The Argos Index® is stable at 10.0x EBITDA despite market turmoil
The Q3 2022 Argos Index® was stable at 10.0x EBITDA, in line with the average of the past five years.
This apparent stability conceals the divergence between the high end of the market, where multiples are still above 12x EBITDA, and the lower end were multiples decreased by 0.8 EBITDA point to 8.9x EBITDA. Large, quality assets with stronger pricing power are seen as more resilient during periods of crisis.
This stability contrasts with the geopolitical and financial deteriorating context and stock market turmoil (1). The alignment that created an historically good M&A environment (low interests, abundance of capital, and economic growth) has shifted in 2022 and continues to worsen in Q3. With global inflationary pressures building, interest rates rising at historic speed, and economic activity on the brink of a recession, the long upward M&A cycle seems has reversed (2).
However, the impact of these adverse conditions on the Eurozone M&A mid-market prices and activity (down 11% in Q3 but stable in value) looks moderate at this point. The mid-market remains highly competitive and continues to benefit from large capital flows to unlisted companies (3). Both strategic buyers and private equity firms are looking to take advantage of market volatility, that many see as cyclical rather than structural, to find attractive growth opportunities.
It should be noted that the Index’s component sectors were stable this quarter and did not impact the Argos Index®, as was the case in the Covid crisis.
(1) The EURO STOXX® TMI Small declined 9.4% in Q3 2022 and 25% since Q3 2021.
(2) Global M&A activity declined 34% in value and 24% in Europe in the first 3 quarters 2022 – Source: Refinitiv.
(3) Buyout dry powder is estimated at €181bn by InvestEurope, although global PE funds raised were down 50% in Q2 2022 (vs. Q2 2021) according to Preqin.
Argos Index® mid-market Median EV/EBITDA multiple on a six-month rolling basis
Source: Argos Index® mid-market / Epsilon Research
Prices paid by PE funds and strategic buyers are both stable
As reflected by the Argos Index, both financial and strategic buyers multiples are stable in Q3. Multiples paid by strategic buyers are still at 9.9x EBITDA, the same level since Q4 2021, and were not affected by the continued contraction in equity markets.
Multiples paid by investment funds are also stable at 10.7x EBITDA this quarter. It is still 0.8x EBITDA higher than strategic buyers: this is mainly due to funds investing in larger, high-quality companies, with higher multiples: 50% of the LBO transactions in the Q3 Argos Index were in the high end of the mid-market (> €150m) vs. 30% of strategic buyers.
Private Equity continues to play a leading role on the M&A market: the LBO volume activity was stable this quarter (compared to Q2), and its share within the mid-market increased to 19% (see part 4.)
Despite the more difficult LBO financing conditions (interest rates hikes, banks’ increased selectivity) and downward revision of growth forecasts, funds continue to benefit from record levels of money available for investment (see part 1.) and new financings such as private debt.
Enterprise value / historical EBITDA
Source: Mid-market Argos Index© / Epsilon Research