Sector focus: Business services
From accountancy services and human capital to consulting and TICC, the business services sector encompasses an incredible range of cash-generating commercial activities. Opportunities abound and, as Clearwater International’s Rob Burden explains, competition for the most attractive assets remains hot.
The first six months of 2022 saw 84 PE buyouts in the sector, the second-highest total on record
Europe’s business services sector is booming. The first six months of 2022 saw 84 PE buyouts in the sector, the second-highest total on record. Meanwhile, aggregate deal value over the same period rocketed to €29bn. This is the highest H1 deal total for business services on record, and far ahead of the previous high of €20.3bn achieved in H1 2021. Against this background, the long-term deal multiple for business services climbed to a new high in Q2. Interestingly, the sector multiple has seen consistent quarter-on-quarter rises dating back to Q3 2019 – a run unequalled by any other sector.
The UK and Ireland was Europe’s most prolific generator of business services buyouts in Q2, amassing 15 transactions with a total value of €5.6bn. This comes following a stellar Q1, which saw the UK and Ireland deal total soar to a record-breaking €10bn. So, what’s behind the surge of interest in business services – and which assets are attracting the most attention?
Tech-enabled services and businesses linked to IT and digital technology are generating a lot of interest
“Tech-enabled services and businesses linked to IT and digital technology are generating a lot of interest” says Rob Burden, Clearwater International partner and Head of Business Services based in the UK. “Corporates are evolving at record pace and they want to work with expert third parties to upskill their workforce, attract and retain world class talent and support their digital transformation journey amongst many other things.”
Traditional professional services are also a growing area of interest for PE acquirers, Burden says. “Legal and accountancy firms are an example. These are hotspots where you have strong visibility of earnings and recurring revenues. You also have some supporting megatrends within the market. If you take the accountancy sector, there is a trend of the Big Four moving away from medium-sized company audits. That works to the benefit of mid-tier accountancy firms who are snapping up the work that the Big Four firms no longer want to do.”
One subsector that is seeing a particularly rapid rise in PE activity is TICC – testing, inspection, certification and compliance. “PE is interested in TICC for several reasons,” Burden explains. “First, it is a large, massively fragmented sector and ripe for consolidation. Second, the structural growth drivers within TICC are very strong. There tend to be compliance-led drivers to the services, whether that is fire & life safety, electrical testing or environmental and water testing. Plus, the expansion of regulation continues to generate new testing and certification requirements. All of this contributes to growth businesses with high recurring revenues.”
CTS and Phenna are good examples of platforms that are consolidating a lot of the fragmented operators out there
PE investment is playing a critical role in building-out platforms within the TICC space. There are many examples such as Palatine’s investment in Construction Testing Solutions (CTS), a buy and build platform which it supported through numerous bolt ons following initial investment in 2018 through to the sale to Oakley Capital in 2022, a deal that Clearwater advised on.
Oakley has also invested in TICC specialist Phenna Group, acquiring the business from Inflexion in Q3 22. Clearwater advised both Stroma and energy certification business Elmhurst Energy Systems on their sale to Phenna Group during 2021.
“CTS and Phenna are good examples of platforms that are consolidating a lot of the fragmented operators out there and really going at pace,” notes Burden.
Despite current economic uncertainties, the business services sector remains strong. Indeed, the pipeline is looking stronger than ever
Consolidation looks set to remain the name of the game in business services. “PE is having a ripple effect through the market from large-cap funds right the way down,” Burden says. “A buy-and-build strategy is as relevant today as it always has been, and platforms will continue to seek smaller bolt-on opportunities as a way to drive value”
Despite current economic uncertainties, the business services sector remains strong. Indeed, the pipeline is looking stronger than ever. “From a Clearwater standpoint, we are coming into H2 with a fantastic order book,” says Burden. “We have already completed 10 business services deals this year in the UK, so we have good momentum. Our clients are operating in those attractive, growing and resilient parts of the sector that should continue to be of interest to PE, so we are certainly optimistic about the year ahead.”