The investment banking industry is increasingly concentrated in the hands of a few big players but the same cannot be said for financial services recruitment. However, there are signs this could be changing.
Longbridge International, a UK AIM-listed search company focused on the banking industry, bought Sequoia Consulting, a small financial services recruitment specialist. Financial details of the deal were not disclosed.
Imprint Search and Selection, an AIM-listed multi-sector recruiter, last month bought Morgan McKinley, a back and middle-office banking recruiter, from 3i for 24m (€35m).
The financial services recruitment industry is ripe for consolidation. In 2004, investment banks, including Goldman Sachs, Morgan Stanley and JP Morgan, participated in more than 80% of global M&A activity, according to Thomson Financial, the data provider. Global data are not available for financial services recruitment, but localised figures from Executive Grapevine, a publishing company, paint a different picture: in 2004, the top 15 UK executive recruiters scraped a market share of just 55.8%.
If the financial services industry is populated with a collection of global big fish, the financial services executive search industry is home to an assortment of minnows. Whitehead Mann Group, the top ranking UK company, last year accounted for only 7.2% of net fee income. In the lower echelons of the market, the likes of Alexander Mann and the Whitney Group fought over 2.1% each.
Brian Hamill, managing director of Imprint, does not rule out further acquisitions in financial services recruitment once its latest purchase has been integrated. "We expect a lot of consolidation in the sector over the next couple of years," he said.
Recruiters said the changing nature of clients was driving consolidation: there are fewer investment banks and they are more demanding.
Jonathan Baines, a director at Whitehead Mann, said the numbers spoke for themselves. Fifteen years ago there were 40 or 50 banks struggling to define themselves in the wake of deregulation; today, he said, there were no more than eight important investment banks dominating the business. "You've got to be servicing at least one, or possibly two, of Citigroup, JP Morgan, Merrill Lynch, Goldman Sachs, Morgan Stanley, UBS, Credit Suisse First Boston, or Deutsche Bank as main clients or you will not have a sufficient flow of business," he said.
Baines said consolidation in the banking sector was encouraging large banks to reduce dramatically the number of recruiters they work with. "Banks want the benefits of their own scale and buying power. They are delivering more volume to fewer search firms, and they want to work with people who can service them internationally and across their product areas," he said.
Hamill said banks were looking for large suppliers. "Historically, the mom and pop shop could set up and make a living working with international banks. That has changed: banks now need an international platform with a strong research function to back it up."
There are also financial advantages to consolidation. Peter Webb, chief executive at Unicorn Asset Management, a fund manager with substantial holdings in most publicly quoted recruiters, said it removed duplication. "You take out the duplicated back-office support element, consolidate the sales teams and keep the top people," he said.
Hamill said the relatively few public recruitment companies traded on higher multiples than privately owned recruitment companies. Therefore private companies tended to be earnings enhancing from day one: "Our investors are mostly investment banks and asset managers themselves. They feel there is a lot of mileage in expanding quickly."
Ian Jermyn, a recruitment industry analyst at Baird, a mid-cap investment bank, said the industry had the potential to attract private equity buyers. In 1999, for example, Advent International invested 25m in the Alexander Mann Group, a diversified recruiter with financial services interests. Advent is expected to seek an exit when the market peaks.
Nevertheless, it may be another few years before consolidation begins in earnest. Webb admitted he was likely to be the catalyst for any big moves. But he said the recruitment industry was barely a year into the recovery phase of a six-year cycle.
If nuptials do take place, it will not be for the first time. Jermyn said the last spell of consolidation coincided with the peak of the investment banking cycle at the turn of the millennium. Not all were successful. In 1998 TMP Worldwide acquired The Consulting Group, a UK banking specialist, for 250,000 of its shares. Its consultants dispersed soon afterwards.
Sue Dodd, a director at Agile Intelligence, a research company studying the recruitment industry, said the sector was not always consolidation-friendly: "Recruitment brands are entirely built around people and it's difficult to value a brand that might walk away at any point. Firms in the industry are better off buying in teams," she said.
Whitehead Mann is an example of consolidation gone awry. The FTSE-listed company, which has made numerous profit warnings in the past year, went on an acquisition spree, acquiring, among others, Baines Gwinner, a financial services recruitment boutique run by Jonathan Baines in 2001 and Leonard Hull, a board-level search firm, in 2004.
Baines said it contributed to the company's present difficulties: "Whitehead Mann expanded too quickly in the late 1990s, leaving the balance sheet in a weak position with an overburden of debt."
However, after losing staff, Whitehead Mann appears to have learnt from past failings. Last month, it announced a new stock options programme to tie in top staff. With luck, the company will not be washed under when the next wave of consolidation occurs.