As we progress through 2024, the landscape of mergers and acquisitions (M&A) is being shaped significantly by the evolving economic environment, particularly the cost of capital. The interplay between rising interest rates and valuation multiples has been vital in determining enterprise values across various transaction sizes.

Historically, the cost of capital has been a critical factor influencing business valuations. As interest rates increase, the cost of debt also rises, typically leading to a decrease in the valuation multiples used to derive enterprise value. However, with anticipated interest rate cuts in both Canada and the US shortly, we are observing a potential peak in senior debt pricing that likely occurred towards the end of 2023.

In the private equity market, the impact of rising interest rates is felt differently across various segments. Notably, lower-end transactions have shown more resilience compared to their larger middle-market counterparts. Although our focus has traditionally been on larger transactions, this newsletter delves into deals in the $10-$25 million range to highlight intriguing developments within the private equity space.