First Advantage (FA), which operates a platform for background checks, took advantage of the healthy IPO market this week. In its IPO deal, the company issued 25.5 million shares at $15, which was at the high end of its of $13-to-$15 range. On the first day of trading, shares jumped by 33%. The underwriters on the offering included Barclays (BCS), Bank of America (BAC), J.P. Morgan (JPM), Citigroup (C), Evercore ISI, Jefferies, RBC Capital Markets, Stifel, and HSBC.
In 2010, CoreLogic sold First Advantage to Symphony Technology Group, which is a private equity firm. Then the company was sold again in 2019 to Silver Lake. Along the way, it accrued several bolt-on acquisitions to bring more scale to its business. The result is that First Advantage is now one of the leading players in the background check industry. (See First Advantage stock chart on TipRanks)
Backgrounder on the Business
First Advantage’s services are extensive. The company checks for crimes, and screens for drug and health problems. It also offers tools to help monitor social media, allow for work verifications and even allow for biometric authentication.
For the most part, its revenues come from pre-onboarding and performance screening. The company’s services are available across more than 200 countries and territories. In fact, last year there were over 75 million screens performed on the platform and the customer base exceeded 30,000. Customers include five of the top private sector employers, 55% of the Fortune 100 and about a third of the Fortune 500. Moreover, the top 100 customers have an average tenure of 12 years. In other words, First Advantage has a fairly steady business with strong recurring revenues.
A key to the success of the company has been its integrations with more than 65 third-party HR software platforms. This has made it easy for customers to use the background checks within their workflows.
Additionally, First Advantage has extensive databases. For example, it offers its customers access to more than 480 million criminal and work history observations. To maintain the quality of this data, the company has invested heavily in RPA (Robotic Process Automation). Consider that there are about 2,200 bots that manage the databases, alongside a strong team of curators and data scientists.
There are a myriad of positive secular forces driving First Advantage’s business. First of all, companies do not want the liability of making a wrong hiring decision. The costs can definitely be significant – not only in terms of the money but also due to the damage it can bring to the reputation of the brand. In the worst case scenario, the wrong hire can carry the potential for harassment and violence in the workplace.
The difficulty in performing background checks is exacerbated by the increased mobility and turnover of the workforce. Additionally, the rise of contingent and flexible workers, such as freelancers and consultants, makes pinning down facts about potential employees even more slippery.
First Advantage Data on TipRanks
According to TipRanks’ Insider Transactions data, First Advantage corporate insiders sold shares worth $85.3M in the last 3 months.
Bottom Line On First Advantage
First Advantage is not a high-growth company, but the underlying business is solid. Also, its market opportunity is large. According to Stax, which is a management consulting firm, the the global Total Addressable Market (“TAM”) for its current products and solutions is $13 billion.
There is also much opportunity for background check companies in foreign markets, where penetration rates are fairly low.
Now that it has gone public and has more capital, First Advantage will be in a good position to capitalize on this – and drive nice returns for investors.
Disclosure: Tom Taulli does not have a position in First Advantage.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
