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Private Equity is Hungry - The State of M&A

The world is a volatile place. Inflation, conflict, elections and AI, to name a few, have meant a lot of things in business are taking a pause. Mergers and acquisitions are no exception. However, things are still moving, and signs of new life are everywhere. That's why we invited Georgios Markikis, managing partner at Venero Capital Advisors to the Textkernel booth in Paris at UNLEASH World to chat about the state of M&A. From the recent Clevy acquisition by Fountain to the current thawing of markets to how hungry private equity is at the moment to make things happen. Turns out, there's a lot of dry powder out there, which not only makes this interview interesting, but necessary for anyone who makes their living in workforce businesses.


Intro: Hide your kids. Lock the doors. You're listening to HR's most dangerous podcast. Chad Sowash and Joel Cheesman are here to punch the recruiting industry right where it hurts. Complete with breaking news, brash opinion and loads of snark. Buckle up, boys and girls, it's time for The Chad and Cheese Podcast.

Joel: Oh, yeah. What's up, everybody? It's Marie Antoinette's favorite podcast, aka The Chad and Cheese podcast.

Chad: She lost her head over this podcast.

Joel: I'm your co-host, Joel Cheeseman. Joined as always, the Gérard to my Depardieu, Chad Sowash is in the house. And we are just giddy, live from Unleashed World, from the Textkernel booth to welcome a show favorite, Georgios Markikus.


Georgios Markikus: Hi guys. Good to be back.

Joel: He's the managing partner at Venero Capital Advisors. Welcome to the podcast again.

Chad: Welcome back.

Georgios Markikus: Yeah, thank you. Third time and then I can say that I'm a regular.

Joel: Your fifth show you get a red velvet smoking jacket. So keep doing it. Your mom...

Chad: With our big heads on the back.

Joel: Your mom will be proud at some point of your accomplishments.

Chad: We still have to get... We have to get Quincy's out.

Joel: That's right. So some of our listeners don't know you.

Chad: What?

Joel: Give us a little Twitter bio about you and the company.

Georgios Markikus: Yeah, so I'm managing partner at Venero Capital Advisors, so we are an M&A advisory firm focusing exclusively on HR tech and the future of work. We're the most active advisors in the space. So yeah, keen to talk about what's happening right now.

Joel: And Chad says you have the most beautiful head of anyone that we've ever interviewed.

Georgios Markikus: Oh, stop.

Chad: It's a good looking head.

Joel: It is.

Georgios Markikus: Thank you.

Joel: You guys can trade shaving techniques later.

Chad: Yeah, you can't pull this off with a funky shaped gourd like yours.

Joel: I know. I know. It's awful having a full head of hair. Anyway, anyway.

Chad: So okay, so let's talk about this. Today versus two years ago, the market is so much completely, I mean it's like flopped, right? So tell us a little bit about what you're seeing in the market right now, differences, where you're excited, where you're seeing... Where is it going?

Georgios Markikus: Absolutely. So two years ago, we were having boom time and then...

Chad: Sugar rush.

Georgios Markikus: Yeah. And then COVID hit and everything just collapsed. After COVID, we had what we call the post-COVID boom. So you had a surge in investment and a surge in M&A.

Joel: Free money.

Georgios Markikus: Free money. Seriously. Record levels. And then what happened? 2022, the markets collapsed, markets crashed and a lot of uncertainty in the market. Recession is coming perhaps, interest rates are going up. So what we saw is HR tech from an investment perspective wasn't affected dramatically day one, but over the months and the quarters we've seen a steady decline in investment. And Q3 just closed, we had the lowest number of funding rounds...

Chad: Wow.

Georgios Markikus: Since late 2018 and then lowest volume invested in the space. Now the question is what's been happening? And there's two things that have been happening. Number one, VCs, yes, they have been more diligent about who they invest in, but the interesting thing is that companies themselves have also not been coming to market as much. Why? Because over the last 18 months, they realized that they need to get to profitability. They've been reading the same headlines. They know that funding will be hard to get, debt financing is getting more expensive, so everybody has been coming leaner, right? Everybody has been focusing on cutting costs.

Chad: Which is a good thing, right?

Georgios Markikus: Yes and no.

Chad: Okay.

Georgios Markikus: Why? Good thing because everyone's been extending the runway, right? But what's happening to growth? You cannot be cutting costs and not affect your growth. So I think next year we'll be looking back to 2023 and 2023 will be a slow year for a lot of folks because they've been cutting costs.

Chad: Sure, sure.

Georgios Markikus: Alright, so it's interesting. Pros and cons to cutting costs.

Joel: What are we going to see in terms of, you mentioned the unicorns, I assume there are down rounds happening or will be, valuations are going to plummet. What's going to happen to these unicorns that we talked about between 2020 and 2022 or three?

Georgios Markikus: Yeah, interesting.

Joel: You're choosing your words carefully.

Georgios Markikus: Yeah 'cause last year, there was some panic raising where valuations took a hit. This year, the panic has subsided. So we're not seeing panic investing anymore or distress investing. So I think for the unicorns, probably they'll do okay because investors will bet that they will be winners ultimately. So I think they'll do okay.

Chad: Plus they already have investment in it, and they don't want to lose that investment if it dies.

Georgios Markikus: Exactly. So they'll double down.

Chad: Yeah.

Georgios Markikus: Exactly. Now the people who hurt probably are the ones who are maybe in the middle. They've raised funding, probably high valuations, but they haven't quite hit their metrics. Now they're forced to cut costs. They'll see growth slow down and they will be impacted. I think the unicorns will probably do okay.

Joel: My sense is that the most successful ones are chomping at the bit to go shopping. My sense is there's a clearance rack of companies that are ready to be bought, which I'm guessing is your wheelhouse. Talk about that.

Georgios Markikus: Yeah, so M&A, interesting. Different story for M&A. M&A volumes have remained very constant for the last couple of years. So we didn't see the slowdown that we've seen in investment. We haven't seen that in M&A. Very consistent volumes. And the other interesting thing that happened this year versus last year, valuations picked up quite a bit.

Chad: Really?

Georgios Markikus: Yeah. Yeah. So last year, we saw a big contraction, 2022, about 40% to 50%. This year...

Chad: Wow, that was huge.

Georgios Markikus: Well, still in line with public markets. Public markets collapsed by 50%. Workday, from 12 times to six times. But this year...

Joel: Don't get me started on ZipRecruiter. Don't even get me started.

Georgios Markikus: They got hit badly, yeah.

Chad: Yes, they did.

Georgios Markikus: By the way, they're not the only ones. Everybody in recruitment got hit. But this year, something interesting again has been happening. Valuations have been going up. Why? For two reasons. Firstly, companies haven't been forced to go to market anymore because they extended their runway, they cut costs, so there's been fewer distressed sales. For the companies that have been forced to come to market this year, the multiples were low, low single digits, really low multiples. But the companies that have been coming to market are the ones that choose to come to market and their KPIs are very strong. On the other hand, you have private equity with loads of cash that they haven't been able to deploy for a couple, you know, for at least one to two years. Keen to do good deals. So for the right assets with the right KPIs, these guys pay really, really high multiples.

Chad: So it's a thinner market, but it's more healthy?

Georgios Markikus: Yeah. Yeah.

Chad: Right? Okay. Which is not a bad thing overall. I mean getting ideas on the market's one thing but there are a shit ton of bad ideas that are out there that actually make it to the market. We see them and you see them all the time. Yes.

Georgios Markikus: We've seen them. Yeah we see them all the time. So yeah, but it's very interesting because I mean it was IntelliHR that was acquired earlier this year and that played out in public. It was a publicly listed company. It started out, initial bid for that company started at four times revenue, right? Which is relatively low. There was a bidding war and the final price was north of, I think, 11 or 12 times. So the starting price versus the final price shows you that for the right asset, buyers are willing to, and we've seen this in other situations as well, for the right assets, buyers are willing to pay a lot.

Chad: What are those assets? I mean, it's not just technology, right? What are those assets?

Georgios Markikus: Great question. We get asked this. So what is a good, what makes an asset in demand? Well, a couple things. First of all, the KPIs need to be good, right? Growth needs to be good. Profitability is very important these days, much more than a few years ago. Rule authority, you keep hearing about that much more today than a couple years ago. But also, you need to be differentiated. You cannot be another commodity asset that's undifferentiated, that does what others are doing. So you need to be a bit, you have your own moat and your own competitive kind of advantage and those assets attract a lot of attention. If you're just another, ATS for example is an example of a very competitive, very commoditized market. Those probably struggle to get really high multiples, but some others can do really well.

Joel: So I'm hearing a little bit of optimism, but a little bit of skepticism. We've been waiting for the IPO markets to sort of break for over a year now. What's your take on that? We have a Personio that just raised, it's coming to America, it's talking about an IPO. There are companies here at the show that have been talking about IPO, ISEMS, Greenhouse, et cetera.

Chad: Kinda backed out.

Joel: What's your take on the IPO market? Is that going to break open in '24 or not?

Georgios Markikus: In '24 possibly. We had some attempts by ARM and others to float this year.

Joel: BIRKENSTOCK was huge.

Chad: Instacart.

Georgios Markikus: So, probably some false starts, but I think maybe, hopefully, '24. Remember with the stock markets, they move before the real economy reflects the upturn. So hopefully, by next year, the effect of all the interest rates and everything will have played out and we will start to see the central banks returning to focusing on growth as opposed to shrinking the economy, so if that happens as soon as that happens the markets will open up before we actually see this play out and then IPOs will resume.

Joel: Is anyone in this space that you're like I'm really rooting for them because we haven't had a good publicly traded company in my lifetime. Is that going to change?

Georgios Markikus: Look, I mean we have some great companies that, you know, from Personio, I think UKG probably is going to want to IPO at some point relatively soon. So I think we have some really good former startups who became unicorns who eventually, hopefully will come to market. And if those do well, then I think it's going to be a very strong signal for everybody in this space. So I think everyone would be rooting for some good IPOs in the sector to be successful.

Chad: So we're at Unleash. It is busy as hell.

Joel: Buzzing.

Chad: There are just as many startups as there was back when the sugar rush was on. So I mean, this to me seems incredibly positive. Do you think that this is a false positive? Or do you think that we're still moving in the right direction?

Georgios Markikus: No, no, I think we're moving in the right direction as things are changing, right? So a few years ago we had, well, we at Venera called the period of rapid innovation. So you had a lot of companies pop up that were addressing point solutions and very specific problems and those have started to consolidate. I think now the companies that you see here probably are more nuanced. I think they probably tackle problems that are real and they probably do that in a more differentiated way. I think you start to see the non-differentiated copycats probably fade away gradually. We had a lot of those in recent years. So I think the ones that are now surviving and certainly the ones that are spending the time and effort and money to exhibit are probably ones that think, look, we have something here.

Joel: So one of your more recent deals was Fountain acquiring Clevy. I'm curious with the AI revolution, everyone's talking ChatGPT here, what kind of deals are you seeing percolating from your point of view? What's hot, what's being acquired, what's being shopped for?

Georgios Markikus: Yeah, so AI was very hyped, but that's not necessarily a driver for M&A today. It helps, right? But it's not that someone is looking specifically for it. I mean, there are a couple vendors, or even some big names, I'm not going to name names, but some big guys who want to acquire.

Joel: Georgios never names names, everybody.

Chad: Not on the mic at least.

Joel: Yeah, not on the mic.

Georgios Markikus: But largely speaking, AI is a feature that a lot of companies promote as having, but that's not necessarily the driver for M&A. What is a driver is what I mentioned earlier, offering a product that targets a very specific pain point, a niche solution that, when I say niche, it's something that the big vendors will not spend the time and money to build it out.

Chad: So they'll acquire it.

Georgios Markikus: They will acquire it, right? The workforce management is very hot these days. Health and safety and security compliance, those areas are very much in demand. Interestingly, multi-country payroll is also...

Chad: Oh, hell, I bet. Yeah.

Georgios Markikus: Making a comeback behind the scenes. Some companies... Some vendors have released their own features, but also from an M&A perspective, there's things happening there.

Chad: Seeing big growth in EOR too, right? I mean, there's huge growth in EOR.

Georgios Markikus: And those guys are looking to make bolt-on acquisitions that complement their offering. They want to have more things that they can upsell to their customers. Learning is big, combined with skills, upskilling, reskilling. So yeah...

Joel: It's not just the sizzle and the steak sometimes it's the side of Fritts everybody.


Georgios Markikus: There you go.

Joel: Georgios Markikus everybody. Georgios, for those that want to learn more about your company or connect with you where would you send them?

Georgios Markikus: Website or you can find us on LinkedIn.

Joel: Always a pleasure. Chad that's another one in the can, time for another cappuccino.

Chad: We out.

Joel: We out.

Outro: Wow, look at you. You made it through an entire episode of the Chad and Cheese Podcast. Or maybe you cheated and fast forwarded to the end. Either way, there's no doubt you wish you had that time back. Valuable time you could have used to buy a nutritious meal at Taco Bell, enjoy a pour of your favorite whiskey or just watch big booty Latinas and bug fights on TikTok. No, you hung out with these two chuckleheads instead. Now go take a shower and wash off all the guilt but save some soap, because you'll be back. Like an awful train wreck, you can't look away. And like Chad's favorite western, you can't quit them either. We out.


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