In the face of weakening recessionary concerns, macroeconomic volatility and geopolitical uncertainty, the UK recruitment market continues to demonstrate resilience. Amidst prevailing structural skills shortages and acute candidate scarcity in the UK, hiring activity remains buoyant and quoted company share prices continue to signal business and investor confidence in the UK economy and its labour market.

At a macro level, in March the Office for Budget Responsibility reported that the UK will avoid a recession this year and inflation is expected to fall to 2.9% by the end of 2023. Moreover, leading commentators such as the CBI expect that interest rates are now close to or at their peak below levels being forecast, with cuts to the base rate expected in 2024.

At a sectoral level, both generalist and specialist-quoted UK recruiters have continued to evidence strong trading performance in recent periods. PageGroup plc reported that between its third and fourth quarter (year-end Dec-22), net fee income rose by 3.5% and for the full year 2022, grew by 20% year-on year. In addition, leading STEM recruiter SThree plc reported its revenue rose 22% year-on-year, with temp and perm revenues rising by 22% and 8% respectively.

Over the past 12 months, the erosion in the value of sterling relative to the dollar (around 8% reduction year-on-year) has been indicative of wider UK market volatility. Despite this, overseas acquirors have signalled that they see a significant opportunity to invest in the UK and there is a prevailing perception that UK assets are priced at a relative discount and therefore recruitment sector assets present good value for international investors.

With what is viewed as a positive backdrop for the sector with acute candidate shortages across several areas, one would expect the market to be brimming with buyers. There is, however, a disconnect between the resilience and prospects of the UK recruitment sector and the current level of appetite for M&A activity.

To be clear there are buyers around, just not in the volumes that one would expect in such a buoyant period for the sector and with the economic backdrop outlined above. So what is driving this?

• Private Equity

Private equity appetite and willingness to invest in the UK recruitment sector has significantly reduced in the last 12 months. In the second half of 2022 this was in part due to macroeconomic concerns and the perceived medium-term prospects for recruiters in the face of a slowdown, particularly those which are perm heavy.

Availability of debt from mainstream banks and private debt funds has constrained activity due to increased interest rates making debt more expensive, leverage multiples falling meaning private equity having to put more of its own money in to deals which is driving down returns with a corresponding impact on multiples paid. Multiples are out of line with vendors’ expectations which have not moderated based on strong underlying performance.

Our expectation is that the constraints in the debt markets will reverse in late Q2/early Q3 this year which will see private equity investors return to the market with significant levels of “dry powder” and an ability to pay strong multiples backed by greater debt availability.

Business owners who are looking to realise value should spend the next few months productively focusing on key areas

• International buyers

Significant nervousness exists from international buyers around the UK macroeconomic landscape. The UK, which has consistently been viewed as a “safe” place to invest, has seen its credibility undermined in the aftermath of the Truss mini budget in September 2022. This has significantly undermined confidence in UK macroeconomic policy and the attractiveness of the UK as a place to deploy funds.

Whilst the financial cost to “UK plc” can be readily estimated, the damage to the UK’s reputation may take longer to assess and restore. As a consequence of the UK’s blighted reputation, there is a noticeable trend in overseas buyers prioritising other markets in terms of M&A activity, such as Germany and Benelux.

• Domestic strategic buyers

There are still acquisitive and well-funded UK strategic buyers in the market which is positive news for those with shorter-term realisation ambitions. With private equity buyers largely out of the market there is a clear “window of opportunity” for those buyers able to pursue deals quickly. When private equity returns to the market with leverage available, this will likely drive multiples higher.

What is the current advice for recruitment business owners?

The M&A market is currently soft. There are buyers around, but the number and variety of buyers will significantly increase over the next couple of quarters.

Business owners who are looking to realise value should spend the next few months productively focusing on key areas which will attract significant attention and influence execution risk and the outcome achieved in conjunction with your advisor. When private equity and international buyers return to the market in Q3 2023 there will be a “flight to quality” with organisations able to be very selective on which assets they acquire.

It is therefore of fundamental importance for business owners to be able to present a credible narrative to support the evolution of the numbers and demonstrate “best in class” KPIs, operational excellence and compliance to attract and retain interest. Taking time and seeking advice to understand how these will be assessed by a buyer and what can be done to address any shortcomings will be time and money well spent and minimise execution risk in a transaction.

Conclusion

Business owners should be clear that momentum and optimism in the market remains. With improving macroeconomic fundamentals, investor confidence is continuing to reset and will improve in 2023. The sector’s fundamentals remain strong, with no sign of wavering in a structurally tight labour market. However, the current environment offers a precious window of time to create, enhance and maximise shareholder value ahead of the next wave of consolidation which seems poised to break in Q3 2023. Be patient and demonstrable resilience will pay off later this year.

Simon Marsden is director at Gambit Corporate Finance

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