Drake Star co-founder: How HR’s evolution is driving a very active HR tech M&A market

There is a lot of movement in the HR tech market – especially if you look at it from an M&A perspective.

In the fourth quarter (Q4) 2023 alone, approximately 200 transactions took place in the sector, and more than $3.5 billion of total capital was invested.

This strong market traction indicates an appealing outlook for 2024, including $28.8 billion US dollars expected market volume for 2024 and a 13.4 percent expected market CAGR until 2027, as outlined in the Drake Star Global HR Tech Report first quarter (Q1) 2024.

A major driver of this is the fact that 89% of HR leaders plan to increase HR technology budgets, making it the #1 area of investment for the third year in a row – that’s according to Gartner’s 2024 HR Technology Imperatives.

Adapting to global workforce challenges, digital transformation and the AI revolution

The HR function has been experiencing significant pressure in recent years, which is why the market has seen the development of a number of innovative solutions that address the challenges faced by HR professionals.

The global talent shortage as one of them, is constantly being reinforced by aspects such as changing demographics, the lowest global unemployment rate for the last 20 years, and an expected global workforce gap of 85 million until 2030 (as research by Korn Ferry has shown).

More than 75% of companies are struggling to find the right people with the right skills to fill their open positions according to the European Centre for the Development of Vocational Training.

This global workforce gap along with escalating talent acquisition costs is also why retaining talent has become increasingly important – and why skill-based hiring and talent management are on the rise.

At the same time, the digitalization of the sector is on the agenda since delivering a digital experience along the entire talent journey is crucial, as the new generation of talent consists of digital natives who expect a seamless experience online.

Ralf Hoffman, co-founder and managing partner, Drake Star.

The growing importance of digitalization of the HR function is underscored by prioritizing workforce and cost management.

Efficiency improvements, employee communication, and remote work capabilities are key digitalization drivers.

Automation, data-driven decision-making, and consolidation of legacy tech stacks help to optimize cost management.

For many of these aspects, AI solutions are being discussed.

Experts expect that many jobs will be redesigned by Gen AI and that therefore new skills will become relevant and highly sought after.

Simultaneously, implementing Gen AI-based solutions will create the need for new roles, too.

Its influence will extend throughout organizations, affecting different business units such as business operations, software development, sales, marketing, and customer service, as Gartner’s HR Toolkit for 2024 points out.

HR is expected to meet new business demands as it has become a strategic function

As a result of these changes, the role of HR has evolved from a traditional administrative function to a new strategic responsibility.

A company’s workforce has become a business priority for CEOs and decision makers, right behind growth and technology related questions.

In addition, decision makers in the field have to manage an increasingly complex technology portfolio.

HR initiatives that impact the entire business, such as hybrid working environments, learning and development, and employee experience, are critical for organizations to maintain their competitive edge.

Therefore, while in the past, classic HR topics included employee administration, payroll and employment policies among others, the teams are now dealing with aspects like hybrid work productivity, employee experience, skill-based development, and flexibility and wellbeing, just to name a few.

Despite the variety of topics, it is crucial for HR departments to balance the delivery of business benefits with the associated costs to achieve optimum business value.

HR is therefore increasingly looking to technology to deliver on this delicate balancing act. These developments are also reflected in the M&A activities of companies in the HR tech sector.

M&A activity has been dominated by strategic investors

In 2023, strategic buyers made up more than half of the M&A activity in HR tech, driven by efforts to offer holistic platform solutions to provide end-to-end digitalization of the HR function.

Around two thirds of invested capital was allocated to later stage venture funding rounds, as investors are looking for more mature assets with a clear path to profitability.

As shown in the Drake Star Global HR Tech Report, there are a number of active PE-backed and public consolidators that have acquired several companies in the period from 2020 to 2023.

For example, Norwegian process automation software provider VISMA, which has acquired 14 companies in total in three years – among them Belgian online staff planning tool Beeple, Pervuian employee engagement SaaS company mandü, Swedish payroll specialist Kontek, and Norwegian HR application software dottie.

Drake Star has seen tremendous activity in the space and has advised on several key HR tech deals over the past months, such as the acquisition of VEDA by Investcorp.

VEDA offers a holistic end-to-end HR software platform, enabling customers to utilize payroll, time & security and people management solutions.

Through the partnership the company aims to become the number one HR tech platform for medium-sized companies within the DACH region.

Virgin Pulse was acquired by HealthComp via Blackstone. Virgin Pulse develops an employee health engagement platform to drive wellbeing, culture, and productivity.

This acquisition is supposed to create a tech-enabled platform that can develop novel benefit designs, while leveraging AI to track and improve outcomes.

CompXL was acquired by Salary.com via Accel-KKR to expand Salary.com’s international capabilities.

CompXL offers a cloud-based comprehensive compensation planning tool, providing budgeting, total rewards statements, and managing incentives.

These selected examples illustrate how strategic collaborations are being entered into in the HR tech sector, plus how products and services are being supplemented by the latest technologies to help meet the increasing demands on HR professionals.

And, ultimately, to combat the shortage of skilled workers and all the associated developments in the best possible way.