News

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.

As we review the quarterly activity of private equity mergers and acquisitions, it’s evident that the landscape is evolving, shaped by the aftershocks of the COVID-19 pandemic and shifting economic dynamics.

Since 2021, we’ve observed a rapid acceleration spurred by the pandemic, but now a noticeable deceleration in growth. Valuation multiples, particularly for deals ranging between $25-$50 million and $100-$250 million, have declined during this period. This trend suggests that the entire market is currently grappling with growth challenges. While transactions in the $50-$100 million range have seen a slight uptick, last quarter’s multiples are down from Q1 2022 when TEV/EBITDA multiples were 8.8x and now 8.2x. This signals a broader market trend toward re-evaluation and adjustment.  As purchase price multiples have contracted, the Total Debt / EBITDA debt multiples continue to revert to their mean and below.

In the latest quarter, deal multiples in transactions below $50 million increased. Deals in the $10-$25 million range experienced a 0.7x increase to 6.6x TEV/EBITDA, while those in the $25-$50 million range rose by 0.1x to 7.0x TEV/EBITDA.

However, there was a multiples compression for deals in the $50-$250 million range. Transactions between $50-$100 million decreased by a full turn from 8.7x to 7.7x TEV/EBITDA, and those between $100-$250 million also declined by a full turn from 11.1x to 10.1x TEV/EBITDA.

Buckle up for another year of financial rollercoaster madness, brought to you by the unpredictable dance of EBITDA multiples and the continuing climb of debt costs. Yes, we blame them entirely for the sarcasm.

Deals Valued between $25-50 million – In Q3 2022, valuation multiples for deals in this range stood at 7.8x EBITDA. However, a notable shift occurred, and these multiples dropped by 15.3% to 6.6x EBITDA…….