HR & Staffing Services Market Update – June 2024

Tight Labor Market Drives HR & Staffing Services M&A, Acquirers Shift Focus to HR Segment

The Human Resources (HR) & Staffing Services sector has undoubtedly been a bright spot in the capital markets, primarily driven by a tight U.S. labor market. U.S. unemployment levels have not exceeded 4% since January 2022 and have continued to remain favorable, standing at 3.8% as of March 2024, according to the U.S. Bureau of Labor Statistics (BLS).¹ Employers have increasingly relied on sector participants to recruit and manage personnel as competition for qualified talent has accelerated. Heightened demand for sector services has spurred elevated merger and acquisition (M&A) activity in the space through year-to-date (YTD). In addition, sector participants offering outsourced HR services have been in particularly high demand as these functions are typically less staff intensive.

A continuously tight labor market has underpinned an active M&A environment for HR and staffing businesses. While we have seen strong transaction results throughout the sector, acquirers have increasingly targeted the HR segment to capitalize on sticky customer bases and significant revenue visibility.

Bob BalabanHead of Business Services Investment Banking, Capstone Partners

Business Services Industry M&A Sets Tone for HR & Staffing Services Market

Rampant M&A activity in the broader Business Services industry has created a strong backdrop for transaction growth in the HR & Staffing Services sector. Of note, industry M&A volume reached 379 transactions in Q1 2024, marking an increase of 157.8% year-over-year (YOY). In comparison, total U.S. middle market deal volume declined 21.1% YOY in Q1 2024. Industry M&A growth can be attributed to organizations increasingly outsourcing non-core business activities to bolster capacity for primary functions and reduce overhead costs. These dynamics have created sticky customer bases for many industry participants, driving elevated M&A pricing. Over the last three years ending Q1 2024, the Business Services industry average purchase multiple amounted to 9.0x EV/EBITDA, up from 8.6x EV/EBITDA in the last three-year period ending Q4 2023. Robust deal volume and valuations have also materialized at the sector level in Q1 2024, especially in Capstone’s key Business Services verticals: Accounting Services, Business Process Outsourcing & Contact Centers, Marketing Services, Information Technology Services, and HR & Staffing Services.

HR & Staffing Services M&A Volume Spikes, Valuations Remain Healthy

The HR & Staffing Services M&A market has performed well YTD, with 54 transactions announced or completed. This represents a 17.4% rise compared to YTD 2023. Although sector deal volume growth has not reached that of the broader Business Services industry, this increase indicates a significant resurgence of inorganic growth strategies in the space. Private strategic buyers have been primarily responsible for this surge, comprising 59.3% of sector deals YTD. Nearly all (96.9%) of the private strategic acquirers that have been engaged in transactions to-date are headquartered in North America, focusing on expanding domestic geographic coverage and service offerings. Sponsor-backed acquirers have maintained their presence in the HR & Staffing Services M&A market YOY despite a diminishing outlook for interest rate cuts in 2024. Private equity add-on engagements have accounted for 29.6% of sector transactions to-date compared to 30.4% in YTD 2023. Sector participants’ ability to attract reoccurring projects and clients have piqued private equity investment in the space. In addition, private equity firms’ portfolio exit strategies have heavily favored M&A, further propelling strategic and sponsor-to-sponsor transactions. From 2021 through YTD, 97.4% of private equity exits in the sector have materialized in M&A. Initial public offerings (IPOs) have accounted for the remaining 2.6% of sponsor exits during the same period.

HR & Staffing Services sector participants have continued to garner strong M&A pricing as acquirers have increasingly submitted competitive bids for quality assets with sticky customer bases. From 2021 through YTD, the average sector M&A multiple was 8.2x EV/EBITDA. This compares to 8.0x EV/EBITDA from 2018 to 2020 and 8.2x EV/EBITDA from 2015 to 2017. The consistency of average purchase multiples speaks to the sector’s defensibility throughout economic cycles, which has been upheld by ongoing labor shortages in technical areas and an increasingly complex employee benefits environment. While large-scale transactions have headlined the sector, the middle market (less than $500 million enterprise value) has continued to yield significant levels of deal activity at healthy valuations. The middle market has comprised 90.2% of disclosed sector transactions from 2021 through YTD, garnering an average enterprise value of $67.6 million during the same period.

HR Segment Sees Heightened Demand and Acquisition Appetite

The HR segment has enjoyed heightened demand as organizations have increasingly outsourced employee benefits and healthcare administration, retirement planning, background screening, and corporate training to reduce costs and improve service quality. Notably, 60% of businesses surveyed in 2023 expect to begin or increase their reliance on HR outsourcing providers, according to Information Services Group’s (ISG) 2023 Industry Trends in HR Technology and Service Delivery report.² This marks an increase of 10% compared to 2021, according to the report. In addition, many companies have outsourced HR functions to maintain workplace safety standards, safeguard employee health, and ensure compliance with evolving labor regulations—mitigating the risk of infraction.

Sector M&A activity to-date has reflected amplified demand in the HR segment. In YTD 2024, the HR segment has accounted for the lion’s share (46.3%) of sector M&A targets, up from 37% in YTD 2023. The Staffing segment has comprised 44.4% of deal targets YTD, followed by full-service providers with both HR and staffing capabilities (9.3%). Furthermore, the HR space has experienced the greatest YOY increase (47.1%) in deal volume to-date. Strategic buyers have led HR segment M&A activity YTD, representing 56% of transactions. Private strategics have remained the dominant buyer type (48% of segment deals to-date), often rolling up middle market competitors to gain scale and market share. However, private equity add-on deals in the space have nearly doubled YOY to nine transactions YTD from five in the prior year period. Sponsors have gravitated towards the segment due to the reoccurring nature of outsourced HR projects providing significant revenue visibility.

HR Segment Garners Premium Valuations from Strategic and Financial Buyers

Acquirers in the HR & Staffing Services sector have demonstrated a willingness to acquire HR outsourcing providers at premium valuations. From 2021 through YTD, pure-play HR targets have garnered an average enterprise value of $446.0 million compared to $162.6 million for pure-play staffing targets and $118.0 million for full-service participants. Although large-scale deals have bolstered the HR segment average, middle market providers have also drawn strong M&A pricing. Several notable transactions demonstrating robust HR segment M&A valuations are outlined below.

• H.I.G. Capital to Acquire Alight’s Payroll & Professional Services Business (March 2024, $1.2 Billion) – In March 2024, global private equity firm H.I.G. Capital announced its acquisition of Alight’s (NYSE:ALIT) Payroll & Professional Services business for an enterprise value of $1.2 billion. Alight’s Payroll & Professional Services business primarily includes technology-enabled human capital management, outsourced payroll, and outsourced HR administration services. H.I.G. Capital has pursued the acquisition largely due to the business unit’s attractive revenue mix. Of note, Alight’s Payroll & Professional Services business’ recurring revenue is expected to rise to more than 90% of its total revenue mix by transaction close, according to a press release.³ The transaction demonstrates sponsors’ interest in establishing platform businesses in the space to capitalize on segment tailwinds.
• First Advantage to Acquire Sterling Check (February 2024, $2.2 Billion) – First Advantage (Nasdaq:FA) announced its acquisition of Sterling Check (Nasdaq:STER) in February 2024 for an enterprise value of $2.2 billion, equivalent to 3.0x EV/Revenue and 17.2x EV/EBITDA. Sterling Check provides background screening services for employers, candidates, and partnership organizations. The company serves a myriad of industries including Healthcare, Consumer & Retail, Industrials, Financial Services, and Transportation & Logistics. The acquisition is expected to deliver more than $50 million in run-rate synergies for the combined entity, according to a press release.⁴ In addition, the transaction is anticipated to provide greater diversification of revenue across business segments, end markets, and geographies. “We are thrilled to announce the acquisition of Sterling, demonstrating our commitment to delivering high-quality, cost-effective employment background screening and identity verification solutions that enhance value for customers by helping them hire smarter and onboard faster, while also positioning First Advantage for long-term value creation,” said Scott Staples, CEO of First Advantage, in the press release.
• Inspirit Capital to Acquire Wiley Edge (January 2024, $52.5 Million) – In January 2024, private equity firm Inspirit Capital announced its acquisition of Wiley Edge from John Wiley & Sons (NYSE:WLY) for an enterprise value of $52.5 million. Wiley Edge provides upskilling and corporate training services. The company operates in 11 countries, aiming to reduce the skills gap in high-demand areas such as Technology and Financial Services, according to a press release.⁵ Wiley Edge also offers tailored training programs to reskill clients’ existing workforces and fortify employee retention rates. The transaction illustrates middle market participants’ ability to draw favorable pricing from financial buyers. “We are delighted to be investing in Edge. The business has a unique global footprint and deep relationships with an impressive array of market-leading clients. We believe that the compelling value proposition Edge provides will continue to become increasingly important for both employers and entry-level talent,” said Will Stamp, Founding Partner at Inspirit Capital, in the press release.

To discuss the widespread impacts of HR outsourcing, provide an update on your business, or learn about Capstone's wide range of advisory services and HR & Staffing Services sector knowledge, please contact us.

Max Morrissey,  Vice President, was the lead Market Intelligence contributor to this article.

Endnotes

1. U.S. Bureau of Labor Statistics, “The Employment Situation – March 2024,” https://www.bls.gov/news.release/pdf/empsit.pdf, accessed April 22, 2024.

2. Information Services Group, “ISG Survey Finds Enterprises Struggle to Show Business Value from HR Technology,” https://ir.isg-one.com/news-market-information/press-releases/news-details/2023/ISG-Survey-Finds-Enterprises-Struggle-to-Show-Business-Value-From-HR-Technology/default.aspx, accessed April 22, 2024.

3. Alight, “Alight Announces Agreement to Sell Payroll and Professional Services Business,” https://www.alight.com/about/newsroom/alight-announces-agreement-to-sell-payroll-and-professional-services-business, accessed April 22, 2024.

4. Sterling Check, “First Advantage to Acquire Sterling Check Corp.,” https://www.sterlingcheck.com/about/news-article/first-advantage-to-acquire-sterling-check-corp-for-2-2-billion-in-cash-and-stock/, accessed April 22, 2024.

5. WebWire, “Inspirit Capital Announces Acquisition of Wiley Edge,” https://www.webwire.com/ViewPressRel.asp?aId=316344, accessed April 22, 2024.