Key takeaways from Venero's 2019 HR Tech M&A and investment report

We are delighted to present our 2019 analysis of M&A and investment trends in the HR Tech sector. This is the second year in a row we release such a report, after the overwhelmingly positive reception of the inaugural publication. 

Similar to last year, in this report we share some of the insights and observations we have gathered from working with companies and investors in the Human Capital Management space over the last 12 months. We review the most prevalent M&A and investment themes, analyse notable transactions and highlight the factors that are likely to drive corporate finance activity for HR Tech businesses going forward.

Below are the key takeaways. You can request the full report here.

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M&A Activity Highlights

• The HCM space continues to consolidate, with acquisition interest from corporate and, increasingly, private equity acquirers and their portfolio companies
• Business Intelligence and Analytics saw several blockbuster deals, and acquisition interest remains for quality targets irrespective of size and, to some extent, profitability
• Most transactions involve strategic buyers with limited track record of M&A
  
• This can make it hard to identify acquirers without a broad understanding of the sector
  
• In recent years private equity has been involved approximately 10% of the time, with a propensity towards $100M+ transactions
  

Investment Activity Highlights

• $4.4 billion invested in HR Tech companies during the last 12 months (+26% YoY)
• Average investment size grew as venture and growth equity investors gravitated towards later-stage deals
• Several $100M+ funding rounds announced, particularly in 1Q and 2Q 2019
• As employers continue to automate HR processes, a growing number of HR Tech companies reach scale-up status and attract increasingly large amounts of funding. This was evident across sub-segments, but was most prevalent in Admin HR (benefits & payroll administration).
  

Public Trading Multiples

• Recovery for HR Tech stocks in the last 6 months, closing up 19% YoY
• Median trading valuation of 5.0x EV/Forward Revenue
• Paycom and Workday continue to be valued at a premium to HR Tech peers
• Top-line growth is the main valuation driver, with recurring revenue commanding higher valuation multiples vs. one-off sales

M&A Transaction Multiples

• Acquisition multiples for prized assets in certain segments continue to edge higher: the median acquisition multiple for 2019 YTD is almost 11x LTM Revenue
• This reflects the outsized potential particularly of cloud-based HR Tech companies
• Nonetheless, competitive differentiation, defensibility, growth prospects and synergy potential are key factors in determining valuation

Sector Trends

• Despite the dominant presence of single-vendor HCM suites, employers often require point solutions that are complementary or best-in-class. This has been a fundamental driver of M&A in the HR Tech space and is likely to remain so for the foreseeable future.
• Recruitment Marketplaces are targeting a large but fragmented sector, unrelentingly competitive, where incumbents still dominate. Venture funding is available for top performers, but becoming increasingly selective. M&A consolidation is ongoing and expected to continue.
  
• AI is widely expected to transform employers’ ability to make better HCM decisions. Use cases exist across the entire HCM lifecycle and include recommendations on recruiting, assessing, training, team building, planning and augmented analytics.
  

Click here to request a full copy of Venero's 2019 HR Technology Perspectives, M&A and Investment Report.