PEO Industry Investment Thesis - by Lightyear Capital
This thesis was created by Lightyear Capital as an analysis of the PEO industry covering growth trends, market opportunities, value proposition, and the competitive landscape. Lightyear Capital is a private equity group that focuses in the financial services arena and has been in business since 2000. They have provided private equity capital to a broad spectrum of companies across the financial services industry. With over $2.5 billion of capital raised, Lightyear seeks to leverage their sector-focused expertise and market insights to create value in our portfolio.
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Professional Employer Organization (“PEO”) – Industry Investment Thesis
We believe the PEO industry represents an attractive sub‐sector for the following reasons:• Growing Market with Tailwinds
The PEO industry grew revenue at a 10% CAGR from 2001 to 2013
Small businesses are increasingly outsourcing non‐core back and middle‐office functions
The Affordable Care Act and other regulations have increased the complexity and expenses in the human resource (“HR”) function
Small businesses are becoming more aware of the PEO value proposition
Large Addressable Market that is Significantly Underpenetrated
Small to mid‐sized businesses (“SMBs”), defined as an employer with fewer than 500 employees, represent 5.0 million companies in the United States and employ 56.3 million U.S. workers (or 49% of the total)
PEOs currently have 3.1 million worksite employees (“WSEs”), or 6% of the total addressable market
Strong Value Proposition for Employers and Employees
Employers: i) allows CEO / owner to focus on the core business; ii) clients of PEOs grow faster, are less likely to fail, and experience lower employee turnover; and iii) clients are delivered more services for a lower cost than doing it in‐house
Employees: receive fortune 500 benefits, access to retirement plans, and other benefits
The PEO Landscape is Fragmented and Ripe for Consolidation
There are approximately 880 PEOs in the United States
The top 10 PEOs control ~51% of the market, while the remaining PEOs control ~49% of the market
We expect further consolidation in the industry as scale provides pricing, service, and technology advantages, making small PEOs less competitive
The Business Model is Characterized by:— High client and revenue retention (i.e. 85%+)— Highly recurring and predictable revenue (i.e. most sales and client loses occur in 1Q) with some insurance risk— Limited client concentration (i.e. the top 10 clients represent 10% or less of gross profit and PEOs have hundreds / thousands of clients)— Strong operating leverage given the large percentage of fixed expenses— High free cash flow conversion given limited capital expenditures requirements
Track Record of Private Equity Investing in the Space
13 private equity firms have invested in the PEO space
Join the Conversation on Linkedin | About PEO Compass
The PEO Compass is a friendly convergence of professionals and friends in the PEO industry sharing insights, ideas and intelligence to make us all better. All writers specialize in Professional Employer Organization (PEO) business services such as Workers Compensation, Mergers & Acquisitions, Data Management, Employment Practices Liability (EPLI), Cyber Liability Insurance, Health Insurance, Occupational Accident Insurance, Business Insurance, Client Company, Casualty Insurance, Disability Insurance and more.
To contact a PEO expert, please visit Libertate Insurance Services, LLC and RiskMD.