The Argos Index® mid-market

Fourth quarter 2020

Main conclusions

  • Historic record for the Argos Index® at 11.1x EBITDA
  • For the first time, multiples paid by private equity funds cross the 10x bar; they finally close the gap with the multiples paid by strategic buyers
  • Multiples > 15x represent nearly 20% of the transactions
  • Driven by a favourable market environment and consequently their higher valuations, listed companies were in a position to make opportunistic acquisitions
  • Mid-market M&A activity remained weak in the fourth quarter and throughout 2020
01

Historic record for the Argos Index® at 11.1x EBITDA

The Argos Index® reached 11.1x EBITDA, its highest ever.

Multiples are up in all segments in a context of low mid-market M&A activity. This strong increase is linked to:

  • the prospects for a rebound in economic growth with the discovery of effective vaccines against Covid-19 – despite a second epidemic wave and a recession of -7.4% of GDP in 2020 for the euro zone.
  • the massive intervention of central banks to keep long-term interest rates low.

But the level of the multiples can also be explained by the evolution of its composition. 65% of the transactions referenced in Argos Index® in the 4th quarter are for healthcare and technology sectors, a 15-points increase compared to the previous quarter. These sectors are spared, or even favoured, by the crisis, are not cyclical and have high multiples.

02

For the first time, multiples paid by private equity funds cross the 10x bar; they finally close the gap with the multiples paid by strategic buyers

Multiples paid by investment funds have risen sharply, by more than 20% to 11.2x EBITDA, a level not seen since the Argos Index® began in 2004.

Multiples are driven by the strong competition with strategic acquirers on companies not affected by the crisis, the ever-increasing level of investment in private equity1 and the access to low-cost acquisition debt (linked to central bank policies).

1 Preqin has predicted that PE AUM will double from $4.4tn in 2020 to $9.1tn in 2025 – Source: Institutional Investor, 4.11.2020

Enterprise value / historical EBITDA Source: Mid-market Argos Index® / Epsilon Research
03

Multiples > 15x represent nearly 20% of the transactions

The percentage of transactions with multiples higher than 15x returned to the level reached in the second half of 2019.

Percentage of transactions at multiples > 15x EBITDA Argos Index™ sample Source: Mid-market Argos Index® / Epsilon Research
Percentage of transactions at multiples > 15x EBITDA Argos Index™ sample
Source: Mid-market Argos Index® / Epsilon Research
04

Driven by a favourable market environment and consequently their higher valuations, listed companies were in a position to make opportunistic acquisitions

Large listed companies were active in the mid-market, representing more than 75% of the strategic buyers in the second half of the year. They benefit in particular from access to low-cost financing, which enables them to make opportunistic acquisitions, as well as from the rapid recovery of the equity markets and their own multiples, which rose by nearly 20% this quarter to 10.1x EBITDA1.

The prices of unlisted companies are driven by massive government intervention to support activity and central banks2 to keep interest rates very low. These policies have favoured the strong recovery of equity markets3 and the ever-increasing level of liquidity invested in the unlisted sector.

1 EV/LTM EBITDA of 10.1x, Euro Zone listed mid-market companies (source: smallcaps.infrontanalytics.com)

2 Total Assets held by the ECB is up 54% between Feb. and Oct. 2020 (Source: ECB in Duff & Phelps Valuation Insights Q4 2020)

3 EURO STOXX® TMI Small is up 15% in Q4 2020

Comparison of listed and unlisted mid-market multiples (paid by strategic buyers) Source: Mid-market Argos Index® / Epsilon Research / InFront Analytics
05

Mid-market M&A activity remained weak in the fourth quarter and throughout 2020

Paradoxically, the sharp rise in the Argos Index® is taking place against a backdrop of low mid-market M&A activity.

In 2020, mid market M&A activity fell by 15% in volume and 36% in value, logically marked by the strong economic recession and uncertainty in 2020 caused by the Covid-19 pandemic.

In the fourth quarter, the volume of mid-market activity was down 13% compared with the previous quarter but up 47% in value, returning to the level of the fourth quarter 2019.

 

Eurozone mid-market activity (€15-500 million) in volume, by segment Source: Epsilon Research / Market IQ
Eurozone mid-market activity (€15-500 million) in volume, by segment
Source: Epsilon Research / Market IQ

Of all sellers in mid-market transactions, nearly 50% were private individuals and families. Mostly driven by the fact that Corporates have been less active in their carve-out processes.

Typology of vendors - M&A Europe Zone Mid-Market Evolution of market shares in number of transactions. Source: Epsilon Research / MarketIQ
Typology of vendors – M&A Europe Zone Mid-Market
Evolution of market shares in number of transactions.
Source: Epsilon Research / MarketIQ

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