HCM Outlook: Harbor View's Q1 2023 Report

Human Capital Management

M&A Trends & Outlook:

In the first quarter of 2023, the Human Capital Management industry witnessed a continuous reduction in M&A activity after an unprecedented year for M&A and investment in 2022 There were a total of 75 acquisitions, an 18% decrease from the 97 deals in the fourth quarter of 2022 This decline in M&A transactions can be attributed to the current economic uncertainty and market instability that continue to affect investor confidence. Despite these challenges, our outlook remains optimistic for M&A activity as strategic acquirers seek to ramp up inorganic growth strategies and acquire complimentary companies in a less frothy valuation environment.

VC

Trends & Outlook:

The number of venture capital deals increased quarter-over-quarter and the amount of funding increased significantly This increase is mainly driven by two deals that accounted for $800M in investment, both of which play in the workforce management space (See page 12). While investment has increased, the average investment in Q1 was $24M compared to $34M in 2022, returning to prepandemic levels. Investors have access to record amounts of dry powder but are exercising caution with their investments, particularly in the wake of the Silicon Valley Bank collapse Given recent market volatility and the impact of global events, investors are likely to remain cautious and focused on investing in high-quality startups with strong fundamentals and potential for long-term growth

STAFFING

The staffing sector saw a decrease in M&A activity, with a total of 30 deals compared to 35 in the previous quarter The deals that did take place were mainly focused on financial staffing and IT

• Financial Services and IT Staffing: Osceola Capital-backed staffing company Talent Group acquired technology staffing firm Queen Consulting Group Also, IT staffing firm Agency Worx was acquired by freelance staffing company WorkGenius Korn Ferry acquired SALO, a consulting and staffing firm for accounting, finance, and HCM professionals. Similarly, financial services and IT staffing firm ProTask was acquired by IT staffing firm Inspyr Solutions

CORE HR

In the Core HR sector, M&A activity was driven by acquisitions of compensation & benefits and payroll companies Consolidation has accelerated as companies look for ways to improve their overall compensation packages and retain top talent

• Compensation & Benefits: Employee benefit platform Jellyvision acquired Picwell, which offers AI-generated benefits decision support. Moreover, Mexican startups Plerk and Minu announced their merger, combining Plerk’s digital employee benefits card into Minu’s employee service platform

• Payroll: CAVU HCM has been an active acquirer in the payroll sector through two acquisitions in February The company acquired cloud-based payroll provider ABCS and payroll services provider Pay Team, expanding its reach in Atlanta and Pennsylvania

75 M&A DEALS

18% QoQ

81 VC DEALS

$1.9B VC ACTIVITY

Activity within talent management was driven by acquisitions in the learning and talent analytics segments The combined subsectors accounted for over 50% of acquisitions within talent management

• Learning: Deskless workforce training platform eduMe acquired TikTok-like learning platform Playbook to deliver immersive, standardized training to frontline workers Developer of learning and hiring platform for nurses NextStep was acquired by caregiver training platform CareAcademy.

• Talent Analytics: Humanforce, a provider of workforce management tools, announced its plans to acquire people management and analytics platform intelliHR for 8x revenue

TALENT ACQUISITION

The talent acquisition sector had the lowest M&A activity and public company performance of the HCM sectors tracked The deals recorded were mainly within background screening (See page 7) and talent sourcing, driven by continued demand for reliable and cost-effective screening and sourcing solutions

• Background Screening: Public players in the space are expanding globally. Sterling (NAS:STER) acquired two pre-employment screening providers First, Sterling acquired Latin American background screening provider Socrates and second, global provider of pre-employment screening A-Check Global

• Sourcing: Talent acquisition platform that utilizes AI and ML Talvista was acquired by interview intelligence platform Clovers. Notably, players in the space are rolling out new products that leverage AI to enhance recruiters’ search efforts, such as SeekOut’s launch of SeekOut Assist

COMPARATIVE

YoY Median Revenue Multiples

Driven by 50%+ decrease in enterprise value across 3 players (FVRR, STER, UPWK)

Source: PitchBook, Data as of March 2023

YoY Median EBITDA Multiples

Driven by 30%+ decrease in enterprise value across 3 players (COUR, XM, UDMY)

Despite facing challenging market conditions that affected the overall S&P index, the Core HR index emerged as the top-performing index, while the Talent Acquisition index underperformed during the period.

Source: Refinitiv Indices based on equal-weighted prices and excludes companies not traded prior to 3/1/2022

HCM PUBLIC TRADING STATISTICS

n/m: multiples less than 0x or greater than 50x Source: PitchBook

TALENT MANAGEMENT

TALENT ACQUISITION

STAFFING

DEAL COUNT BY SUBSECTOR

HR TECH FINANCIAL

HR TECH FINANCIAL

HCM NOTABLE TRANSACTIONS

RECENT NOTABLE ACQUISITIONS

$2.6B TO BE ACQUIRED BY

• Works Human Intelligence (WHI) operates a payroll software intended to simplify hiring and staffing work.

• The additional capital will be used to support the company’s next phase of growth and augment WHI’s enduring customer value proposition.

• Qualtrics helps organizations collect feedback and data across 4 sectors: Customers, Employees, Brand, and Product.

$12.5B

TO BE ACQUIRED BY

HR TECH FINANCIAL

HR TECH STRATEGIC

$1.5B TO BE ACQUIRED BY

$885M

FEB 2023

ACQUIRED BY

$4.6B

FEB 2023

ACQUIRED BY

STAFFING STRATEGIC

STAFFING STRATEGIC

STAFFING STRATEGIC

UNDISCLOSED

FEB 2023

ACQUIRED BY

UNDISCLOSED

FEB 2023

ACQUIRED BY

UNDISCLOSED

JAN 2023

ACQUIRED BY

Sources: PitchBook, SIA

• Momentive Global, formerly known as SurveyMonkey, is a survey software product that enables organizations to engage with customers and employees.

• This public-to-private acquisition will bolster Symphony Technology Group’s portfolio of software, analytics, and data companies.

• Redzone Production Systems is an employee management and coaching program focused on mid-tier food and beverage manufacturers.

• QAD, backed by Thoma Bravo, can now expand their supply chain software to drive rapid, tangible increases in retention and productivity on the frontline.

• SAP divested Qualtrics to Silverlake and CPP Investments, which will allow Qualtrics to partner with ERP vendors to broaden its overall market and bolster investments into new technologies, like artificial intelligence. HR TECH FINANCIAL

• KnowBe4, Inc. operates the world's largest simulated phishing platform to assess, track, and mitigate the ongoing threat of social engineering attacks.

• Vista will provide additional resources and operational expertise to enhance KnowBe4’s services and scale the business to international clients.

• Salo provides consulting, fractional, and direct-hire services for senior-level positions in finance, accounting, and human resources.

• The acquisition will broaden Korn Ferry’s organizational consulting portfolio to include interim and project-based staffing capabilities.

• Nstar Global Services assists with direct-hire and temp-to-hire, offers screening and interviewing services, and provides asset relocation services.

• Westerwood Global will benefit from Nstar Global Services’ industry expertise in semiconductor, solar, and pharmaceuticals.

• Personify Search provides talent management, recruitment process outsourcing, and employee engagement for healthcare and life sciences companies.

• The deal will complement WilsonHCG’s pioneering achievements in the RPO industry and constitutes their third HCM acquisition in the past two years.

HCM ACTIVE BUYER SUMMARY

TOP ACQUIRERS – PAST 30 MONTHS

864 acquisitions since September 30, 2020

19% of buyers made more than 1 acquisition in the last 30 months

• MRINetwork (2022): Executive search and recruitment services

8

• Northbound Executive Search (2022): Recruitment and consulting services

• Dubin Workforce Solutions (2022): Executive placement services

• LotusUSA (2022): Engineering, staffing services, and technology solutions

7

• Savantis Solutions (Staffing Operation Unit) (2022): Staffing services

• Affordable Rehab Services (2022): Therapy staffing services

• Star 1 Personnel (2022): Food & hospitality staffing

6

• Workstaffing (2022): Staffing and recruitment for employers and jobseekers

• Apprentice Personnel (2022): Temp staffing and payroll services

• Efficient Hire (2022): Employee onboarding

5

• Apriss Insights (2021): Data & analytics

• Health e(fx) (2021): Workforce management 5

• Propel International (2021): Talent assessment & development

• OPRA Psychology (2021): Psychometric testing & assessment

• Human Scope (2021): Leadership assessment & development 5

• Quorbit (2022): Workforce planning for frontline & hourly workers

• Ascentis (2022): HRIS

• Interboro Systems (2022): HR administration 5

• Skill Survey (2022): Reference-checking & skills assessment

• Candidate.ID (2022): Recruitment platform

• Altru Labs (2020): Hiring & training

• Harver (2021): Pre-employment assessment

• Checkster (2020): Pre-hire reference checks

• FurstPerson (2020): Talent assessment

• Talenting (2021): Talent management platform

• QCI Healthcare (2021): Healthcare staffing

• HireVergence (2021): IT Staffing

SPOTLIGHT: BACKGROUND SCREENING

The pressure to make efficient and effective hiring decisions in the wake of a global talent shortage and a geographically dispersed employee base has driven market interest in the need to streamline the employee screening process Background screening transactions are on track to surpass historical precedents, as 5 acquisitions have already been announced or completed in Q11 There were 9 pre-employment screening VC raises in 2022 and 1 in Q1 2023, totaling $216M The Total Addressable Market for the Background Screening industry is $13B2, and screening and verification companies serve a vital HCM role. The impact of hiring the wrong candidate is extremely detrimental - workplace misconduct cost U.S. businesses $20B in 2021 and replacing an employee can cost up to 9 months of their salary 3 .

Background Screening M&A Deals

RECENT BACKGROUND SCREENING ACQUISITIONS

Public Company Performance

Despite declining stock prices (See page 2) , new innovations and robust M&A activity have caused public background screening companies to attain record levels of revenue and EBITDA in 2022 First Advantage implemented selective price increases, increased automation, and operational efficiencies to expand their customer revenue and reduce costs. They acquired Form I-9 Compliance to add Form I-9 and E-Verify product solutions, and prioritize international expansion, new technology, and enterprise risk services as strategic M&A priorities Sterling Talent Solutions grew their client base by 9%, implemented post-hire monitoring, and expanded fingerprinting revenue by 300% through a partnership with FINRA. Their recent acquisition of A-Check Global solidifies their experience in Healthcare, Industrials, and TechMedia HireRight improved their margins by managing data costs and optimizing their mix of onshore and offshore labor All three public companies underwent IPOs in 2021, spurring increased transparency in the screening industry.

Trends and Developments

Enhanced Use of Technology: Advanced algorithms, machine learning, and artificial intelligence are being implemented to analyze vast amounts of data quickly and accurately.

Expansion of Global Screening: Employers are now extending their screening processes to cover candidates' international backgrounds as companies expand global operations Sterling acquired Socrates to expand to Latin America and HireRight will acquire Inquiro Vitae to expand to Argentina and serve the hiring needs of multinational clients.

Improved Candidate Experience: Employers want to ensure that candidates have a positive experience during the screening process, including clear communication, timely updates, and opportunities to address any discrepancies. S2Verify acquired Yale Associates to expedite customer service and add scale.

Rise of Social Media Screening: Amidst privacy concerns, employers are increasingly leveraging social media platforms to gather insights into candidates' online presence, behaviors, and reputations. Fama, backed by Silverton Partners, acquired Social Intelligence to incorporate their social media analytics and to expand their screening partners by more than 75%

1Pitchbook 2First Advantage 3Society for Human Resource Management

HR TECH M&A TRANSACTIONS

TALENT MANAGEMENT

Source: PitchBook

TALENT MANAGEMENT (CONT.)

TALENT ACQUISITION

Sources: PitchBook, SIA

STAFFING M&A TRANSACTIONS

HCM FINANCING ACTIVITY

VC activity in workforce management was driven by two large raises:

1) Rippling raised $500M to cover payroll after the Silicon Valley Bank collapse The cash will now be used to improve their platform and solutions

2) Shiftkey raised $300M to improve scheduling and payments for nurses and combat nurse staffing shortages.

HR TECH UNICORN TRACKER

2023 NEWLY MINTED UNICORNS

WORKFORCE MANAGEMENT

HR TECH UNICORNS

Source: PitchBook

Talent Management

Talent Acquisition

Core HR

EARLY-STAGE VENTURE CAPITAL

Sources: PitchBook, HRTECHFeed

LATE-STAGE VENTURE CAPITAL

PRIVATE EQUITY GROWTH / EXPANSION

The material in this report is for information purposes only and is not intended to be relied upon as financial, accounting, tax, legal or other professional advice. This report does not constitute and should not be construed as soliciting or offering any investment or other transaction, identifying securities for you to purchase or offer to purchase, or recommending the acquisition or disposition of any investment. Harbor View Advisors does not guarantee the accuracy or reliability of any data provided from third party resources. Although we endeavor to provide accurate information from third party sources, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.