M & A valuation Series: Lack of Private Equity
It wasn’t that many years ago that I dismissed the benefits of Private Equity investment in the Australian recruitment industry. I considered there were other ways to raise capital and private recruitment agency shareholders “could do better” in terms of the structure and disruption of a private equity deal. My views are changed.
One of the certainties of Private Equity involvement in your business is that you know what you are going to get. The organisations are, to a large extent, beholden to the financial objectives of their fund, which is to realise a return on their investment within a defined time period.
This pure focus on a financial transaction, on a financial outcome, sometimes goes against the “business” principals HHMC espouses.
If we are advising an agency on sale options, we lean towards transactions that have strong future business objectives, not just financial objectives. This is especially important when most transactions incorporate an earn out into the structure and all parties need to hold their focus for an extended period. It is probably also recognition that we deal with a lot of lifestyle and owner dominant business owners that are emotionally attached to their business.
Scarce Corporate Companies
In the recruitment industry there is a very small percentage of companies that meet corporate business characteristics. It is time consuming and expensive to develop these characteristics.
Many agencies that display corporate characteristics, especially in the US and the UK, are those that have Private Equity investment.
It is the preparation and execution of the investment process, and the matching of ambitious entrepreneurs with focussed growth capital, that often drives these characteristics.
Companies that get a private equity company’s attention have to be good. They have to have a high quality business – size, growth, margins, profit, management team, excellent financials, and a strategy to keep the growth going. Lifestyle companies don’t fit these criteria and only the best owner dominant companies will be considered.
Having your board controlled by a Private Equity company takes the romance and personal wishes out of the boardroom. The Private Equity company are not specialists in the recruitment industry and are not spending much time internally with your organisation. But they’ll be very good at many of the activities that you have little experience in. The Board agenda will be very focussed.
Private Equity companies pay well for their investment in companies. But companies that meet their investment criteria need characteristics and desire to be part of an investment process. Few recruitment agencies will meet a Private Equity company investment “hurdles” set for the company and set for the capability of the leadership team.
In the UK and the US, the investment objectives set by the Private Equity companies creates a sense of expectation in the industry and creates a target for recruitment agency owners to aim for. These owners then invest more aggressively towards more focussed goals to ensure they are a desirable target for the Private Equity companies.
This pull factor is missing in the Australian market, and the Australian recruitment industry suffers because of it. The stock market is not the only answer and that has been repeatedly shown over the past 15 years.
How is the Australian recruitment industry viewed globally? Mature and sophisticated. Modern. Easy to do business. But slow growth. Very conservative. Lacking ambition. Few quality emerging companies.
A stronger Private Equity influence would invigorate the industry.