Private Equity recruits

On September 5, private equity player Graphite Capital bought a majority stake in recruitment company NES as part of a £86m secondary buyout deal. NES’s original management team was backed by Bridgepoint.

The deal marked Graphite Capital’s return to this sector. Senior partner David Williams says: “Graphite has already successfully backed several companies, including Huntress, Aktrion and, most recently, TMP Worldwide.”

Graphite will hold a majority stake in the business, which was founded in 1978 by Geoff Lloyd and Bryan Sullivan. The new management team is led by current chief executive Neil Tregarthen.

The Manchester-based company, bought out for £32m by Lloyd and Sullivan with Bridgepoint’s backing in 1999, specialises in supplying professionals on long-term contracts to oil and gas companies and transport providers, including the Dubai Metro, among others. IT staff are also placed in the UK.

In late March, a similar business, Morson, was floated on AIM by broker Brewin Dolphin with an initial value of £73m.

Since Tregarthen joined the group two years ago, profits have risen by an average of 33% annually. Turnover is expected to rise 16% in the year to this October. Tregarthen said: “With Graphite’s support, we foresee substantial organic growth in all our key markets.”

Most of the staff placed by NES work on projects scheduled to last several years. Tregarthen believes this should insulate the business from any possible downturn after the last few years of benign economic growth.

He says: “Nearly half our contractors are already working on assignments of nine months or more and we plan to increase that percentage along with the proportion of permanent placements.”

Another experienced venture capitalist, Mark Owen, managing director of NGBI, has also returned to the sector lately.

Last year, NGBI sold its investment in general recruitment business Walker Hamill for £10m. “That represented 3.4 times our original investment in 2002. We had bought the company from the group to whom Brian Hamill and the founders had originally sold the business,” says Owen.

He has now found a fresh recruitment business in which to invest that cash, having completed the £11.2m management buyout of hotgroup’s traditional recruitment practice from newspaper publisher Trinity Mirror last month. This has been renamed Ochre House.

Like Graphite’s Williams, Owen argues that Ochre House is relatively immune to the economic cycle since its major business services the education sector.

“Education recruitment demand is affected by demographics more than anything,” Owen says. “The company has a mix of sectors and a suite of good brand names. I feel fairly comfortable that the mix of business will provide a good deal of stability in the event of a downturn.”

Owen, who has invested in recruitment companies for more than 10 years, says that across the sector there has been a marked increase in activity in recent months.

He says: “That’s a symptom of where we are at in the cycle. Recruitment is tied to what’s happening across the economy generally. When we are in the depths of a recession, recruitment companies are not hiring many people. Now we are in a better position.

“However, some recruitment businesses are less reliant on general economic health. For instance, public sector recruiters depend on government spending,” Owen says.

“Our view is that there is still a good way to run in the cycle. There is no downturn at the moment but we are looking at businesses that should remain robust. We are also backing the management team in our particular investments.”

Owen is less confident about more generalist investment opportunities beyond the niches Graphite and NGBI have identified. “The valuation of publicly traded recruitment groups has risen significantly over the past four years,” he says.

Sector heavyweight Hays, which until recently was in the FTSE 100, last week said it was still on the lookout for suitable acquisitions after delivering a 14% rise in net fees to £538m over the year to last June.

Finance director Paul Venables said: “Geographic infill or the acquisition of specialist market sector knowledge remains a part of our development strategy.”

Over the past year, eight of the company’s 37 new offices arose from acquisitions, following the purchase of healthcare specialist Recruitment Solutions Group for £20.6m from Barclays Private Equity, and Chinese business St George’s Harvey Nash for £7.8m.

However, NGBI’s Owen says: “Hays specialises in the market for lower paid staff. It’s difficult for them not to be affected by the economy overall.”

Elsewhere, another quoted company, head-hunter Whitehead Mann, is being pursued by hedge fund Och-Ziff about a £26m possible management buy-in. The team is led by Piers Marmion, former head of fellow head-hunter Heidrick & Struggles.

With City firms expecting bonuses to be 50% higher than last year, financial head-hunters are expecting a heyday after these bonanzas are paid, with many dealers expected to move on. Consequently, fees are expected to surge at financial head-hunters next year.

This month, Alexander Mann Financial Markets has already been bought by AIM-listed Hat Pin for £7m. This is the latter company’s third acquisition over the past year. Alexander Mann, which has offices in London and Hong Kong, will be rebranded Akamai Financial Markets.

The acquired business made fees of £6.3m in the 10 months to July 31, more than the £5.7m it made in the full year to last September.