Business services: an attractive sector for Irish and overseas investors

The Covid-19 pandemic may have caused an unprecedented decline in the business services sector in 2020, but its strength and resilience should see it bounce back strongly in 2021 as the economy reopens, giving plenty of chances for investment or acquisition.

Ireland has long been an international leader in the business services sector, primarily down to the quality of the IT, the country’s highly developed infrastructure and depth of expertise in human resources. It was back in the 1990s that international companies began to base their functional support activities in the country in numbers.

Since then, many leading international businesses in the sector have established a base in Ireland, including Accenture, Serco and Sita. In addition, many homegrown business services companies have developed and are now strong players in the market too.

More than 45,000 people are employed in business services in Ireland and this is set to continue to grow in the coming years. But, like many other sectors, the industry suffered significantly during the Covid-19 pandemic due to lockdowns in Ireland, stifling activity. Rates of decline were at historic highs in the early months of the pandemic, according to the AIB Ireland Services Purchasing Managers Index, with new business and exports both recording huge falls.

This has continued into 2021 as Ireland has gone back into lockdown. The February 2021 AIB Ireland Services Purchasing Managers Index (PMI) report [aib.ie/content/dam/aib/fxcentre/docs/resource-centre/aib-ireland-services-pmi/feb-2021-report.pdf] noted that activity in the business services sector fell, along with the technology, media and telecoms and transport, tourism and leisure. This was the second consecutive month of decline for companies in the business services sector, following three months of growth in the last quarter of 2020 when lockdown measures had been eased.

New business in the sector fell sharply – the only sector to far worse was transport, tourism and leisure.

But there are hopeful signs for the remainder of 2021 – indeed, expectations are at their strongest for almost three years, according to AIB Ireland’s Services PMI report. This is likely to be down to the anticipated widescale rollout of effective Covid-19 vaccinations in the coming months, which should enable the government to ease lockdown conditions and lead to a return to something like ‘normal’. As has been shown in previous months, when lockdown measures are eased the business services sector recovers very quickly as demand for services returns.

Dealmaking

Irish business support businesses have been attractive to international businesses. For example, in March 2020, tech unicorn The Access Group snapped up Irish HR technology and payroll software specialist CoreHR.

The acquisition, the terms of which were not disclosed, saw CoreHR, which has three offices in Ireland and one in the UK, form part of the newly formed Access People Division. It is hoped that the division will have revenues of £200 million by 2024.

For Access, the deal broadened the company’s range of services across a number of markets, while for CoreHR it will help the business to achieve its next stage of growth.

The Access Group, based in the UK, has grown quickly after two rounds of private equity funding, and has been on an aggressive acquisition strategy in recent years.

Elsewhere, the pandemic has not stopped deals completing. In November, recruitment company CPL Resources was acquired by Japanese human resources company Outsourcing for €318 million in cash. [www.irishtimes.com/business/retail-and-services/cpl-agrees-318m-takeover-by-japan-s-outsourcing-inc-1.4399832]

CPL, founded in 1989, made a gross profit of €100.3 million – up 4% year-on-year – in the year to June. The company, which has 45 offices across the world and employs some 13,000 people, had first revealed it was in discussions with Outsourcing in March. It is an indication of the strength of the company that the pandemic did not put the Japanese firm off making the acquisition.

The deal gives Outsourcing its first foothold in Ireland, with CPL’s founder Anne Heraty, along with husband and fellow director Paul Carroll, netting more than €100 million for their 34.5% stake in the business.

Investing

Business services companies have also been investing in Ireland. While the number of these investments dropped off during the pandemic, there was significant activity in the early part of 2020.

For example, in March 2020, HubSpot announced that it was planning to open new offices in Dublin – called ‘HubSpot House’ and create 450 new jobs by 2023. HubSpot’s business functions will continue to expand in Ireland – from building core software as an engineer to supporting its customers in sales and services roles. Positions will be available in HubSpot’s Docklands offices, HubSpot House, as well as fully remote across Ireland.

The company came to Ireland in 2013, choosing Dublin for is EMEA headquarters. Since then, the company has more than tripled its headcount from an initial 150 and expanding its office footprint.

Meanwhile, in February HR software provider Personio announced plans to expand its Dublin office. The office, which was only established in April 2020, intends to grow from its current 40 employees at the site to 180 by the end of the year.

Personio is supported by IDA Ireland (www.ideaireland.ie) and has other offices in Munich, London and Madrid.

Geraldine MacCarthy, Chief Revenue Officer at Personio, explained the rationale for expansion, saying the European market is highly underserved in terms of HR software for SMEs: “And this year, with businesses needing new ways to effectively manage remote and hybrid workforces, the appetite for HR technology has only increased.”

Why base a business services company in Ireland

As highlighted above, many Irish and overseas firms are looking to invest in Irish business services companies; the country provides an attractive place to establish an office.

Ireland has long been known for its low corporate tax rate of 12.5%, as well as its reasonable cost of living and of commercial property – even in the capital, Dublin.

Other reasons include the availability of skilled labour. Ireland has one of the most educated workforces in the world, and, with the proliferation of business services companies, there are plenty of experienced potential employees out there.

There are low barriers to entry in Ireland. Setting up a company is relatively easy – with the right advice, of course – and the availability of infrastructure and high-speed broadband internet is also a plus.

There is also support for the sector from government agencies. SkillNet Ireland supports business development in Ireland and provides learning opportunities for more than 70,000 trainees per year.

Another major plus factor for investing in Irish business services companies is that Ireland is now the only native English-speaking country in the EU, following the UK’s departure at the end of 2020. This makes it attractive for inward investors, especially from the UK, US and Canada. As a result, Ireland benefits from being part of the single market and the frictionless trade with the 26 other members of the bloc that it brings.

Ireland is also part of the Euro, which has proved to be a stable currency and not prone to sudden fluctuations, which is always liked by investors.

Prospects

While the past year has been difficult for business services companies, there is nonetheless confidence that the future is bright. When lockdowns have been eased, activity in the business services sector has bounced back well and the indications are that this will happen again when social restrictions are gradually removed again in 2021. A widespread economic recovery is predicted in Ireland in 2021 and business services companies will be needed to play a role in this.

Getting advice

With such sentiment, there will be investment opportunities. For those looking to invest in a company providing business services in Ireland, acquire an existing company or establish a new office, it is crucial to get the right advice.

Those looking to invest or buy should seek out advisers with specialist knowledge of the sector in Ireland – including its history, leading players and local norms. Malone & Co Accountants can assist on all the relevant aspects from setting up a company to providing all ongoing financial compliance services. We can also provide diligence services as part of any potential acquisition or sale to ensure that any deal achieves the value hoped for at the outset.