Human Capital Management 2025: Navigating Growth, AI & Regulation

The Human Capital Management (HCM) technology sector is undergoing a rapid transformation, driven by large-scale AI integration, evolving regulatory frameworks, and a growing focus on workforce well-being. Easing inflation and lower interest rates have set a positive macroeconomic backdrop, stimulating M&A activity and boosting investor confidence, while geopolitical outcomes continue to shape market dynamics.

Key Highlights:

• Market Growth: The global HCM software market is expected to grow at a 12% CAGR through 2030, driven by flexible financing, digitalization, and IoT adoption.
• Global Focus: In-depth analysis of DACH, Europe, and the US – including top M&A deals and sponsor-backed platforms.
• Industry Trends: Outcome-based contracts, digital monitoring, predictive maintenance, and performance guarantees are shaping the sector.
• Valuation Insights: Median EV/EBITDA multiples around 8x, with premium valuations for service and digital solution providers.
• Sector Overview: Construction, medical technology, security & surveillance, HVAC, and more – with market size and growth forecasts.

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Current macroeconomic environment

Easing inflation and lower interest rates set the stage for growth – geopolitical outcomes shape market dynamics

• Inflation in both the US and EU has eased significantly, which created room for monetary policy easing throughout 2025
• Lower interest rates reduce financing costs, enhance valuations, and support corporate investment and refinancing
• This environment is set to stimulate M&A activity, with more favorable conditions for both strategic buyers and financial investors
• Stable labor markets further bolster cyclical sectors, creating momentum for growth
• At the same time, positive geopolitical developments – such as successful peace negotiations in conflict regions – further unlock significant growth potential and reinforce investor confidence
• Continued uncertainty due to geopolitical events though could slow cross-border M&A and capital flows, with investors favoring defensive sectors and regions perceived as safe havens

HCM transformation accelerates as AI integration, regulation, and workforce well-being become strategic imperatives.

AI-driven transformation of HCM: Generative AI has shifted from experimentation to large-scale integration, redefining the global HCM market

• HCM platforms embed AI for predictive workforce planning and personalized employee experiences
• AI-native challengers are reshaping talent acquisition, compensation, and learning, forcing incumbents to accelerate innovation and expand their capabilities
• Upskilling and reskilling demands grow as automation transforms roles, fueling demand for learning technologies

Regulation & compliance as key market driver: Stricter frameworks accelerate adoption of HCM platforms

• New frameworks such as the EU AI Act put organizations under pressure to adopt compliance-ready HCM platforms, with significant penalties and liability risks for non-compliance
• Regulatory tightening creates strong upside for vendors, as companies shift towards integrated, subscription-driven platforms that ensure resilience and scalability
• Market consolidation is accelerating, with strategic buyers and PE firms targeting AI capabilities and CFO-adjacent solutions to build broader business suites

Employee experience & well-being as core performance lever: Turning employee-centric programs into measurable drivers of growth

• Companies increasingly view employee well-being and personal development as central to retention, motivation, and productivity
• HCM suites are evolving into holistic ecosystems that combine wellness, feedback, career paths, and mobile-first tools to ensure seamless connectivity

HCM is poised for robust growth, fueled by further AI adoption and resulting regulatory requirements

Salient HCM trends spearheaded by AI and regulation:

Artificial intelligence

• AI adoption surged by an additional 14% YoY to 72% in 2025, with HCM leaders reporting 63% productivity gains and 55% automation of manual tasks
• Becoming a critical lever for HCM, enabling data-driven decisions, efficiency, and competitive advantage

Regulation & compliance

• New regulations such as the EU AI Act introduce heavy penalties of up to €35M or 7% of global turnover, forcing organizations to adopt compliance-ready HCM platforms – creating strong upside for vendors

 Employee well-being

• 87% of companies provide formal wellness programs in 2025, up from 61% in 2020, with 72% ranking employee well-being a strategic priority
• Well-being programs are now central to talent retention and productivity strategies

 Hybrid work solutions

• 73% of employees worldwide report that remote work makes their current role more attractive
• European and US companies continue to reduce office footprints, with hybrid models driving demand for flexible co-working and regional hubs instead of traditional HQs

Business model expansion

• Vendors expand beyond HR through acquisitions in areas like expense and contract management to build broader business suites and reduce complexity for SMEs, enlarging TAM and driving growth through cross-selling

Current applications of AI in recruiting (2025, selection):

HCM teams primarily use AI to streamline job descriptions and resume screening, while other use cases are still emerging

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With a projected CAGR of ~12%, the global HCM software market is on track to more than double in size by 2030

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The employee journey showcases the diverse themes in HCM

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Talent acquisition and workforce management drive deal activity, while European and US markets exhibit distinct transaction dynamics

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HCM M&A deal activity remains below historical levels, but recent transactions signal a return of confidence in both sponsor and strategic dealmaking appetite

• YTD 2025 HCM M&A activity reflects a slight upwind of the market, with high transaction value returning to pre-Covid levels, supported by resilient public market performance in HCM technology
• The number of announced deals remains consistent with historical averages, while transaction values are shaped primarily by mid-sized and consolidation-driven deals, signaling that bolt-on and tuck-in acquisitions remain the preferred path for both financial sponsors and corporates
• Key themes in 2025 include heightened focus on people analytics and AI-driven insights, alongside continued demand for training and professional development tools, highlighting ongoing effort to enhance workforce productivity and efficiency in costly labor environment

HCM fundraising continues to exhibit a declining trend since its peak in 2021

• Following declining trends since 2021, 2025 continues to experience a negative development in HCM-related fundraising deal activity. This is likely driven by generally tense macroeconomic factors across the globe impacting tech sector valuations and overall fundraising still not fully normalized compared to average pre-COVID levels
• Despite a general decline in VC funding, the HCM sector remains attractive to investors, particularly in the areas of niche solutions and AI-powered automation
• Key market trends and product developments, as noted previously, will continue to shape HCM fundraising activity as we move further along into 2025 and throughout 2026

For any questions feel free to reach out to us.