Private Equity Is Coming
Hide your great Canadian microcap compounders because private equity is coming to take them!
My friend Francis Lavoie recently shared a fascinating Visual Capitalist chart with me. According to Citizens Bank, $2.5 trillion in private equity (PE) cash reserves are currently waiting to be invested.
It’s a staggering amount.
You can read the full article here.
Let’s unpack a few of the main takeaways as it relates to small public companies:
Historically, there’s been a strong correlation between PE dry powder and M&A deal value (look at the two lines on the chart). Deal value fell off a cliff during the last two years while dry powder increased. The data suggests we could see a strong rebound in M&A activity going forward.
Most deals happen among smaller companies, while PE firms hold out on mega-deals. It probably has to do with the macroeconomic environment, namely the rise in interest rates, which makes it more challenging to finance larger deals. Small deals are in favor right now because they are easier to get over the finish line.
Private equity makes up about 40% of the global M&A market. A considerable part of the M&A market is sitting on huge piles of cash reserves and looking for opportunities.
This data correlates well with a trend that’s been developing lately in the Canadian microcap market. Several small public companies have been acquired by US private equity firms.
A few more deals have been announced after I wrote a post on this topic last month (Flurry of Acquisitions). The primary one was the acquisition of Q4 Inc. by Sumeru Equity Partners (a US private equity firm) for $257 million, a valuation of 3.3 times annual recurring revenue and a 36% premium to the last closing price.
The combination of a devastated Canadian microcap market, extremely low valuations, a favorable USD/CAD exchange rate, and the PE market dynamics highlighted above make for a powerful cocktail.
If the microcap market doesn’t recover, I fully expect to see an inflow of US private equity money into the space and a wave of privatizations.
Will Canadian investors wake up before it’s too late?
Disclaimer
This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund does not hold a position in Q4 Inc (TSX: QFOR). Always do your own research and consult a professional before making investment decisions.