Approach to 2024 and beyond must be 'back to basics:' co-chair of McCarthy’s private equity group
After two record-breaking years for private-equity M&A volume, deal counts in 2023 returned to normal.
According to McCarthy Tétrault’s “2024 Private Equity Outlook,” Canada’s private equity market was busy in 2023 despite macroeconomic headwinds. With 441 private equity transactions, the market was not as active as in 2021 and 2022, during which there were 611 and 583 deals. But 2023’s tally is in line with the numbers from 2017 to 2020, which were busier than 2013 to 2016.
“2023 was, in many ways, a reset year, a back-to-basics year,” says Patrick Shea, co-head of McCarthy Tétrault’s private equity group. “2023 certainly saw a significant drop in deals from those two record breakers. But in terms of deal counts, it was very similar results to 2018 and 2019, which were two very busy years.”
He says 2023 was “choppier” than the last two years, with deals stopping, starting, and stopping again and many busted deals.
Shea says that private equity firms have now had a few years to digest “the new normal” in the industry, characterized by higher interest rates and shifting geopolitical realities. These firms have now had time to “normalize,” “strategize,” and “recalibrate their approaches.” He says the approach in 2024 and beyond will be on what made private equity firms successful in their inception in the 1970s and 1980s – identifying solid businesses that can generate cash flow and focusing on making operational improvements to those businesses.
“2021-2022 were years where almost anything went because deals were happening quickly, people were paying high prices, people weren't worried about macroeconomic headwinds because the headwinds were pushing favourably,” says Shea. In 2024 and forward, the basic elements that made private equity successful in its early days will take centre stage because steep interest rates mean firms can no longer simply rely on cheap capital, highly leveraged deals, and ever-increasing multiples, he says.
“We’re in a bit of a ‘back to the future’ reality for this year and beyond.”
According to the 2024 Private Equity Outlook, when it comes to private equity deal value, the numbers have been relatively flat for four years. Though deal counts were up in 2021 and 2022, those years had $19 billion and $14.4 billion worth of transactions. There was $16 billion in deal value in 2023.
Sector-wise, business products and services were the most active with 193 private equity transactions. There were 92 IT deals, 31 in financial services, and 17 in the energy sector.
Despite the importance of the energy sector to the Canadian economy, Shea expects to see a continuation of that hierarchy. Artificial intelligence will give companies in the tech sector the opportunity to grow and acquire other businesses, and there could be consolidation in AI and other businesses that integrate AI into their processes, he says.
The number and value of private-equity backed exits continued their downward trend in 2023. In 2022, there were 146 worth $14.15 billion. Those numbers dropped to 88 and $3.72 billion in 2023. “Numbers this low have not been seen in more than a decade,” said the Private Equity Outlook.
Shea says the drop in exit numbers can principally be attributed to high interest rates and they will return as 2024 progresses and rate stabilize or come down.
