Monday Market Minute | May 1, 2023

PE sponsors cautiously reengage as valuation gaps narrow

What Moved

Q1 2023 PE deal data showed a modest uptick in Canadian mid-market transactions, particularly in recession-resistant sectors like healthcare services, essential infrastructure, and business-to-business software. The bid-ask spread that had paralyzed deal activity through late 2022 was narrowing, primarily because sellers were accepting the new valuation reality. Deal multiples for mid-market Canadian companies had compressed to 6–8x EBITDA from 9–12x at the 2021 peak — levels that allowed PE sponsors to underwrite attractive returns even with 5% cost of capital.

Why It Matters

The reengagement was selective and disciplined. Sponsors were prioritizing businesses with pricing power, contracted revenues, and low capital intensity — characteristics that performed well in higher-rate environments. Leverage levels in new deals were conservative by historical standards, with equity contributions of 50% or more common. This was not the return of 2021-era exuberance — it was rational deployment at cycle-appropriate valuations.

Signal to Watch

Exit activity remained the missing piece. Until sponsors demonstrated an ability to exit portfolio companies at acceptable returns, LP appetite for new PE commitments would remain constrained.

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