By highlighting capacity constraints, supply chain challenges and labor tightness over the past year have only reinforced the value of outsourced professional, IT, and industrial and commercial services, as well as specialty distributors. We’re confident investor demand for high-quality companies will remain very strong, and that private equity groups will continue to expand into subsectors that may previously have been under their radar.
Outlook 2023
The business services landscape is fast-moving, dynamic, and diverse, and serves a rich variety of end markets. Here, senior bankers from the Harris Williams Business Services Group discuss industry trends creating M&A opportunities, which subsectors they expect to be most active this year, and how buyer dynamics are shifting.
Which major trends are creating M&A opportunities in business services?
The overall value proposition for outsourcing non-core business activities continues to gain momentum, driving growth and M&A opportunities across a wide range of professional, IT, and commercial and industrial services, as well as in specialty distribution. Businesses of all types have become increasingly aware of the advantages of focusing on their core expertise and relying on third-party specialists for everything else. Beyond capacity, businesses that outsource non-core activities gain access to deeper and more current knowledge in those areas than they typically possess themselves.
Supply chain challenges and labor tightness have reinforced the value of outsourcing.
Which subsectors do you think will be most active in your industry?
As noted above, there are many areas within business, commercial, and industrial services that we think will attract investor attention over the next year.
Specialty Distribution
The supply chain challenges of the past few years have helped foster continuing investor interest in specialty distribution. Serving a wide range of industry sectors, leading specialty distributors have gained share by working closely with suppliers and customers to maintain the flow of goods and materials and keep customers in business. Superior scale and sophistication play a key role in this industry and provide concrete opportunities for investors to create value.
Professional & Tech-Enabled Services
Accounting, consulting, and legal services are appealing to investors seeking recession-resilient businesses, since the core activities they support tend to remain steady regardless of economic conditions. Further, technician-driven businesses continue to draw investor attention, as companies that excel at hiring, training, and retaining highly skilled or technical labor can differentiate from competitors and drive strong economic returns on the scarcity of that labor pool.
IT Services
Given the ongoing need to modernize IT infrastructure, the sustained lack of experienced technology talent, and the complexity created by remote work environments, the IT services sector will continue to attract attention, especially in managed security, cloud services, digital transformation, and data analytics.
Commercial & Industrial Services
Areas with a link to ESG initiatives will be in the spotlight: Once again, compliance will see interest, since it helps companies meet critical environmental and labor standards, as will testing, inspection, certification, and compliance (TICC). Facility services businesses such as HVAC, building automation, and energy management specialists are also seeing interest from ESG-focused investors given the potential to help customers reduce carbon footprints and meet health and safety requirements, as well as their recurring business models.
Specialty Distribution
The supply chain challenges of the past few years have helped foster continuing investor interest in specialty distribution. Serving a wide range of industry sectors, leading specialty distributors have gained share by working closely with suppliers and customers to maintain the flow of goods and materials and keep customers in business. Superior scale and sophistication play a key role in this industry and provide concrete opportunities for investors to create value.
Professional & Tech-Enabled Services
Accounting, consulting, and legal services are appealing to investors seeking recession-resilient businesses, since the core activities they support tend to remain steady regardless of economic conditions. Further, technician-driven businesses continue to draw investor attention, as companies that excel at hiring, training, and retaining highly skilled or technical labor can differentiate from competitors and drive strong economic returns on the scarcity of that labor pool.
How are M&A investor dynamics shifting in your industry?
As we often see during periods of economic uncertainty, there’s a more pronounced focus on quality, particularly regarding platforms built via M&A. Buyers are paying close attention to the degree of operational and managerial integration between acquisitions, trying to avoid businesses that seem cobbled together. This has always been the case but has been a more intense area of focus in recent months, and we expect it to continue.
We're also seeing more infrastructure investor interest in businesses that have "infrastructure-like" qualities. This is a trend across Harris Williams as infrastructure-focused investors look to expand their universe of steady-growth businesses beyond traditional areas like roads, bridges, and utilities. In business services, those investors are attracted to companies with recurring, contractual services that cannot be deferred. There are many businesses in our industry that fit that description.