Recruitment sector M&A activity Q2 and Q3 2024

Despite tough trading conditions in Q2 and Q3, acquisitions of UK recruitment targets trended close to the average of 15 deals per quarter seen over the past two years – although overseas acquisitions by UK firms slowed significantly following a strong Q1. There were 16 deal completions in Q2 (14 UK recruitment targets and 2 overseas targets acquired by UK investors) and a further 16 completions in Q3 (15 UK assets and 1 overseas target).

Overall, in year-to-date 2024, there have been 46 acquisitions of UK assets announced, slightly ahead of the prior year’s 43 at the same stage. However, overseas expansion is lower, with only 10 deals in year-to-date 2024, compared to 21 throughout 2023.

Key themes in recruitment sector

In Q2 and Q3, the key themes included:

• Subdued Mergers and Acquisitions activity as challenging market conditions continue to put pressure on EBITDA.
• Notable appetite from the US buyer pool, representing just over 20% of exits.
• A drop in overseas assets acquired by UK buyers.
• Continued interest in verticals with a higher contract/temp/repeating revenue base, such as professional services, recruitment platforms/software, and education.
• Trade buyers outperformed private equity (PE) as the preferred exit route.
• PE investment via add-ons to existing portfolio companies, rather than new platform deals, becoming increasingly important.

Challenging market conditions continue to limit EBITDA growth

Subdued M&A activity in Q2 and Q3 reflects challenging market conditions experienced across most of the recruitment sector. This has been reflected in the Q3 trading updates from the likes of Hays, PageGroup and Adecco all reporting a drop in Net Fee Income (NFI) compared to 2023. The UK, and particularly permanent recruitment, experienced above average declines as recruitment budgets tightened and hiring processes slowed.

In this context, sellers may wait for market-led EBITDA recovery or prioritise internal issues such as managing fee earner headcount levels for current and future demand. It also means that deals in progress tend to take longer, as buyers become much more cautious on current trading and sustainability of earnings. On the plus side, it can also mean opportunities for buyers to acquire deals with an element of financial distress. Businesses that show resilience during this period can also appear more robust and attractive.

The statistics may also reflect uncertainties caused by the UK general election and hesitation in the market (including European buyers) to deploy capital. It will be interesting to see if there is a change in deal volumes post-election and Autumn Budget. Some business owners looked to close deals in October 2024 ahead of anticipated Capital Gains Tax (CGT) increases announced in the recent Autumn Budget, and others may now be mindful of planned changes in certain CGT reliefs post-April 2025. However, the burden of changes to payroll taxes may impact underlying earnings depending on the ability to pass increases on.

Based on our own deal experience, we would expect to see some impact, noting data specialist Trilogy’s recent sale to Korn Ferry - but less so in the staffing sector than in others given the overall macro-economic dynamics.

The US continues to show interest in UK-based assets

In Q2 and Q3, nine of the 29 acquisitions of UK targets were completed by non-UK buyers, with six (21%) of these being US buyers. This compares to only 3% of deals involving US buyers in 2023. 

US buyers may perceive the UK as a gateway into Europe and were particularly active in acquiring recruitment platform and software providers, including ZipRecruiter (of Breakroom) and Falcon SOJA Ventures (of job.com). Other notable verticals were:

• Technology specialists: H.I.G.- backed Oxford Global Resources’ acquisition of Linksap Europe and Swipejobs’ acquisition of ReThink.
• Education staffing: Quad Partners LLC’s investment in Vision for Education.  
• Consulting firms: WhiteCrow Research’s acquisition of Armstrong Craven.

Significant drop in overseas assets acquired by UK buyers

In the last six months, only three transactions were completed in which a UK buyer acquired an overseas recruitment asset. This follows a strong Q1 with seven overseas acquisitions. Acquirers may wish to boost organic growth through international expansion, but capital constraints and shortage of opportunities may limit this in practice.

Transactions included US-based 3DIQ by Staffing Future Limited and the acquisition of Xcede Group’s South African business by nGage (backed by Graphite Capital).

The South African business unit of Xcede has been rebranded to SMART4 Energy and will continue its 14-year history operating in the energy and resources sector, providing engineering, commercial and financial talent across the region. The acquisition was part of nGage’s international expansion strategy and cemented its first foothold in Africa.

Continued sub-sector interest in key verticals

The top three most active sub-sectors in Q2 and Q3 were recruitment platforms/software, with five transactions (17% of deals), professional services with five transactions (17% of deals), and education with four transactions (14% of deals).

With significant hype in the global market around new technological advances such as automation, AI, and data analytics, many businesses are looking to integrate new solutions that can create cost savings and efficiencies within their operations or improve the quality of their data. This has made recruitment platforms/software targets a premium commodity in the recruitment sector for several years.

The professional services sub-sector includes finance, marketing, human resources and legal professionals. A notable deal was the acquisition of Clayton Legal, a provider of recruitment services to the legal sector, by Bluestones Group. Bluestones has been an active buyer across all sectors of recruitment, acquiring 24 targets in the UK and internationally since its inception in 2014, several of which RSM has advised on.

Bluestones also acquired Pace Investment Group’s recruitment businesses, a multi-brand acquisition of specialist providers. This highlights the acquisition trend towards specialist firms.

Education continues to be a preferred sector for both trade and PE buyers as investors look for targets with strong ESG angles for their acquisition criteria. A notable deal in the sector was the acquisition of Aquinas Education by Zen Educate in May 2024, the same month in which Zen Educate secured a $37m Series B investment. Zen Educate plans to continue to address the teacher staff shortages across the UK and US markets via several more acquisitions.

Trade buyers outperform PE as the preferred exit route

Trade buyers were responsible for 16 (55%) of the acquisitions of UK assets in Q2 and Q3 2024. Nine of these were completed in Q2, while seven were completed in Q3. Across 2024 year-to-date, trade buyers represent 23 deals (56%), a small increase from 2023’s 27 trade deal completions (54%) across the year.

A transaction that highlights acquisitions to further growth through strategic collaboration was TXM Group’s acquisition of Talent Works. TXM Group is a dynamic global resourcing and consultancy business specialising in technology, engineering, and healthcare sectors. Talent Works adds depth and breadth of services in Managed Service Provider (MSP), Recruitment Process Outsourcing (RPO), and Employer Brand solutions across EMEA and North America, again highlighting the importance to buyers of “stickier” revenue models such as RPO.

Increasing importance of PE add-ons

In the last six months, PE investors have been split between bolt-on acquisitions (45% of PE acquisitions) and primary transactions (55% of PE acquisitions), for a total of 10 completions. In 2023, primary PE deals accounted for 74% of the total completed PE transactions. As anticipated this year, PE firms are seeking bolt-on acquisitions for existing platforms to accelerate growth and prepare for their exit horizons.

PE interest often has a stronger focus on those operating in attractive niche areas of the market. H.I.G. Capital, the backers of Oxford Global Resources, continue to make add-on acquisitions with the most recent acquisition of Linksap Europe, a specialist SAP recruitment firm. RSM advised on sell-side due diligence and data analytics support.

Deep sector niches have appealed to PE in recent periods due to their stronger trading performance over the larger generalists. Recruiters that have established a sector niche and focus on high-quality placements, especially with a high contract/temp mix and international reach, tend to show greater resilience and ability to grow despite market challenges.

Closing thoughts

The biggest impact on M&A activity in the sector generally has been tough macro-economic conditions suppressing EBITDA. However, there have been notable exceptions. We were thrilled to have advised on sell-side due diligence for Linksap Europe, a premium staffing solutions firm demonstrating a deep niche in providing SAP consultants in over 40 countries.

Linksap Europe was acquired by a portfolio company of US PE firm H.I.G. Capital, Oxford Global Resources. This is a good illustration of wider themes seen over Q2 and Q3, highlighting the importance of both the US buyer pool and add-ons for existing PE investments.

It will be interesting to see the impact of the Autumn Budget on future M&A in the sector. With increases in UK payroll taxes, the ability to protect margins and drive growth through a specialist niche, ‘land and expand’ of client relationships, and geographical expansion will become increasingly important. Those businesses able to demonstrate growth through the current cycle could become well-placed as highly credible investment propositions in 2025.

For further information or to discuss how we could help you realise your business growth ambitions, please contact Jonathan Wade.