UK business services sector provides investment opportunity: Q&A with Suzy Smith - Real Deals mid market report 2023
BREAKING POINT
RPL's Director, Suzy Smith, has been recently featured in Real Deal's mid market report 2023. During her Q&A Suzy explains why the UK business services sector is thriving and how to diligence firms in this sector
What is your assessment of the current state of the business services sector?
"Business services is a very broad sector and crosses over with a lot of others, from automotive to software, environment or the public sector. Whatever the industry, there are companies providing B2B services.
It has been a strong-performing sector for a decade or more. In the past few years, there has been a major trend towards outsourcing, which has driven growth within the business services sector. More recently, this shift has been coupled with a desire on the part of investors to avoid the risks associated with consumer-facing businesses. It is one of RPL’s biggest sectors.
Of the 300-plus transactions we have worked on, a third have involved business services. Recent examples include deals in fire safety, accountancy, employee surveys and medical transport."
How has the pandemic changed the sector?
"Our private equity clients are seeing companies with very impressive growth numbers because they have benefited from the pandemic. It is our job to assess which of these companies had temporary boosts and which are going to continue on an upward trajectory.
I have mentioned the trend towards outsourcing already, but I would add that Covid accelerated the need for remote working options, process efficiency, improving margins and digital transformation, all of which the business services sector can help with.
It is also worth mentioning that consumer behaviour and expectations have changed since the pandemic. This can affect how a target operates and performs, so analysis of these shifts has become a regular feature of our work."
Which areas within the sector offer good investment opportunities for private equity at the moment?
"Anything providing an essential product or service, because businesses are becoming more cost conscious. For example, spending money on repair and maintenance rather than capital expenditure. All B2B companies have to provide an excellent return on customer investment to do well.
Also, companies providing services or products driven by regulation. This means it is business critical – for example, machinery maintenance because of regulations requiring certain types of machinery to be inspected every few years.
Finally, many investors are excited about AI and companies that claim to be using or otherwise benefiting from it. We assess the extent to which a target is actually utilising AI and adding value, to ensure clients are not overpaying for hype. We are also always on the lookout for where AI is a potential threat – for example, in marketing or graphic design. It is not necessarily a deal breaker but we make sure management is knowledgeable about AI and keeping up with the game."
What should potential investors (or vendors) in this sector do or consider when conducting DD beyond actions or considerations common to all sectors?
"It is easy to be formulaic with due diligence but we make sure we approach each project individually. Regulation is a key driver for the business services sector, so it is important to see if there are any new regulations coming up that could present an opportunity or a threat.
With business services more than other sectors, we focus on the procurement process and the relationships between the target, its customers and perhaps the end-consumer too. The way this area works varies so much and the procurement cycle can be a lot more complicated and rigid than in consumer-facing businesses, with contracts, tenders or frameworks involved.
We ask various questions such as: How often does the provision of goods or services occur? What is the lifecycle of these relationships? Who holds the relationship? Who are the key decision makers? What is the level of customer concentration? When are the relationships up for renewal? These things are really key to providing an accurate forecast."
Would you recommend a generalist or specialist DD provider, and why?
"We are a generalist due diligence provider because our clients are often generalists themselves. Specialists definitely have their place but they usually come with a price tag beyond our lower midmarket clients' budgets, and they can overload firms with too much detail. We give our clients the key messages in a way that is easy to digest.
In addition, using us means consistency of service. A client can come to us with any project, so over time we can build a strong relationship. And given that we have worked on more than 300 transactions across many sectors, we have experience in almost every industry and can get up to speed on the current state of any market very quickly.
Our broad experience also means we always have many different perspectives on a business. We can bring new ideas about adjacent markets or alternative ways of doing things, drawing on knowledge from other sectors. Because it is such a broad and varied sector, business services is the perfect example of where a generalist approach really shines."
