Canadian M&A activity slowed down in second half of 2022 and continued to lag in 2023
After a slowdown in late 2022 and throughout 2023, a new report from Bennett Jones details promising trends that could spell a resurgence in M&A activity in 2024.
According to “Ready to Rebound: Canada's 2024 M&A Landscape,” last year, Canada saw 2,528 M&A transactions with an aggregate value of $231.84 billion as of Nov. 30. In 2022, there were 3,424 transactions worth $280.65 billion. The report notes that deal activity in 2024 could see a boost from interest rate and inflation stabilization, a rise in private credit-backed deals, the popularity of secondaries and continuation funds for exits, and an uptick in restructuring and distressed M&A opportunities.
In 2023, the power and utilities sector led deal-making with 30 transactions worth $40.8 billion, followed by software’s 194 deals with $26.5 billion in value. The oil and gas sector was the third most active, with 56 deals and $23.7 billion in deal value. The report's authors suggest that the oil and gas sector’s strong showing will continue in 2024 and that the energy transition will invigorate M&A activity with international interest in Canadian renewables.
Inflation and the historic rise in interest rates, which widened the gap in valuation expectations between buyers and sellers, drove much of last year’s lag in deal activity, says Angela Blake, a partner at Bennett Jones and author of the report. She says that was paired with geopolitical uncertainties and a bank crisis in the US.
“A lot of those challenges that we faced last year are still in place right now, and we're still having to deal with them. But the market has had a lot of time now to adjust and adapt.”
Blake says the expected stabilization of interest rates and inflation will help “bridge the gap,” and buyers and sellers sitting on the sidelines will soon have to jump into the mix. Private equity funds coming to their end of life and sellers who need to execute business transitions may not necessarily have much longer to wait, she says.
According to Bennett Jones' report, deal-making will also benefit from the surge in private credit, which emerged to fill the gap left by the retreat of conventional lenders. While private lenders are not new, the conditions have never been as optimal to actively participate in the market, says Blake.
“If you look at the US or over in Europe, there's an explosion of activity there on the private credit side, and we haven't seen that same extent here yet.” However, she says Canada is typically slower in following these trends, and the firm expects growth in the use of this tool in 2024.
According to the report, one of 2023’s “defining themes” in private equity was a slowdown in exits. This has led to a spike in the use of secondaries and continuation funds, which allow investors to sell their stakes in a fund before the fixed end-of-term or to remain invested after it to await more favourable valuations.
“Anything that creates optionality right now, I think, is helpful in this market,” says Blake.
After record lows in 2020 and 2021, restructuring and distressed M&A returned to normal in 2023 and is trending toward a rise in 2024, said the report. This is due to high interest rates and the end of COVID-related government supports. Blake says there have been many restructurings and insolvencies in the cannabis sector over the last year, and plenty of companies in every industry will be unable to continue servicing their debt or get new financing for operational issues.
“It's good if you're shopping,” she says. “If you're a buyer, that gives a lot of opportunity to deploy capital towards investments that you might be able to get at a really good price… decent businesses that just have been a victim of the confluence of negative headwinds that we've been dealing with generally on a macro-economic scale.”
Blake co-authored the report with Curtis Cusinato, Ashley White, Jesse Mighton and Bronwynn Shaw.
