The new year is shaping up to be a good one for merger-and-acquisition (M&A) activity, as interest rates continue to fall, aging business owners consider their options and dealmakers around the world look to deploy capital.
“There’s a lot of pent-up demand for transactions from both buyers and sellers,” said Michael Morrow, managing director, national leader, M&A and capital markets with BDO Canada.
The outlook is comparable to 2021, when M&A activity spiked after the first year of the Covid-19 pandemic.
“You had interest rates fall to zero,” Morrow said. “People realized that the world was not going to completely collapse, and all the demand that had been put off for six months rushed back into the market. You saw M&A peak at crazy levels.”
It’s unlikely that 2025 will match that kind of deal volume here in Canada, in part because economic growth has slowed in recent months. Statistics Canada reported that the Canadian economy grew at an annualized rate of just 1% in the third quarter.
“We do expect continued growth in M&A,” Morrow said. “It’s probably going to be lower than we saw in 2021 … where we had rebounding economic growth, really low interest rates and availability of sellers. In 2020, there were relatively few transactions because of Covid.”
Joe Millott, principal and founder of Acquatio, a firm that provides M&A advice to the wealth management industry, said he’s “bullish,” but also “a little bit cautious” about the availability of capital to fund deals.
“We need really strong and healthy capital markets … to be in place to facilitate a strong M&A environment,” he said. “Right now, everything is looking good. Interest rates are forecast to come down, which makes the cost of debt lower and more attractive for a buyer to come in and pay a great price for a good opportunity. So long as optimism remains, I think it will be a great year for M&A volume.”
Canada’s wealth management and insurance advisory service providers are both hot properties among industry players looking to scale up and outside investors who see the sector as a source of stable earnings.
“It’s really a frenzy right now in the insurance space,” Morrow said. Firms are being valued at four- and five-times revenue. “We’ve never seen valuations as high as we see now. … The consolidation there is just on fire.”
There’s plenty of demand on the wealth management side too. “The banks have a significant piece of that market overall,” Morrow said, “but there are plenty of independents with good market share and opportunities.”
The CI Financial deal
In late November, Abu Dhabi-based Mubadala Capital took CI Financial Corp. private in a $4.7-billion deal, valuing the enterprise at $12.1 billion. Shareholders took home $32 per share, a premium of 33% in comparison to CI’s previous closing price.
“The CI deal is an obvious indication that there is some significant foreign interest in Canadian assets,” said Rob Hong, CEO and co-founder of Sapling Financial Consultants. Private equity firms see value in Canadian operations, particularly those that do business in the U.S., he said. “Canadian assets tend to be cheaper. … There are big benefits to using a Canadian firm to sell into the U.S. marketplace, with Canadian costs.”
Richard Betsalel, managing director at Crosbie & Company Inc., an M&A advisory and investment bank, said the CI investment was an American wealth management play, primarily. “The U.S. side was really what they wanted,” he said, in reference to the firm’s Corient business line. A little less than half of the company’s $518 billion in assets under management as of Sept. 30, 2024 reside in the U.S. “Canada is a nice to have.”
Betsalel said the investment is a long-term demographics bet that makes sense in both Canada and the U.S. “The population keeps getting bigger. Assuming the markets do OK, your assets go up, which means your fees go up.” He expects there to be continued interest in the business among private equity investors.
Morrow said Canada is attractive to global investors. “We get a lot of inbound interest from parties outside of Canada, whether they’re in the U.S., Latin America, Europe or Asia. We’re a pretty stable country, with a good court system, a relatively stable political system and relatively stable economy. We don’t really have the kind of big boom and bust cycles in Canada.”
As the Canadian dollar weakens relative to its U.S. counterpart, that makes domestic acquisition targets more valuable.
“There are lots of scale opportunities in the Canadian market,” Millott said. “One opportunity to transact was CI, and that had been sort of telegraphed to the capital markets for some time. Now that the deal has been announced, it will have a ripple effect.”
Millott also said he’s optimistic that the CI deal will benefit Canadian reps. “The management team announced $750 million of new capital as part of that transaction,” he said. “I believe Canada will be a healthy beneficiary of that.”
The broader market
Multiple sources told Advisor.ca that M&A activity won’t only consist of CI-sized deals. The opportunities to scale up in both wealth management and life and health insurance are compelling.
“A lot of these are individuals or very small groups that set their practices up 20 or 30 years ago,” Morrow said. “It’s such a valuable business that the large consolidators are paying out for it.”
BDO Canada is “advising on a number of transactions” on the insurance side, said Morrow. “Consolidators are really looking for opportunities to scoop up distribution. … There’s a huge rush to try to own that distribution in markets across Canada.”
“The insurance sector is as hot as we’ve ever seen,” he said. “It’s definitely a seller’s market right now.”
Millott agreed. “There’s probably about 10 buyers to one seller in this market, so it is a fantastic time to be a seller,” he said.
Still, advisors thinking about testing the waters need to know that the process can be a complicated one.
“A lot of people would be surprised to hear that around 50% of letters of intent or deals agreed to in principle actually fail,” said Millott. “The most common reason for failure is a lack of alignment on valuation — which is probably the most crucial one — a difference in culture and mission between the buyer and seller and a difference in the vision — what does growth look like and how is that growth going to be delivered?”
Millott advises his clients to prepare carefully before going to market and to assemble a team of professionals. “You need a really strong accountant, lawyer and M&A advisor.”
Risks to the outlook
For all the pent-up demand and solid fundamentals, there are risks that could throw one or more spanners into the works. Canada’s slowdown in gross domestic product growth is a clear one. It would support the continued lowering of interest rates, but it could also make it more difficult to access capital. And U.S. president-elect Donald Trump’s tariff threats have the potential to destabilize economies here and abroad. Any effort by Ottawa to counter could drive inflation back up, and interest rates along with it.
“Canada has had fairly stagnant growth this year, and last year,” said Morrow. “Right now, we’re forecasting Canadian growth to return to normal rates of over 2%. If that doesn’t occur, that would certainly slow the path of acquisition.”
That risk applies to the buy side though, not the sell side. Advisors looking for an exit strategy aren’t likely to be turned off by an economic downturn.
“Business owners, as well as management teams, are approaching retirement age,” said Morrow. “The succession issues within those organizations are creating the need to sell.”