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Main Conclusions
The Argos Index® continues its slow decline, at 9.7x EBITDA
The Argos Index® is down 2% at 9.7x EBITDA in Q1 2023, a limited decline although it is its lowest level since the 1st semester 2020. Multiples paid by private equity funds and strategic buyers have both decreased.
The mid-market activity continued its fall by 9% in value to its lowest level since Q2 2020, led by the upper mid-market and in line with global M&A trends.
The macroeconomic environment continues to deteriorate, with increasing geopolitical tensions, persistent inflation and rising interest rates (1), slowing economic growth and volatility in the equity market. Its impact on the M&A market started spreading in the activity data in the 2nd semester 2022 but slower on the transaction prices. As the M&A market cycle reverses, the gap between sellers’ and buyers’ price expectations still takes time to narrow.
The market is also getting more polarized, as often in crisis periods. The divergence between the upper and lower mid-market is still at a record level of 5.0x EBITDA and the proportion of multiples under 7x and over 15x EBITDA has increased this quarter to 38% of the deals. On the upper end of the market, dealmaking was concentrated on a smaller number of quality assets with strong pricing power, mostly in the Tech/Pharma sectors.
(1) The ECB hiked rates twice by 50bp in Q1 taking the benchmark rate to 3%.
Mid-market Argos Index® Median EV/EBITDA multiple on a six-month rolling basis
Source: Mid-market Argos Index© / Epsilon Research
Prices paid by private equity funds and strategic buyers have both continued their moderate drop
Multiples paid by investment funds are down 1% at 10.4x EBITDA, a limited decline from Q4, while the activity is down 9% in volume and 23% in value this quarter. Prices are slowly contracting as interest rates continue rising, meaning higher borrowing and refinancing costs, lower leverage but also more selectivity on assets acquired.
European Private Equity fundraising picked up in Q1, raising €26.4bn, on pace for a higher fundraising year than 2022 (1). It shows confidence in private markets and supports prices, despite difficult LBO financing conditions, as more money is made available for quality investments.
Multiples paid by strategic buyers droped 6% at 9.2x EBITDA. The decrease is faster but prices have not been to much affected by the 2022 public equity market volatility (2). Private company lower volatility in times of crisis confirm they can take a longer view on the economy, and large corporates can take advantage of the market downturn to find attractive growth opportunities.
(1) Source: PitchBook Q1 2023 European PE Breakdown
(2) The EURO STOXX® TMI Small was up 8% in Q1, and only 6% below its Q1 2022 level
Enterprise value / historical EBITDA
Source: Mid-market Argos Index© / Epsilon Research
Increased proportion of transactions at multiples under 7x and over 15x EBITDA
20% of the transactions in Q1 2023 are at multiples over 15x EBITDA, up from previous 2022 quarters. Most of these deals were made in the Tech/Pharma sectors. The share of transactions at multiples under 7x EBITDA accounts for 18% of analysed transactions, in line with Q4 2022.
Share of transactions at multiples >15x EBITDA Argos Index™ sample
Source: Mid-market Argos Index© / Epsilon Research
Share of transactions with multiples < 7x EBITDA and > 15x EBITDA Argos Index™ sample
Source: Mid-market Argos Index© / Epsilon Research
Mid-market M&A volume activity drops in record low value
Euro zone M&A activity is down 9% in value in Q1 2023 and is now, after its 57% fall in Q4, at its lowest level since Q2 2020, the climax of the Covid-19 crisis. Both lower and upper segments of the mid-market are seeing lower activity, although the bulk of the value fall is within the upper segment (disclosed value divided by 3 since Q3 2022).
This steep fall is in line with the European M&A market, down 63% year on year in Q1 2023(1). It confirms the reversal of the M&A cycle as the macroeconomic environment keeps deteriorating. Interest rates continue hikes by the ECB as the inflation hits record levels, increasing concerns about the economy and prospects of a recession as the war in Ukraine fuels continued uncertainty on the continent.
The number of transactions is down 13% on Q1, led by the 15% drop of the upper mid-market (deals between €150m and €500m). The volume activity remains however in line with its 2021/2022 level, pulled by smaller deals, which continues to prove a more resilient market.
(1) Source: Refinitiv, in the FT, 01.05.2023
Eurozone mid-market activity (€15–500m) in volume and value
Source: Epsilon Research / MarketIQ
As in Q4 2022, private equity funds were less active than corporate buyers in Q1 2023. Their share(1) in mid-market M&A is still below 15% vs. 20%+ in 2021.
Share of LBO in Eurozone Mid-market M&A
Source: Epsilon Research / MarketIQ
