ERG INSIGHTS

M&A ACTIVITY IN THE ENTERPRISE RISK MANAGEMENT SERVICES MARKET

The Enterprise Risk Management Services (ERMS) market, consisting of companies providing services ranging from investigations, business intelligence, due diligence, background checking and pre-employment screening to security and cyber consulting, has largely recovered from the COVID related slowdown and returned to growth.

Companies throughout the sector are hiring globally to respond to increasing demand, driven by capital market and transaction activity, including the growth of Special Purpose Acquisition Companies (SPACs).

M&A activity in the ERMS market also continues to accelerate, and is significantly ahead of last year’s level:  In the first five months of 2021, 15 deals were completed, compared to 19 in the entire 2020.

New Market Trends

Key trends in the market we observed in the first five months of 2020:

• Most of the completed transactions were small or medium sized targets. 

• The number of cross-border deals increased significantly: 47% of transactions were cross borders, compared with only 16% in 2020.

• US buyers’ dominance increased: 73% of all transactions involved US buyers. However, 53 % of all targets were UK based vs 47% US.

• Strategic buyers led the ERMS M&A market activity, accounting for eleven out of twelve deals. This, however, this understates the influence of financial investors: Some of the strategic buyers are backed by PE firms that are well capitalized and have access to inexpensive debt. Security companies pursuing deals to diversify their service offering were particularly active buyers in the market.

• Buyers and Investors were interested in companies with services across the ERMS spectrum; transactions in 2021 included companies focused on:

  • Security, training and capacity building

  • Strategic advisory, including political risk advisory

  • Cyber security

  • Business intelligence & Investigations

• Financial investors were particularly interested in pursuing industry roll-up strategies to build market leaders with scale and ability to take market share from incumbents.

• Valuations Are Attractive but Structured Deals Are the Norm. We expect targets with differentiated offerings that fit buyers’ strategic priorities to attract premium valuations. Companies with subscription-based services or high-levels of recurring revenue are likely to attract be valued at a particularly high multiples.

• However, buyers also continue to carefully manage their risk exposure, resulting in deal structures with larger contingent components. Private equity backed acquirers will continue to expect equity rollovers by management teams to ensure alignment of interests.

M&A Outlook for 2021-22

Well-funded private equity investors looking for new acquisition opportunities, the availability of private debt capital and strategic buyer appetite are likely to drive continued high leave of M&A activity in the sector, and create a bright outlook for ERMS businesses evaluating strategic alternatives over the next 12 to 18 months.

The ability to travel and the global economic recovery will further facilitate deal-making. As the ERMS market continues recover and grow, we also expect more companies to try to take advantage of the strong market demand and seek a sale or a recapitalization.

Going forward, we expect increasing interest in companies with new skillsets, which allow the buyer to better support clients’ evolving requirements, including specialists in emerging fields such as ESG, crypto asset compliance and blockchain analytics; and digital/open-source intelligence and investigations.