PE Pulse 2022

Executive summary

As we enter the third year of the pandemic, our annual Canadian private equity survey shows a continued optimism despite fewer respondents expecting transactional volumes to increase year-over-year. This is perhaps unsurprising given 2021’s record year for private equity dealmaking, which peaked at a five-year high at the close of last year.

A positive outlook for the sector is ongoing in terms of investment returns, with just under half of surveyed respondents expecting returns on realized investments to improve in 2022. At the same time, we do see sentiment shifting when it comes to the overall global political economic climate, with world events and other factors, including the prospect of rising interest rates, potentially influencing stakeholders’ outlook on fundraising. In particular, recent events related to the Russia-Ukraine conflict as well as sanctions on Russia, may have broad global implications as well as an impact on funds investing in Europe, geographic allocations for investment strategies, as well as implications for sponsor portfolio companies who do business with Russian entities. Only approximately one in four private equity respondents believe it will be easier to raise new funds in 2022—a figure which represents a significant decline from 2021.

The vast majority of stakeholders say the current level of valuation multiples paid during M&A transactions involving private equity financing is too high. As long as valuation multiples remain high, private equity funds will continue to sell their assets at a record-setting pace; however, some direct consequences on valuations could come from increased energy prices, potential supply chain disruptions and capital markets developments   

Respondents to our survey pointed to a number of factors, including global economic and political uncertainty and rising interest rates, as potential headwinds in 2022. If interest rates continue to increase, this should push valuation multiples down. Lower valuation multiples coupled with high vendor pricing expectation could lead to misalignment between buyers’ and sellers’ price expectations. If this occurs, we expect to see more earn-outs used to bridge buyers’ and sellers’ valuation gap. Despite potential volatility in the year ahead, the amount of private equity dry powder remains at record-setting levels, demand for strong assets will continue to remain high which should fuel the private equity M&A market.

As businesses continue to focus on digital transformation, the technology sector remains a key sector of choice for private equity dealmaking, although fewer stakeholders believe the sector will produce the best opportunities as compared to a year ago.  

When asked to describe factors that are critical to their success in the coming year, the highest proportion of respondents cited hiring (and maintaining) good talent as key—a widely-held view across organizations who continue to grapple with abrupt changes in workforce dynamics triggered by increased M&A activity, the pandemic, the mobility and shortage of talent, increasing need to pay higher amounts to retain and attract good talent, and aggressive recruiting for top performers. While the current environment is undoubtedly putting pressure on the private equity market, institutional investors are not expected to decrease their private equity allocations this year, reflective of the high demand for this asset class. These factors serve as strong indicators of deal activity and momentum in the year ahead.