In the current world of M&A, there are opposing forces at play. On the downside, we’re facing global uncertainty, trade wars, and an inverted yield curve that, historically, has been predictive of an economic downturn. On the other hand, there is still more than US$1 trillion in private equity capital, as well as an abundance of cash on corporate balance sheets, fueling competition for attractive targets.
How are buyers responding to these mixed market signals?
We’ve reported previously that Private Equity buyers are increasingly targeting “add-on” deals – smaller acquisitions that are tucked into an existing platform as part of a buy and build strategy. This is evidenced by recent US and Canadian reports from Pitchbook and the CVCA, where H12019 deal activity in, respectively, the US and Canada, reflected a record percentage of smaller acquisitions. We are also seeing increased buyer concern around how a prospective target will weather an economic downturn. As FirePower Director, Investment Banking, Kenan Dizdarevic notes: “Potential buyers are digging deeper and further back into a target’s financial performance, to understand how cyclical its revenues are, and how resilient its business model is.”
Our takeaway: while storm clouds may be looming on the horizon, there is still plenty of demand for high quality Canadian businesses in the mid- and lower mid-market. Sellers should be prepared, however, to discuss the strengths and downsides of their business, and provide historical performance data that support its long-term prospects, and shed light on how it will fare in the face of a recession.