Gambit Corporate Finance announces the publication of its Human Capital M&A Market Review for Q2 2019.
Key Valuation Drivers for Human Capital Companies:
- The split between temporary and permanent income is important to acquirers when assessing opportunities. Lenders tend to look more favourably on businesses with a high percentage of recurring contract income which directly influences a purchaser’s cost of capital. It is common for different valuation multiples to be applied to the two income streams (typically >2x EBITDA for contract vs perm).
- Buyers are willing to pay higher multiples for niche businesses in markets with strong fundamentals. Scale, geographic coverage and a differentiated service offering are key drivers of valuation. Firms that diversify into too many markets and sectors may find that they dilute value to purchasers.
- Building strong contractual agreements with key clients mixed with a diversified customer base provides a resilient and sustainable platform for future earnings while increasing shareholder value. Talent management is particularly attractive in this regard.
- Cycicality remains a key issue for human capital companies. Whilst we expect to see the current upward trend in valuation multiples continue for the short term, correctly predicting the next peak is critical for buyers and sellers in timing of M&A activity.
Outlook for M&A Activity:
- The Gambit HC index shows that valuations for public interest companies increased by 14% in Q219, due to strong recruitment fundamentals, investor confidence in global stock markets returning and increasing deal volumes in the sector.
- Institutional shareholders are continuing to put pressure on boards to enhance market ratings further through acquisitions and at a quicker pace given the level of corporate and institutional cash available.
- Financial investors deployed significant capital in Q219, with venture capitalists investing in disruptive online businesses particularly in Europe, the Middle East and Asia. Private equity investors have remained active in the UK with a number of specialist recruiters attracting capital from both institutional and angel investors.
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