The Human Resources (HR) & Staffing Services sector has exceled since the resumption of hiring after the height of the pandemic. Due to the tight labor market, job seekers have gained substantial leverage in employment opportunities, driving demand for recruitment and onboarding services. This has been supported by a continued decline in the U.S. unemployment rate from its pandemic peak of 14.7% in April 2020 to 3.5% in September 2022, representing a return to pre-pandemic levels (3.5% in January 2020), according to the U.S. Bureau of Labor Statistics.1 Despite economic headwinds, the increased emphasis businesses have placed on effective HR and staffing services has fueled sector optimism—a sentiment that Capstone recently heard echoed while attending Staffing Industry Analysts’ (SIA) September Collaboration in the Gig Economy conference in Dallas. The resilience of the sector to the current downturn, significant private equity interest, and high-growth end markets are among the key drivers of continued revenue growth and merger and acquisition (M&A) appetite in the space.
In the investment community, today’s tight labor market puts a spotlight on those firms that can deliver talent that is so hard to find. The current candidate-driven market is propelling human capital businesses to be more resourceful and market-driven than ever before. Those that effectively utilize the latest technology to maximize efficiency are seeing the benefit in their bottom lines and market valuations.
HR & Staffing Services M&A Exhibits Stability, Add-On Deals Rise Year-Over-Year
M&A volume in the HR & Staffing Services sector has remained on pace with 2021 levels, with 129 transactions announced or completed year-to-date (YTD). Buyer appetite for higher-margin businesses has continued in 2022 to-date, especially in areas of Contingent Staffing such as Light Industrial and Healthcare. While strategic buyers accounted for the majority of transactions YTD (56.6%), private equity add-on deals comprised the greatest year-over-year (YOY) increase in 2022, rising 10.3% to reach 36.4% of total YTD sector transactions. HR and staffing services providers with a history of financial stability, growth prospects, and experienced management teams continue to be categorized as high-quality assets, commanding buyers’ attention and receiving favorable valuations.
HR & Staffing Services sector M&A valuations have averaged a robust 10.1x EV/EBITDA from 2018 through YTD 2022, outpacing the broader Business Services industry average of 8.3x EV/EBITDA during the same period. While the Contingent Staffing segment has accounted for significant M&A volume, the Permanent Staffing segment has attracted higher purchase multiples due to its elevated margins and lack of cyclicality. In a recent example, The Pritzker Organization, a middle market private equity firm, entered into a definitive agreement to acquire Epic Staffing Group from Webster Equity Partners for an enterprise value of $675 million, equivalent to 11.3x EV/EBITDA (April 2022). Epic Staffing Group offers permanent placement services to clients in the Life Sciences and Healthcare markets, which represents one of the fastest-growing segments in the HR & Staffing Services sector. "Epic is exactly the type of company that we look to partner with–a sustainable, growing business with an outstanding management team that is committed to further growth. Mark and his team have done a great job building the Epic platform, and we are very optimistic about the ability of Epic to continue to expand its business through providing high quality service to its existing customers and growing its customer base organically and through further acquisitions," said Larry Tarschis, Managing Director of The Pritzker Organization, in a press release.2
Ten Key Takeaways from Our Time at SIA's Collaboration in the Gig Economy Conference
Through conversations with staffing firms, keynote speakers, and panel discussions led by C-Suite executives at SIA's Collaboration in the Gig Economy conference, we have identified several factors that are expected to shape the sector through year end and into 2023.
1. HR & Staffing Services M&A to Withstand Economic Downturn
Despite economic uncertainty, the HR & Staffing Services M&A market has exhibited substantial resilience through YTD. As noted by private equity panelists, the current recessionary period has had significantly less impact on unemployment rates and hiring trends compared to previous downturns. On the contrary, organizations are looking to bolster workforces and upskill current employees to defend against diminishing retention rates. This has resulted in steady sector growth and acquisition opportunities for participants looking to capitalize on robust strategic and private equity buyer interest.
"Since 2010, there have been 217 private equity firms that have invested in the Staffing space and there are currently over 150 in 2022, so there is clearly a lot of interest. With unemployment being as low as it is at 3.5%, and even if there is a recession or slowdown and unemployment goes up to 5%, I don't think the Staffing space will be hit as hard as past cycles or slowdowns," said Dan Campbell, Partner at MSouth Equity Partners, during a panel.
"Organizations are going to continue to use staffing services as a tool in how they manage their labor force. This is a really attractive tool in an environment with general inflation and wage inflation going up. We think that these services will continue to be relied on. There is also an education component. We've seen how this sector performs during different cycles and it is not as volatile. Every time businesses are performing it creates new buyers and more educated investors. Bringing in more institutional investment is good, it leads to more investments, growth, and positive attention," added Jarryd Levine, Managing Director at Stone Point Capital.
2. Sponsors Showcase Preference Towards Specialized, High-Margin Targets
Armed with $1.2 trillion of dry powder (PitchBook3), sponsors have increasingly targeted specialized sector participants. The deployment of capital towards middle market businesses in niche segments can mitigate sponsors' risk profile while providing significant returns. Margin strength has continued to be a key investment criterion for private equity firms targeting HR & Staffing Services sector players to deliver healthy earnings growth to fund investors. Jonathon Bunt, Director at FFL Partners, commented on FFL's investment thesis for HR & Staffing Services targets during a panel discussion. "I think there is a lot of interest, and growing interest, in Staffing. There are an increasing number of private equity firms that realize how powerful solving talent needs are. Also, the amount of dry powder out there is a really important factor in that private equity has raised a lot of money and there is a finite number of deals to chase. There will continue to be an appetite for great companies with a defined market and are growing at an attractive rate. Our thesis is very much around specialization. The more specialized you can be with higher bill rates and less MSP [Managed Service Provider] or VMS [Vendor Management Systems] exposure are positive things in our view. The higher your growth rate and the more specialized you can be, the more attractive you will be to the average buyer," said Jonathon Bunt.
Sponsors have also demonstrated a willingness to complete add-on transactions during periods of economic volatility. The spike in add-on deals YOY has showcased the effectiveness of buy-and-build strategies as private equity firms look to scale portfolio businesses inorganically. Stone Point Capital has exemplified this with $4.3 billion in capital deployed to HR & Staffing Services platform and add-on transactions over the last eight years, according to the firm's website.4 Managing Director at Stone Point Capital, Jarryd Levine, spoke to the advantages of add-on deals as it relates to the firm's staffing portfolios.
"Tuck-ins have been a private equity play for a number of years and it is one we have run successfully. We think the model of strategic and thoughtful tuck-in acquisitions where you can take a platform business that can acquire smaller players to leverage the economies of scale and investments in Technology, Cybersecurity, and Centralized Marketing and realize true operational synergies is a huge value lever that can be played on both sides. Frankly, it's a win-win on both sides because you get a lot of businesses that get to a certain size and have to make that decision of whether they want to invest and go at it alone or partner up with a platform that might provide a lot of those centralized services and benefits. It's a really strong lever in and around the Staffing space for both services and software providers. The ability to be a centralized platform and then add more value, products, and services through your relationships is a win-win for the sellers, buyers, and clients. That model is here to stay as it creates a lot of opportunities," said Jarryd Levine.
3. High-Growth Markets Drive Staffing Demand
The U.S. Staffing market experienced a record revenue growth rate in 2021, rising 32% YOY, according to SIA President Barry Asin. Demand for HR and staffing services has continued into 2022, with a projected YOY revenue growth rate of 14% supported by heightened bill rates and enhanced operational efficiencies. The Healthcare, Information Technology (IT), and Industrial Staffing segments have comprised the largest market share in 2022, accounting for nearly 75% of the U.S. Staffing market. Driven primarily by ongoing nursing shortages and pandemic-induced demand, the Healthcare Staffing segment is forecasted to generate $55.1 billion in revenue in 2022, an increase of 18% compared to 2021. The IT Staffing segment is projected to capture $41.7 billion in 2022 revenues, followed by the Industrial Staffing segment ($40.2 billion).
4. The Platformization of Everything
Digital transformations in the gig economy have led to the rampant adoption of software platforms in the HR & Staffing Services sector. Notably, 39% of staffing firms expect software platforms to fully replace repetitive tasks by 2023, according to Brian Wallins, Research Director at SIA. In addition, staffing providers utilizing direct sourcing platforms are eight times more likely to achieve a favorable return on investment (ROI) compared to participants which solely rely on traditional service models. Among the keynote speakers and panelists, there was a consensus that process automation tools will not take the place of recruiters, rather enable them to prioritize candidates' experiences. The benefits of which are two-pronged: bolstering internal productivity and successful job placements.
5. New Roles Emerge for Recruiters
The primary responsibilities of recruiters are slated to change as staffing firms adopt software tools to automate internal processes. With the added automation of repetitive tasks, staffing providers are expected to capture more revenue per recruiter, as recruiters' focus turns to business development and sales—connecting job seekers with employers and managing clients' expectations on job fulfillment. One prominent, contributing factor is the utilization of blockchain credentialing technology by recruiters, which ensures resume accuracy when filling a requisition. The heightened adoption of blockchain credentialing technology has spurred record levels of funding in the sub-segment, amounting to $54.6 billion in 2022, an increase of 189% YOY, according to Brian Wallins, Research Director at SIA.
6. Upskilling to be the Foundation for Next-Generation Staffing Firms
Upskilling capabilities have become a strong value-added offering for participants in the HR & Staffing Services sector as a method to bridge the talent gap. The skill gap among temporary workers has been exacerbated in recent years by a shortening half-life of skills, rampant adoption of software tools, and heightened screening criteria by employers. In 2022, nearly 90% of temporary workers identified an interest in advancing their careers through upskilling, according to SIA President Barry Asin. This has resulted in many staffing firms incorporating a Recruit-Train-Deploy (RTD) model, in which the staffing firm recruits a candidate and provides relevant coursework and invaluable hands-on experience prior to the job placement process. In addition to bridging the talent gap, RTD models can also bolster customer retention for staffing firms as the expanded offerings serve the candidate throughout their career advancement.
7. Remote Work is Here to Stay
While temporary workers were forced to adopt work-from-home practices at the onset of the pandemic, the remote work model has continued to prove effective in 2022. Of note, 61% of temporary workers rated remote work as highly valuable in 2022. In addition, 38% of professional employees and 50% of IT jobholders have continued to work on a remote basis in 2022, according to Brian Wallins, Research Director at SIA. The current talent shortage has afforded significant leverage to employees, many of whom prefer flexibility in work times, location, and project assignments. As a result, remote work models are projected to be utilized by 35% of professional employees and 50% of IT workers by 2026, demonstrating the longevity of this employment model. The shifting labor force has made it critical for staffing firms to adapt to the new environment in terms of talent sourcing and engagement, namely through digital channels.
8. Generational Shifts Prompt Tailored Staffing Solutions
Generation Z (Gen Z), defined as those born between 1997 and 2012, is the first digitally native generation to enter the workforce and bring a different career outlook compared to previous generations. Sector participants offering temporary staffing solutions tailored to the behavioral changes exhibited by Gen Z will be well-positioned to capture heightened demand long-term, as this generation is expected to comprise more than 30% of the labor force by 2030, according to SIA panelist Heather McGowan, Future of Work Strategist. Gen Z has demonstrated a preference towards job flexibility, often choosing roles that fit their lifestyle, rather than defining a way of life by their career. At the core of Gen Z's decision-making process is a sense of belonging, followed by community, location, and then a career. In addition, Gen Z tends to consider peers as collaborators as opposed to competition and often look to leadership as a source of intrinsic inspiration. These behavioral factors have driven a large portion of Gen Z workers to the gig economy in pursuit of a multi-industry career, in which they can fulfill repeatable, short-term roles.
9. Converging Technology and Services Models Present New Business Lines
Large, public staffing firms have increasingly adopted software platforms, offering self-serving options to enhance sourcing capabilities and become the Employer of Record (EOR). As temporary staffing platforms are typically agnostic to EOR models, the convergence of software and services has provided new opportunities for public players in the gig economy. Of note, Randstad (ENXTAM:RAND), Adecco Group (SWX:ADEN), Persol (TSE:2181), and Kelly Services (Nasdaq:KELY A) have all incorporated a talent platform or temporary staffing platform into their traditional staffing business models. Randstad has led the sector through its two operating companies, Randstad General Staffing and Randstad Technologies Group, bringing together the human touch element of professional staffing and technology-driven workforce development to gain a global footprint.
10. The Path to Unicorn Status: Building Effective Management and Investor Teams
As of September 2022, there have been a record 72 workforce solutions unicorns, with respective valuations exceeding $1 billion, according to Brian Wallins, Research Director at SIA. Driven by heightened venture capital investments, sector startups have greater accessibility to funding and management support in 2022 compared to prior years. As described by panelists from Check, Globalization Partners, Sense Talent Labs, and Checkr, the foundation for a successful workforce solutions business typically starts with identifying a pain point in segments with historically low net promotor scores (NPS) and tailoring the offering to eradicate the pain point. Bringing on a management team early in the business' lifecycle can provide additional support with diverse perspectives. Determining an appropriate investor is often dependent on the business stage. Early-stage investors typically focus on the product or service offering and late-stage investors often align investment criteria with the performance of the offering. Regardless of the financing round, the panelists agreed that funding should be secured well in advance of its utilization to maximize operational efficiency and ensure longevity for the business.
To discuss our experience at SIA's Collaboration in the Gig Economy conference, provide an update on your business, or learn about Capstone's wide range of advisory services and HR & Staffing Services sector knowledge, please please contact us.
U.S. Bureau of Labor Statistics, “The Employment Situation—September 2022,” https://www.bls.gov/news.release/pdf/empsit.pdf, accessed October 3, 2022.
CISION, “Epic Staffing Group to be Acquired by The Pritzker Organization,” https://www.prnewswire.com/news-releases/epic-staffing-group-to-be-acquired-by-the-pritzker-organization-301527387.html, accessed October 3, 2022.
PitchBook, “Q2 2022 US PE Middle Market Report,” https://files.pitchbook.com/website/files/pdf/Q2_2022_US_PE_Middle_Market_Report.pdf#page=1, accessed October 4, 2022.
Stone Point Capital, “Human Capital Management Portfolios,” https://www.stonepoint.com/companies/sectors/human-capital-management/, accessed October 4, 2022.
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