Interest amongst private equity buyers remains high and it is generally well known that private equity companies still have lots of money they’re looking to invest to buy good quality assets.

When it comes to choosing what to invest in, staffing companies are still very popular with private equity. The staffing industry remains very fragmented however so they’re a good buy and build opportunities.

Also good staffing companies have more predictable cash flows than many other sectors so that means you can often deploy debt to make acquisitions which fits well with the profit and loss model.

Overall the M&A markets are very hot not only in the US and in the UK but also in wider Europe as trade buyers are active as well as private equity seeking human capital investments for a variety of reasons such as geographical expansion or adding scale or as part of their digital transformation.

There is a lot of value creation around digitalization worldwide and what we see in the staffing M&A market fits with this trend very much. We’re seeing online platforms buy traditional staffing companies especially staffing companies which supply large numbers of manual or lower skilled workers and we know that automation has impacted some areas of healthcare staffing in the US that seems slightly to hit the UK as well to all of these high volume areas of recruitment and staffing where technology can help improve margins considerably.

As processes can be automated costs can be reduced and margins improved and the Staffing Industry Analyst (SIA) say that the percentage of buyers using Talent platforms will increase from 14% in 2020 to 22% in 2021 in the US and that a further 47% of buyers expect to use a talent platform within the next two years.

As a result of statistics like this we expect platforms are generally looking to buy traditional staffing companies to accelerate their client acquisition. As a mirror of this we’re also seeing traditional staffing companies and managed service providers looking at buying or partnering with online platforms for the same automation reasons.

We see a large increase in cross-border deals since 2019 and recent deals have usually involved the sellers having set up successful operations overseas especially in the US and or being invested in by an overseas investor from the US or Japan or elsewhere.

A typical comment in relation to talent shortages at the moment is that there isn’t a worldwide shortage of Talent it just isn’t always located where you ideally like it to be. It looks like this is leading to companies wanting greater access to international Talent and we think investors will like targets with media access to overseas markets obviously that comes with a bit more process cost going cross-border.

In human capital investing we do frequently come across local operations which have been set up informally and without being fully locally compliant in terms of licensing or local tax arrangements. This then results in investors seeking to discount their offer price to exclude the profits attributable to that international non-compliant part of a business.

Another trend we’ve seen over the last few years is when staffing companies are buying consultancies. This is often part of a move away from becoming a more general provider of people and to move up the food chain to increase margins and getting a better EBITDA multiple on a sale.

It’s also part of the general trend towards value-added services whether that’s adopting the statement to work model or train to deploy which has also increased enormously in popularity amongst human capital investors.

The growth in the use of warranty and indemnity insurance (W&I) has been one of the biggest changes in emanate deals over the last few years.

Last year there was W&I insurance on nearly half of the deals advised on across all sectors and this has been a factor in workforce solutions in most recent years.

In 2019 only one in six of our deals relied on W&I insurance and we personally characterize W&I insurance is a product which helps sellers sleep at night. Most of this would typically be private companies where sell and purchase agreement is taken up with warranties at a manageable cost which is typically one percent of the accounting scorecard.

It covers risks without doing due diligence and in practice the insurances carry out quite a bit of due diligence if there are certain types of problem perhaps relating to questionable tax arrangements relating to things like IR35  or SECO that will be excluded from the insurance cover. Buyers and sellers then are agreeing to postpone some of the payout until targets have been hit one or two years down the line. In the workforce Solutions sector earn outs where part of the price is deferred and may be conditional on achievement of future growth or profit projections.

Earn outs have always been a factor especially in the UK why it’s been thought a lot of the value of many types of recruitment and staffing businesses is linked to the personal connections of a few key staff who might jump ship after the deals completed.

In the past there has been a lot of distrust about arrangements among sellers of staffing and recruitment businesses. The reason being that if targets are not hit post deal that it is likely to be the fault of the buyer, however, if the legal terms are tight enough earn outs can be framed in a way that reduces risk to sellers. In most human capital  transactions in recent years arrangements have worked well for buyers and sellers.