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Main Conclusions
The Argos Index® is down 8% at 9.1x EBITDA
The Argos Index® dropped to 9.1x EBITDA in Q3 2023, after three quarters of relative stability. It is down 20% from its Q2 2021 peak, and back to its level of Q1 2018 (except for S1 2020 linked to the Covid outbreak).
All segments of the mid-market have seen a price decline, although the upper mid-market fall was steeper with a 20% price drop vs. Q2. Prices have converged between segments: the difference between the upper and lower mid-market has dropped to 1.8x EBITDA, and the proportion of multiples >15x EBITDA is only 14%. The difference between multiples paid by PE funds and strategic buyers is also down to 0.3x EBITDA.
An adverse macro-economic environment has impacted all segments of the mid-market, with persistent inflation, slowing economic growth and the quickest interest rates hike by the ECB in the history of Euro – in addition to a highly tensed geopolitical situation. Seller’s price have started to adjust to this new environment, as shown in the record high proportion of multiples below 7x EBITDA.
PE funds dealmaking and prices paid continued to decline, with increased borrowing costs, reduced access to leverage, more difficult funding, and the prospect of interest rates staying higher for longer. However, they still benefit from record high dry powder. Prices were also impacted by the slowdown of the M&A cycle: the midmarket activity dropped by 40% in value in the first three quarters of 2023 vs. 2022, and 45% for the whole European market. The number of mid-market deals was down 14% in Q3, but only 9% over the Q1-Q3 period, showing again more resilience than the global M&A market in downturns.
Argos Index® mid-market
Median EV/EBITDA multiple on a six-month rolling basis
Source: Mid-market Argos Index© / Epsilon Research
Multiples paid by investment funds and strategic buyers both declined
Multiples paid by strategic buyers were down to 9.1x EBITDA this quarter, due to the adverse economic conditions, M&A market slowdown and public market equity downturn(1). However, large corporates continued to look for growth opportunities, at lower price. Hence their high share of the M&A market in Q2 and Q3 2023 (85% in volume and value) and the record proportion of deals at multiples < 7x EBITDA.
Multiples paid by investment funds continued to decline to 9.4x EBITDA. Higher interest rates have driven up the cost of borrowing to fund acquisitions, with a strong impact on funds.
The gap between prices paid by investment funds and strategic buyers is narrowing (at 0.3x EBITDA): funds are less active in the market but more selective as they still favor quality assets (at higher prices).
(1) The EURO STOXX® TMI Small is down 4.5% in Q3 2023.
Enterprise value / historical EBITDA
Source: Mid-market Argos Index© / Epsilon Research
Record proportion of transactions below
7x EBITDA
44% of the transactions in Q3 2023 are at extreme multiples < 7x or > 15x EBITDA, down from last quarter but still at a high level. However, the proportion of transactions at multiples > 15x EBITDA is near historic lows, as prices are both falling and converging.
Share of transactions at multiples >15x EBITDA Argos Index® sample
Source: Mid-market Argos Index© / Epsilon Research
Share of transactions at multiples <7x and >15x EBITDA Argos Index® sample
The reason for the high proportion of extreme multiples is the strong increase transactions at multiples < 7x EBITDA, that account for 30% of analysed transactions, its highest level recorded.
Share of transactions at extreme multiples (<7x and >15x EBITDA)
Share of transactions at extreme multiples (<7x and >15x EBITDA)
Source: Mid-market Argos Index© / Epsilon Research
Mid-market M&A activity slowdown in value,
but resistance in number of deals
Euro zone mid-market M&A activity declined in Q3 by 14% in volume and 11% in value vs. revised Q2 figures. Over the first three quarters of 2023, the activity was down 40% in value (vs. 2022), but only 9% in volume (from 480 to 440 deals).
The slowdown in the M&A cycle continued, fuelled by geopolitical risks, a slowing economic growth, persistent inflation, and record interest rates hikes by the ECB(1): the global M&A activity was down by 28% to $2tn worldwide in the first three quarters, and by 45% to $384bn in Europe(2).
Investment funds were the engine for M&A activity these last years, but with the increasing cost of debt(3), the prospect of interest rates staying higher for longer and slower fund raising(4), private equity activity has dropped: by 39% on the global market (5) and 50% on the mid-market on the first three quarters of 2023 (in value).
Remarkably, the lower mid-market is showing once again its much stronger resilience in liquidity when the market slows down. While larger transactions have radically lost their liquidity, inflows and outflows of capital continue at a reasonable pace in the lower mid-market.
(1) The ECB has increased rates 10 times since July 2022, by a total 4.5%, the quickest hike since the creation of the Euro.
(2) Source: Refinitiv in Les Echos, 17.10.2023
(3) See the ECB October 2023 bank lending survey (BLS)
(4) Fund raising was down 30% in S1 2023 (source: Pitchbook), and the time to raise funds took on average a record 20 months (source: Preqin)
(5) Source: Refinitiv in Les Echos, 17.10.2023
Eurozone mid-market activity (€15-500m) in volume and value
Source: Epsilon Research / MarketIQ
Eurozone Mid-market - Number of deals
Source: Epsilon Research / MarketIQ
Private equity funds activity continued to decline, and their share(1) in Q3 mid-market M&A stayed at a record low level, arround 15% in both number of deals and value.
1 Does not include build-ups
Share of LBO in Eurozone Mid-market M&A
Source : Epsilon Research / MarketIQ
