2022 in Review: Harbor View's Human Capital Management Annual Report

Human Capital Management 2022 ANNUAL

Following a pinnacle year for Human Capital Management financing and M&A in 2021, 2022 began with a strong start but decelerated amidst rising inflation, recession fears and public market declines. The number of M&A and VC deals continued to rise year over year, but uncertain investor sentiment impacted VC dollars invested. In each of Q1 and Q2, approximately $4.5B in capital flowed to targets, but by Q4, that figure shrank to $1.3B. Companies with a clear path to profitability continued to attract investor interest albeit at lower check sizes

STAFFING

M&A activity in staffing rose 25% year over year. Notably, IT staffing companies acquired specialized capabilities and strategics strengthened their interim executive placement solutions.

• Specialized IT staffing M&A: AEA Investors acquired Red Global Ltd, a Londonbased IT staffing firm for the SAP ecosystem. H.I.G. Capital-backed Oxford Global Resources acquired Workday specialist Hale International.

• Strategics added executive interim placement: Heidrick & Struggles added Germany-based Atreus to its existing contingent talent division, Business Talent Group, which it acquired in 2021. Korn Ferry acquired Infinity Consulting Solutions, a provider of senior-level interim IT professionals, to complement other recent interim executive acquisitions, Patina Solutions Group and Lucas Group.

TALENT ACQUISITION

M&A transaction volumes in talent acquisition, with more exposure to the labor market cycle, shrank by 10% in 2022. The talent shortage in Q1 and Q2 led to record levels ($1.8B) of VC investment into hiring tools but as recession fears emerged in Q3 and Q4, investments subsided. Despite a slight downtick in M&A activity from 2021, transaction activity remained healthy compared to historical standards Two themes in particular drove M&A interest HCM platforms added candidate sourcing tools and institutional-backed pre-employment screening platforms continued to add scale via acquisitions.

• Candidate sourcing solutions joined HCM suites: Silkroad, backed by HighBar Partners, acquired Entelo to add candidate search and recruitment marketing to its onboarding capabilities. Staffing software company Bullhorn acquired SourceBreaker to help recruiters automate candidate sourcing. Paycor strengthened its HCM platform by acquiring candidate sourcing tool Talenya.

• Background screening players added scale: Checkr acquired self-service background screening company Goodhire for $400M to extend its offerings to SMBs. Following its acquisition by Audax Group in September, DISA acquired both GlobalHR and Crimcheck to expand its healthcare customer base. Housatonic Partners acquired three background screening businesses within 12 months: Accusource, PeopleG2 and Proforma Screening OrangeTree, backed by Tonka Bay Equity, acquired Hire Image, Info Cubic and Vericon.

CORE HR

Deal volume in Core HR grew nearly 60% as the market recalibrated its focus on mission-critical HR operations. Payroll, compensation and benefits companies received a combined $2.1B in VC funding. Workforce management tools, including distributed workforce solutions and scheduling tools, accounted for 33% of M&A deals and received $1.6B of VC investment. Driving M&A activity, financial services firms strengthened their positions in HR & benefits, PEOs added HR technology solutions to better serve the mid market and pay equity tools gained interest due to increased emphasis on pay transparency.

• Financial services added to HR & benefits: Arthur J. Gallagher acquired Buck for $660M adding a proprietary benefits administration and employee engagement platform Alliant Insurance Services acquired FutureSense, an HR, compensation and organizational development consulting firm. Voya Financial acquired Benefitfocus, a benefits administration technology platform.

• PEOs strengthened HR tech platforms: PEO Trinet acquired HR, benefits, payroll and scheduling platform Zenefits. PEO Vensure Employer Services, backed by Stone Point Capital, merged with both PrismHR and Namely.

• A focus on pay transparency: Recently merged Payscale and Payfactors acquired Agora and CURO, adding pay communication and pay equity tools, respectively. BambooHR acquired compensation benchmarking and communication tool Welcome.

TALENT MANAGEMENT

M&A transaction volume in Talent Management grew 36% year over year and accounted for 25% of all deals in the HCM space. Within talent management, learning and development continued to receive attention as the market identified the need for continuous upskilling and development of soft skills. In addition, players are prioritizing skills mapping to promote internal mobility and fill talent gaps

• VC firms invested $600M into five leadership & learning unicorns (below) and invested an additional $800M across all other learning platforms.

• Industry leaders added talent mobility solutions: ServiceNow acquired skills mapping company Hitch Works to help companies tie employee learning and development to workforce planning. Linkedin acquired talent marketplace Paddle HR. People analytics company Visier added skills mapping engine Boostrs to its platform to help companies identify skills missing their workforce

LOOKING AHEAD TO 2023

Going forward, we expect valuations to be consistent with where they settled towards the end of 2022: normalized from unsustainable levels in 2021. VC-backed companies unable to grow into lofty 2021 valuations may offer buyout opportunities for buyers in the coming years In 2023, we expect a rebalancing of sector focus with a higher emphasis on more resilient and less cyclical areas of Human Capital Management We expect an emphasis in core HR, talent management and talent development solutions that will reflect some key emerging themes, including a focus on talent marketplaces and capabilities that facilitate skills-based hiring, data and analytics solutions that enable Pay Equity and Transparency and learning solutions that address a significant and long-term need to upskill and reskill the workforce.

Source: PitchBook, Data as of December 2022 TTM Source: Refinitiv

Driven by 4 companies’ 50%+ year-over-year enterprise value declines. Enterprise values and multiples have increased in the first two months of 2023.

SUB-SECTOR ECOSYSTEM

DEAL COUNT BY SUB-SECTOR

Source: PitchBook

TALENT MANAGEMENT (CONT.)

TALENT ACQUISITION

Source: PitchBook

Sources: PitchBook, SIA

STAFFING M&A TRANSACTIONS

Hiring Tools

Workforce Management

HRIS Payroll Learning

Wellness

Compensation and Benefits

Employee Engagement

Leadership Development

Sourcing

Performance Management

Assessments

Pre-Employment Screening

Onboarding

Healthcare Staffing

Talent Analytics

Applicant Tracking

Rewards and Recognition

Recruitment Marketing

Video Interviewing

Core HR Talent Acquisition

Talent Management

Sources: PitchBook, HRTECHFeed

EARLY-STAGE VENTURE CAPITAL

Sources: PitchBook, HRTECHFeed

LATE-STAGE VENTURE CAPITAL

PRIVATE EQUITY GROWTH / EXPANSION

Harbor View surveyed more than 50 lower middle-market private equity firms to gain insight into their expectations for 2023. Despite a tightening of credit markets and increased volatility of the macroeconomic environment, private equity buyers remain eager to invest in the right opportunities with a focus on profitability and stability While larger deals are more impacted by the credit market volatility, the appetite for lower middle market deals remains consistent as buyers still have sufficient capital to deploy.

How do you expect your strategy might change in 2023?

Dynamic market conditions have prompted investors to re-evaluate their capital deployment strategy. This includes shifting investments to more resilient industries and/or slowing down deployment altogether. We expect that the relative lower valuations and tighter credit markets will result in more add-on acquisitions to lower the average multiple across a platform.

What do you foresee being the largest challenge to closing deals in 2023?

Buyers are taking a more conservative approach to evaluating investment opportunities. While lower-middle market deal appetite remains solid, investors cited concerns of high-quality asset availability. Investors also expressed concerns that seller expectations have lagged the market correction.

How would you describe the current capital raising environment relative to recent years?

Fueled by uncertainty surrounding macroeconomic conditions, private equity firms may delay raising new funds or take longer to gain LP commitments.

In 2023, what is your expectation for valuation compared to 2022?

Unsustainable 2021 valuations have returned to more normalized levels amidst credit market tightening and macroeconomic concerns. Buyers still have ample capital to deploy, however, there is lower deal flow activity creating scarcity value for high quality deals in the current market.

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.