HCM market segmentation

We believe that any solution that helps corporations to find/keep key talent and/or support management in increasing internal efficiencies have a right to exist in the long term, especially in a world where talent increasingly acts as a competitive differentiator. But where to start from an investor perspective? The HCM Tech market is extremely broad (as illustrated in Figure 1), with solutions ranging from fully-fledged HCM Suites (e.g., SAP, Oracle, Workday) to very specific point solutions.

A spotlight on investment themes

Over the last few months, we have noted a couple of themes which received increased attention in the market. HCM Tech solutions that address the pain points of a remote/mobile workforce, increase retention through a seamless employee experience and address the topics that matter (e.g., equal pay/compensation, mental well-being) have received more and more interest.

At the same time, we have also noticed a shift in dynamics for “established” solutions (e.g., payroll, applicant tracking). Many corporations have recently realised that their HR processes are no longer adequate and are looking for more “modern and innovative” solutions, creating a new momentum in the market – both from a vendor and investor perspective.

The M&A market remains active despite recessionary concerns

Following the strong uptake of M&A activities in Europe in 2021/22, the number of deals has slowed down in 2023. However, deal activity in 2023 remains clearly above pre-pandemic levels. Despite recessionary concerns, investors show consistent interest in the HCM market considering its long-term market fundamentals (e.g., the relevance of talent and the potential for efficiency gains). M&A activities in Europe are happening across all HCM sub-segments, such as talent management, recruitment, workforce management and core HR.

M&A activities are driven both by financial investors as well as HCM vendors. HCM vendors are mostly active to pursue functional expansion (e.g., with the ambition of becoming a “one-stop-shop” for HCM) through acquiring new capabilities and/or expanding their (geographical) reach.

Number of M&A deals in the HCM market in Europe

In the DACH market, we have seen various interesting and noticeable deals in the last 12 months, including General Atlantic’s minority investment in ATOSS Software (workforce management), the takeover of Umantis (talent management) by Abacus or the acquisition of Softgarden (talent management) by Grupa Pracuj.

Valuations and the seller/buyer-gap

Company valuations recently adjusted across industries (including HCM), reflecting today’s volatile market environment. To understand recent developments better, we have analysed the valuation developments of 20 public HCM leaders (not including digital staffing/marketplaces and learning & development platforms, which show different dynamics).

Revenue and EBITDA multiples of public HCM vendors globally

Overall, we note the median Revenue/EBITDA-multiples have been slightly declining in 2023 with ongoing capital constraints and geopolitical challenges. As a result, we see the price expectation gap between sellers and buyers shrinking, potentially fuelling further investments.