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Main Conclusions
The Argos Index® climbed to 10.6x EBITDA
Following the second-half 2021 correction, the Argos Index® advanced in the first quarter of 2022 to 10.6x EBITDA. It was driven by the high end of the market – lower mid-market multiples remained stable – and by the prices investment funds paid, which rose to 10.8x EBITDA.
First-quarter 2022 multiples were more homogeneous than they have been over the past two years. The standard deviation declined significantly, as did the proportion of multiples in excess of 15x. With the Covid-19 epidemic declining in Europe, the index’s component sectors have readjusted. M&A activity and multiples have increased in manufacturing-services, while declining in relative terms in tech-healthcare. As a result, the gap in median multiples between these sectors fell this quarter to less than 1x EBITDA against more than 4x EBITDA during the fourth quarter of 2021.
The rise in multiples was driven by the strong recovery in economic growth in 2021 as well as by financial terms (negative interest rates) that continued to be favourable. Recovery in mid-market M&A activity in the first quarter – essentially transactions of less than €150m – helped increase the Argos Index®, following the decline in the previous quarter.
The M&A upcycle of the past few years seems to be turning around, however. Overall M&A activity fell by 23% in the first quarter, and deteriorating geopolitical, economic and financial conditions were the main culprits. With Russia’s invasion of Ukraine on 24 February, the uptick in inflation was confirmed, driven by galloping energy and raw material prices. Central banks are preparing to tighten monetary policy, and the latest Covid wave in China has further disorganised the value chain.
While the war in Ukraine had not yet had an impact on SME valuations in the first quarter, it did hit M&A activity in March, which declined 25% in volume and 37% in value compared with January-February 2022.
Argos Index® mid-market Median EV/EBITDA multiple on a six-month rolling basis
Source: Argos Index® mid-market / Epsilon Research
The multiples paid by investment funds pulled the index up
Multiples paid by investment funds increased to 10.8x EBITDA, after declining sharply in the second half of 2021. They continued to be driven by record-high amounts of capital looking for an investment outlet, in a financial context that continued to be supportive despite higher inflation. Nevertheless, risks to LBO financing have increased, as underscored in an ECB letter to the executives of major banks warning them about increased leverage(1).
Multiples paid by strategic buyers advanced slightly to 10.0x EBITDA. This high level is in line with the behaviour of equity markets, which held up well during the first quarter(2). Investors remained optimistic. Large companies continued to transform their business models and their approach to strategic acquisitions. As such, the risk premium on European equities(3) declined sharply from its peak in the first quarter of 2020, at the start of the Covid crisis, to 5%, its lowest level in ten years.
Argos Index® mid-market Median EV/EBITDA multiple on a six-month rolling basis
Source: Argos Index® mid-market / Epsilon Research
Multiples were more homogeneous
European mid-market M&A activity increased
in the first quarter of 2022
First-quarter 2022 M&A activity increased by 12% in volume and 3% in value, following the Q4 2021 decline.
M&A activity was driven by the lower mid-market (it was stable on deals > €150m), the sharp recovery in growth following the Covid crisis, a supportive financial context (interest rates were maintained very low) and active growth strategies on the part of both large companies and investment funds.
This increase is in contrast to the slowdown in overall M&A activity, which declined 23% in Q1 to $1tn, although it remained above that of Q1 2019 and Q1 2020. After an exceptional 2021, the M&A upcycle is starting to turn around, because the economic and financial outlook is clouding up and because of the war in Ukraine.
Source: Mid-market Argos Index® / Epsilon Research / InFront Analytics
Eurozone mid-market activity (€15-500m) in volume and value Source: Mid-market Argos Index® / Epsilon Research
