Invest in a recruitment firm with a healthy CV

The news that City workers are on track to share a record £21bn in bonuses this year is likely to have fuelled a mixture of disbelief, envy and perhaps anger in those who don't work in the Square Mile. But there is another group who will be rubbing their hands together at the prospect the recruitment firms. They typically take a cut of the salaries and incentive payments offered by firms to new recruits and so will be among the biggest beneficiaries.

So what's behind the good times? Stockmarkets are on the up and mergers and acquisitions have hit a record level. This is keeping the bankers in bubbly as they command the biggest bonus-to-salary ratio since the height of the dotcom boom in 2000. That means that the champagne is flowing elsewhere too. Rising profits are creating demand for top staff throughout the industry and companies are having to up the ante if they want to hire the best candidates, creating a buoyant environment for head-hunters.

Investing in recruitment: private equity interest

And where there are profits there is private equity, of course. Well-known City recruitment firm Whitehead Mann has just been bought for £25.7m by Piers Marmion, the former head of Heidrick & Struggles, a US executive search firm. The deal was secured through Marmion's bid vehicle, Palladian Investments, backed by private-equity firm Och-Ziff Capital Management. And they're not the only ones in takeover talks. After seeing its first-half turnover rise 148%, human resources firm Hat Pin, run by Angela Campbell-Noe, is buying City head-hunter Alexander Mann Financial Markets for £7m. IT recruitment firm MSB International is currently the subject of competing bids.

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This trend goes beyond just the top executives. According to internet-recruitment firm Monster, the number of UK jobs advertised online hit "record levels" in August. Companies across the board are taking on staff, but the prime areas are marketing, PR, the media and engineering.

Investing in recruitment: can the jobs boom last?

This job boom may sound somewhat counter-intuitive, since the latest Government figures show that the number of people defined as unemployed and looking for work 1.7 million in the three months to the end of July is at its highest level in nearly seven years. However, that figure is slightly misleading, because the number of people in employment is also at a record level. How can that be? The number of people trying to get jobs is rising faster than jobs are being created, due to the influx of migrant workers, among other factors.

However, while it may look as if the recruitment industry is in fine fettle, there is a potential fly in the ointment the growing threat of an economic slowdown, both in the UK and the US, where a number of British recruitment firms have exposure. That would suggest the way to make money in the sector is to look at firms which have good business models, are specialist recruiters in areas such as IT that are less at risk from a slowdown, and which might be subject to interest from acquirers such as private-equity firms. Below, we look at three candidates with the right CVs.

Three recruiters worth taking on

IT recruiter Interquest (ITQ, 90p) has one of the strongest track records in the sector and its chairman and CEO have solid reputations, having previously headed Abacus Recruitment and MPS International respectively.

The company operates in areas such as retail, banking, healthcare and the public sector, and is highly acquisitive. On a price/earnings ratio of just ten times Panmure Gordon's forecast earnings and yielding a prospective 1.7%, the shares still look good value.

Northern Recruitment (NRG, 135p), which specialises in temporary staff and government contracts, didn't have the best of starts to the year and this led to a number of earnings downgrades. However, these areas are now coming good. The firm is doing well out of the buoyant executive market and is strengthening its hand there. Its Scottish business is also seeing an upturn. The shares trade on a price/earnings ratio of 17 times broker numbers and yield a hefty 5.7%.

Michael Page International's (MPI, 365.5p) origins were in the UK, where it still generates 50% of its revenues. But the firm now operates globally, with large operations in Europe and Australia. First-half profits were slightly weaker than forecast, because of higher share option expenses, but the numbers showed 30% topline growth, suggesting that its markets in finance, sales and marketing are in rude health. The shares trade on 13 times UBS's forecasts for the year ending December 2007, and yield 2%.