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After the slowest year on record for the Canadian private equity market, peaking interest rates and economic resilience have many investors in the space planning to put more money to work in 2024.

Private equity firms in Canada invested $9.7-billion throughout 2023, the Canadian Venture Capital and Private Equity Association said Thursday, representing a 34-per-cent decline from 2022 to the lowest annual total ever recorded. Average deal values also fell to an historic low of $15.5-million.

That total is “underreported,” association chief executive officer Kim Furlong said in an interview, because several of the organization’s members will only disclose the number of deals they completed without sharing dollar values. Even if the real figure is higher, Ms. Furlong said, 2023 was clearly notable for its lack of large deals. Fully 84 per cent of all private equity investments made last year were for less than $25-million.

“There have been years like, say, 2019 that were a $20-billion year because that was the year that WestJet was bought by Onex,” she said, referencing a deal that was worth $5-billion including debt. “Those deals elevate the numbers.”

Higher interest rates appeared to be the key factor keeping bigger deals from getting done. Larger deals often require investors to borrow money, which becomes a more expensive prospect in a high-rate environment.

“When you get to the larger deals, valuations generally are a little bit more robust and there is usually more leverage and so they were impacted more by the shift in interest rates and some of that tentativeness,” said Scott Foster, managing director and Canadian practice leader with Alvarez and Marsal’s global transaction advisory group in Toronto.

“Whereas in the mid-market, the lower mid-market, valuations generally are a little bit less, private equity groups use less debt on them in my experience and therefore that part of the market hasn’t been as impacted.”

Now that interest rates are widely believed to have peaked, Mr. Foster said activity is already starting to pick back up in the private equity space.

“We are probably the busiest we’ve been in a while, I would say right now we are seeing the most activity we’ve seen from Canadian private equity in the past 15 months,” he said. “I don’t think the Q1 numbers will be great, but Q2, Q3 and Q4 could be strong and probably trending ahead of last year.”

Deals are still taking longer to get completed than during the frenzy of deal-making that dominated 2021 and part of 2022. Mr. Foster said instead of taking four months from start to finish, processes have lately required between six and 12 months for proper due diligence to get conducted.

Based on the anecdotal conversations Ms. Furlong has been having with her association’s members, she said “everyone is gearing up for the second half of 2024 and potentially 2025 for a higher level of M&A.”

“There are things happening that PE firms have no control over that are changing the market conditions such that, and this is not anchored in any scientific data, my gut says we are going to see more activity and willingness to sell.”

As one example, Novacap, a private equity firm based in the Montreal area, has already taken notice. Having completed 20 deals worth a combined $905-million, according to association data, Novacap was among Canada’s most active private equity investors in 2023. Those figures surpassed the 10 deals worth a total of $833-million that Novacap completed in 2022.

“Our approach to capital deployment is both strategic and disciplined, focusing on profitable businesses where we can stimulate significant value creation and resource allocation,” said Pascal Tremblay, Novacap’s CEO. “Interestingly, the economic downturn has made such opportunities more evident.”

Mr. Tremblay said Novacap will likely deploy the same amount of capital in 2024 as it did in 2023. “Despite the sector’s slowdown, Novacap has kept its momentum,” he said. “2024 has started on a high note.”

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