Technology vs Services – Investment trends in the Human Capital Services Sector
Is Technology finally coming together with Services to make the Human Capital Management sector a really exciting investment proposition for the private investor?
Back in 1999, I was working on the first round of Private Equity investment for Alexander Mann from the Boston based PE House Advent International. During the due diligence process, a very smart investment director from Advent asked the Managing Director of one of our search businesses what his internet strategy was, “I don’t have one” our MD replied. The investment director immediately responded with “then your business will be dead in 3 years”
Since then, that search business has been sold twice creating a very comfortable life for the MD. Now don’t misunderstand me I am not saying that business models have not needed to change in the past 20 years, quite the opposite, my point is that as with so many technology-driven change agenda’s the bright forward-looking people commenting on these changes get the direction of travel right, what they got wrong is the timing. At the turn of the millennium, we were all concerned that the internet was going to wipe out all of the traditional services businesses. In truth, good services businesses have survived very well since then but they have changed and learnt how to embrace technology.
We are in the Human Capital market and the clue to the services aspect of the sector is in the heading…Human. Although it has taken some time in getting there, I feel that we are now seeing a symbiotic relationship between technology and services delivering genuine value for customers and creating measurable productivity and quality returns
In their review of M&A activity in the second half of 2018 in the Human Capital Management market, the UK based specialist corporate finance house Boxington recorded 285 investment deals including acquisitions and Private Equity investments. Interestingly 125 of these were technology deals and 160 were services deals. Even more interesting for the sophisticated but private investor 60% of the technology deals in the first half of 2018 and 45% in the second half were for deals in the sub $10m category. This is significant because despite the presence of some industry giants like SAP, Oracle and Workday it shows that entrepreneurial early stage businesses are producing some really innovative work with great investment potential.
It is true that the majority of this investment action was in the US, 65% of the transactions, but Boxington goes on to comment that; "We see the increased Private Equity interest as the emergence of a long-term trend of their investment appetite towards technology and technology-enablement".
This heightened activity and sector interest really shouldn’t come as a surprise. It has been clear for some time now that we are in a talent-driven economy with global skill shortages across many sectors putting the “talent management” agenda right at the top of board priorities. The need for improved Human Capital Services is obvious and it, therefore, follows that innovative businesses pushing that agenda forward will receive great interest from investors.
Transparency Market Research (TMR) in the US sees the industry growing from $21bn in 2016 to $48bn by 2016 a CAGR of 9%. It sees the development of cloud-based software as a key driver but interestingly projects that the fastest growing element of the market will be software and services for talent attraction and the retention of human assets.
TMR goes on to explain that it sees the drivers of this growth being, amongst other things, the desire by employers to integrate their Human Capital Management suite of services and technology. It believes opportunities lie in the need for better workforce analytics and moving HR to a digital platform.
Equally important is their analysis of the restraints that the market may encounter; essentially data security and regulatory compliance; more political issues rather than Commercial ones.
This trend is why I am so excited about the investment opportunities in the sector and I think that for the knowledgeable management teams and investors who have the insight to get the Tech/Services mix right there are really good returns to be had.
If what you have read here is of interest, then there is an event on the 30th April that I would like to draw your attention to. Myself and a small but highly experienced investment management team from the Human Capital sector, in partnership with the FCA regulated investment platform Envestors, are launching a specialist Human Capital Management investment service for private sophisticated investors.
The event is set up to explain to investors how the platform works and how we will be working with businesses pre and post investment to maximise returns for all stakeholders. At the event, we will be introducing a small number of exciting companies to a panel of investors.
The event is organised by The Recruitment Network and is by invitation only.
To reserve your place, use the link below: