Business Services companies entered 2023 facing the challenge of controlling operating costs while responding to inflation and continued pressure on labour availability.
Businesses needed to balance salary increases with productivity improvements to remain competitive and limit further price rises. Automation and rapid developments in artificial intelligence were beginning to influence how companies approached efficiency and future growth.
Polestar CF’s April 2023 Business Services Sector Spotlight examines labour and productivity trends, the growing importance of ESG to private equity, listed-company valuations and selected transactions across six Business Services subsectors.
Labour availability and rising employment costs represented significant challenges for the Business Services sector.
Executives needed to balance higher salaries with increased productivity. Without corresponding efficiency gains, rising labour costs could lead to further price increases and contribute to continued inflation.
Automation and artificial intelligence offered opportunities to improve productivity and maintain competitiveness. These technologies were expected to play an increasingly important role in how Business Services companies operated.
Private equity firms were increasingly incorporating environmental, social and governance considerations into their investment policies, operating processes and transaction decisions.
In 2022, an additional 1,069 investors committed to the United Nations Principles for Responsible Investment.
The proportion of total private-capital fundraising secured by firms incorporating ESG into their investment policies also increased to 66% in 2022, reaching a new high.
Evidence indicated a positive relationship between ESG performance and financial results.
Publicly listed ESG leaders that also outperformed their peers on margins and growth delivered 200 basis points of additional shareholder return compared with companies that outperformed only on financial measures.
Government incentives for some ESG investments were expected to strengthen this relationship further.
Limited partners were increasingly including ESG measures within their capital-allocation decisions.
Three-quarters of limited partners surveyed indicated that they would consider removing an investment manager from consideration if it could not provide an acceptable standard of ESG disclosure.
This increased the importance of ESG reporting for private equity firms and the businesses within their portfolios.
Higher energy prices and geopolitical conflict also strengthened long-term investor interest in alternative energy and greater energy independence.
Listed-company valuations provided an indication of market expectations across six Business Services subsectors:
Forward revenue expectations for Construction Services were stronger than recent trading levels.
Public and private-sector demand, infrastructure modernisation and environmental initiatives were expected to support continued revenue growth.
However, construction businesses carried significant fixed and non-labour costs. This limited their ability to improve profitability through labour-productivity initiatives alone.
Facilities Management also showed stronger forward revenue expectations.
The subsector’s lower forward revenue multiple reflected expectations of revenue growth. However, valuations remained below those achieved by some less asset-intensive Business Services subsectors.
Professional Services included consulting, legal services, recruitment and financial services.
Revenue expectations received greater scrutiny as economic pressure affected demand for external professional support. Despite weaker revenue expectations, profitability was expected to remain comparatively strong.
Marketing and Communications businesses faced pressure as companies reconsidered discretionary spending on advertising and external services.
Revenue expectations were downgraded, although overall profitability was still expected to remain resilient.
Logistics, Import and Distribution companies faced significant fixed and non-labour costs.
These costs restricted the extent to which productivity initiatives could improve profitability compared with more labour-led service businesses.
Food Services formed part of the listed Business Services comparison and continued to attract transaction activity during the period.
With inflation remaining above 10%, Business Services executives needed to balance pricing restraint with the requirement to maintain sufficient profitability to support growth.
The ability to improve efficiency without weakening service quality or customer relationships was therefore becoming increasingly important.
The Business Services sector remained active despite the uncertain economic environment.
Reported transaction activity was divided across the six subsectors as follows:
Consulting and Professional Services represented the largest area of transaction activity, followed by Construction Services.
Kingswood Holdings acquired tax, trust and investment advisory firm BFP for total consideration of £6.2 million.
The transaction represented an enterprise-value-to-revenue multiple of approximately 4.42 times.
US construction and consulting company Tetra Tech acquired RPS Group for £636 million after outbidding WSP.
RPS provided consulting and advisory services across property, energy, transport, defence, water and natural resources.
The transaction represented approximately:
Dutch logistics company DFDS acquired McBurney Transport for £138 million.
McBurney generated revenue of £99.7 million and gross profit of £15.2 million during the preceding year.
The transaction represented approximately:
Asian quick-service restaurant chain Chopstix acquired Chozen Noodle’s 27 franchised locations across Moto and Roadchef motorway service areas.
WPP was the most active acquirer within Marketing and Communications.
Its acquisitions included:
The activity demonstrated continued consolidation among marketing and communications businesses.
Construction engineering group RSK continued its acquisition programme across several Business Services areas.
Its acquisitions included:
Treefellers and Richard Irvin FM added facilities-management capabilities, BMG Research expanded RSK’s marketing services and Irish Drilling added ground-investigation expertise.
Labour costs, productivity, automation and ESG were among the principal issues affecting Business Services companies in April 2023.
Businesses needed to manage salary pressures while improving efficiency and protecting profitability. Automation and artificial intelligence offered potential productivity gains, although companies still needed to maintain service quality and competitiveness.
ESG was becoming more influential in private equity fundraising, investment decisions and portfolio management. Businesses capable of producing reliable ESG disclosures were increasingly aligned with the expectations of investors and limited partners.
Transaction activity remained concentrated in Consulting and Professional Services, while strategic buyers used acquisitions to add expertise, capabilities and market coverage.
Rising labour costs, employee availability, inflation and the need to improve productivity were among the principal challenges.
Automation and AI offered opportunities to increase productivity, control costs and help Business Services companies remain competitive.
ESG was becoming increasingly important to private equity policies, operating procedures and investment decisions. Firms incorporating ESG into their investment policies accounted for 66% of private-capital fundraising in 2022.
Three-quarters of surveyed limited partners would consider excluding an investment manager that could not provide acceptable ESG disclosures.
Consulting and Professional Services recorded 110 deals, making it the most active subsector covered.
Construction Services recorded 56 deals, the second-highest total among the six subsectors.
Economic pressure and scrutiny of discretionary spending weakened revenue expectations for external professional services and advertising. Profitability was nevertheless expected to remain relatively strong.
Businesses needed to balance salary increases with productivity growth to limit price rises, protect margins and remain competitive.
The selected transactions show buyers acquiring specialist consultancy, logistics, food-service, marketing, facilities-management and engineering capabilities.
