Monday, November 22, 2010

Industry Thoughts | The Power of Business Services (especially in the current market)

"Industry Thoughts," which will be posted every now and then, will be my 2 cents on sectors, companies, and deals within the private equity industry. They also may be about specific private equity firms. Comments are always welcome!

This morning, one of my contacts in the private equity world (a VP at a strong lower middle-market PE firm in Pennsylvania) posted this article about Human Resources being a core competency. I definitely agree, as I've seen a few private businesses try to outsource the service to 3rd party providers and, as Seth Levine put it, "forget about it". As I thought about it this morning, I started looking at the bigger picture, at Business Services in general.

The Business Services sector has done well in recent times, both regarding companies under the category and as a generally popular target for private equity (focusing on the USA right now). Margins are significantly better as operating expenses are obviously lower versus manufacturing-focused firms, but what makes it a better play now is that the supply of qualified men and women as assets for these service firms (from maintenance work to HR and staffing companies) is much more abundant. The only real necessary requirement for them is that if your firm has a good amount of free cash flow as backup in case if that supply starts to dwindle (which is actually good for the rest of us as that would mean the economy is turning around for the better).

Will this trend of private equity firms acquiring and restructuring Business Services firms last? With a 10% unemployment rate and millions of men and women who have given up searching, I'd say at least for 3-5 years.

No comments: