 2023.

A significant reason for this decline was the relative absence of US buyers in the UK market. In 2023, only two UK targets were acquired by the US, compared to 12 transactions (48%) in 2022. This reflects both:

1. the wider impact of overseas buyers wishing to reduce gearing; and 
2. the toughening market conditions in the US. 

UK businesses previously expanding rapidly into the US (and appearing ripe for acquisition) encountered greater challenges. With newer fee earners less used to tough conditions in 2023, UK management teams faced key decisions in scaling back headcount and the rate of organic expansion. 

While international interest from US and Asia-Pacific buyers declined, European buyers remained active in the UK. Multiple transactions were completed with buyers across France, Ireland, Spain, and the Netherlands (also noting HeadFirst’s £438m acquisition of Impellam Group).

Japanese buyers were prominent in the global market but did not complete any deals in the UK. This might change in 2024 as Bain Capital have recently invested in major player Outsourcing Inc. 

Overseas PE declined more sharply than overseas trade. In 2023, four transactions by overseas PE buyers were completed, compared to 14 in the year prior (where transactions by overseas trade buyers remained fairly consistent at 25%).

UK acquirers of overseas targets

In 2023, UK recruitment firms acquired 21 overseas assets. Of these acquisitions, 43% (nine deals) were by PE-backed firms. The PE interest was largely favoured towards bolt-on opportunities, which made up 67% of the nine PE transactions.

This reflects PE’s appetite and experience in using bolt-on opportunities to expand its UK recruitment platforms internationally.

In 2023, UK buyers were responsible for the acquisition of 21 overseas targets. As noted, this includes significant interest (43%) from PE-backed acquirers expanding internationally.

The largest target geography was the US, accounting for 52% of all targets. This could be due to the continued growth of the US market, now estimated to be worth approximately $220bn.

Australia was the second most popular country, accounting for two deals in 2023. This is a potentially less saturated market and provides improved access into APAC markets for UK businesses.

The market also saw deals across Turkey, Brazil, China, Bermuda, Spain, the Netherlands, and France.