Business Services Insights
After a strong start to the year for the business services sector, the rapid unfolding of the global Coronavirus pandemic has radically changed the rules of the game – at least for the short term. Clearwater’s Partner Marcus Archer and Director Mark Maunsell, share their views on the current prospects for the sector.
How has dealflow altered over the course of the first few months of 2020 and what are the prospects looking forward?
For Clearwater the first quarter – right through to the end of March - was a very busy period, not just for business services but across the business. In areas like education and training or recruitment and consultancy, as well as more broadly across tech-enabled services, there was a lot of activity and pricing was sustained, if not increasing. This was probably driven by more clarity surrounding the UK’s political future and Brexit timings following the general election in December.
there will be quite a lot of dealflow in the acquisitions or carve-outs of non-core corporate subsidiaries
We entered Q2 with a strong pipeline of deals that were expected to come to market, but many of those processes have been hit – even for some of the more lockdown-resilient businesses like those providing remote learning, remote training and virtual assistant type services. The sheer number of workers that have been furloughed means that many businesses are being hit by the crisis because people are simply not around to hit the button on a renewal or a subscription.
Looking ahead an area where we think there will be quite a lot of dealflow is in the acquisitions or carve-outs of non-core corporate subsidiaries. Corporates across Europe are re-calibrating their M&A strategy, and as part of that they are also thinking about how they can shore up their balance sheet and continue to trade; part of that may well be to consider non-core divestments.
Within business services where do you expect to see most interest in the short to medium term?
There will be winners and losers. Some of the sectors within business services that were busy pre-lockdown won’t be now and some that weren’t will be. In our view there are a number of very interesting areas that should see strong activity when the lockdown eases. Healthcare recruitment, for example, is an area that will be very important in the support of the NHS through this period. It might have been an unfashionable sector pre-crisis, but now there will be a number of businesses that need equity support to finance the current demand.
The legal tech and legal services subsector is another interesting area, with businesses here seeing strong revenue growth driven by in-house legal counsels around the world who are embracing technology solutions. The test inspection certification subsector and anything that is compliance- or health and safety-related – especially remote learning will likely be an attractive area. Similarly, climate control businesses, which runs into the broader renewals and sustainability area; we think is going to be a very interesting space as the world tries to look after itself a little more in the post-lockdown era.
A final point to emphasise across the European business services area is that tech-enabled companies stand out: they don’t have to be a pure-play technology proposition, but they need to be leveraging technology in some capacity, which in business services typically means the creation of some kind of operational efficiency; those businesses are often more attractive to PE because they are more scalable.
Will there be demand from, and funding available to, buyers of business services targets?
We believe the appetite and funding will be there. Compared with the aftermath of the GFC, financial sponsors are much better prepared for the current conditions, with operating partners, portfolio teams, value creation teams and digitalisation teams. As we have gone into this crisis they have reacted quickly, liaising with banks to provide liquidity and re-set covenants, as well as putting in place furlough plans. Once these GPs have worked out which of their investees will emerge well, they are likely to invest time in ramping up buy-and-build strategies, even for those that were not on that strategy before. Then you have the new funds in the market, which don’t have any portfolio distractions; they are focusing about how best to deploy capital now.
The difference between this crisis and the situation in 2008/9 is the strength of banks’ balance sheets
The current situation plays into the hands of those that have a flexible mandate and are able to participate in minority partnership investing: this is going to be a very active area in the months to come.
On the debt side, banks might be closed for new business at the moment, but they will re-open and will be keen to lend to good businesses. The difference between this crisis and the situation in 2008/9 is the strength of banks’ balance sheets. In addition, the debt funds are very much open and are sitting on a lot of undeployed capital, although the bar to access this money is set quite high.