The UK B2B services sector offers a winning combination of revenue resilience and significant value creation opportunities, says August Equity partner Kishan Chotai.
Why is B2B services such an important sector for the UK economy?
Kishan Chotai: B2B people centric services lie at the heart of the UK economy, accounting for more than 10% of GDP and 15% of employment during the past decade. Furthermore, going back as far as the 1800s, many of the world’s best-known B2B services companies, including PwC, Slaughter & May and Intertek, originated in the UK. The UK is also often at the forefront of global regulation and other business evolutions, which means UK B2B services companies typically grow bigger and more quickly than their counterparties elsewhere.
What tailwinds is the sector currently experiencing and why is it such an attractive space for private equity at this point in time?
Chotai: When we talk about B2B services at August, we are talking about mission-critical outsourcing and compliance-led services. There has been a huge amount of regulatory change since 2008, which has increased compliance burdens on businesses, especially SMEs, and created opportunities for specialists that can help businesses navigate ever more complex rules. As a result, B2B services companies typically have stable and resilient characteristics, including high proportions of recurring revenues and high margins. And, because the UK does tend to lead the way on new services, there are also lots of opportunities to expand geographically as national regulation is adopted in other jurisdictions.
Is the sector also facing challenges?
Chotai: Like many sectors, the primary challenge that B2B services companies are facing today involves talent attraction and retention. These businesses rely on the quality of the individuals that deliver for their clients. Most of those individuals are highly skilled, with qualifications, so finding and keeping those employees is critical. A skills shortage is the most significant challenge that we see.
What role can technology play in value creation strategies in this space?
Chotai: We see technology as critical to value creation in all of the sectors we invest in. In B2B services in particular, people are the biggest asset that companies have. Anything that can be done to help automate tasks and speed up processes adds value to our businesses – routine, mundane tasks can be automated, providing greater variety and job satisfaction for those who work in these organisations. In addition, technology can be a differentiator for clients. Last year, we partially exited our ISO certification business, Amtivo. The tech platform that we invested heavily in during our investment period removed the need for Amtivo’s SME customers to use expensive third-party consultants, making the service a lot more accessible. So, we see technology as both a retention tool and something that can provide a competitive edge with clients.
Is this a sector that presents consolidation opportunities?
Chotai: Absolutely. Buy and build represents a key part of all our B2B services value creation plans. Acquisitions can create scale, expand service offerings and provide geographical expansion. However, cultural fit is essential in any M&A strategy. Without that alignment, it can be difficult to maintain the high level of client service necessary to be successful in the sector. To give you an example, we invested in the professional services firm AAB in 2021. Since then, AAB has completed eight acquisitions: three to expand geographical reach; two to provide additional expertise and resource in markets already covered; and three to add service lines not previously offered. While that might seem like a lot of M&A, we have also turned down more than 20 other opportunities because the cultural fit or the ambition of the team did not match our own. Buy and build can create a lot of value but if it isn’t done right, it can also do the reverse and erode value, as well as acting as a drain on management time.
How significant is internationalisation as a source of value creation?
Chotai: UK business advisory and compliance services have always exported well. The UK is a global hub for a number of multinational businesses, which means you can scale by offering existing clients services in new jurisdictions. ISO certification, for example, is international by definition and Amtivo expanded into more than 30 countries during our four and a half year hold. The scale of that international ambition was the primary reason that we reinvested when we exited to Charterhouse last year.
What do you think it takes to be successful as an investor in B2B services?
Chotai: We strongly believe in doing the hard yards before approaching any business. We have an in-house origination team that helps identify adjacent investment opportunities to where we have had success in the past – for example new regulations or challenges that businesses are struggling to manage internally. We then build an investment thesis on that sector by market mapping the entire landscape, speaking to experts in that market and our own network, from past and current investments, before approaching any individual companies and building a relationship with the management team. AAB is a case in point. Prior to our investment in 2021, only one or two other private equity houses had invested in that sector. Since our investment, a dozen platforms have received PE backing. We are big believers in being early movers and identifying the best assets. It also allows us to embark on acquisition and internationalisation growth strategies before others try and replicate what you are doing.
The full interview can be found here.