During pre-investment due diligence, it is relatively easy to become considerably well informed on every fiscal aspect of a business; its past performance, its current state and its future ambitions. Ratios can be calculated, returns vs re-investment weighed and a dozen other considerations assessed before deciding to ‘buy’ or ‘not buy’. These assessments are equally valid whether you’re a multi-billion dollar VC firm looking for acquisition, a hedge fund manager considering a major position or a small-time private investor seeking a diversified portfolio to provide for a comfortable retirement.
While Financial (or Economic) Capital data is notable by its abundance, what has traditionally been a little trickier, is measuring the Human Capital in a business and its impact on likely future performance. And, in just the way a ‘perfect market’ is supposed to function, a plethora of businesses have appeared over the last decade or so to fill this gap. There is now no shortage of companies whose goal it is to surface, measure, analyze and use this data and to help firms leverage this form of capital. Thus, the Human Capital Management (HCM) sector is displaying significant growth.
Not having a strategy to leverage Financial Capital would seem unthinkable to most forward-thinking businesses and Human Capital is increasingly being viewed in the same way. Smart companies know that although it can be hard to quantify Human Capital in dollar value alone, investing in developing their people indirectly, yet certainly, improves the bottom line. As noted in part one of this blog, this ‘talentism’, is becoming a dominant form of strategic advantage; according to author Klaus Schwab.
The irony is that now, companies providing these HCM services are thriving and many would argue that they themselves represent a significant investment opportunity. The rise of low-cost high-speed internet access and Software-as-a-Service (SaaS) means that deep, complex HCM solutions, once the exclusive domain of enterprise clients, are now equally available to small and medium sized businesses (SMBs). This opens up a whole new potential world to both HCM industry stalwarts and newcomers alike.
Allied Market Research assert that the HCM market will grow at a CAGR of 7.8% between 2016 and 2023 to reach $22Bn. Other analysts have estimated the unaddressed market opportunity in SMB alone at >$85Bn.This trend and opportunity has not gone unnoticed by the investment community. A group led by Hellman & Friedman recently acquired (and took private) previously publicly traded Ultimate Software for $11Bn and although that’s one less investment opportunity for the little guy, there are plenty more solid investment opportunities for those seeking a foothold in the HCM sector.