Sunil Sharma:
As a result of some of the inefficiencies and challenges we're seeing in the private markets, and there continues to be a record amount of dry powder out there. Private equity funds are increasingly looking to the public markets to look for undervalued assets, and see assets where they can make an impact and then look to take them private.
Anne-Marie Henson:
Hello and welcome to Accounting for the Future. I'm your host, Anne-Marie Henson. And today we're going to explore how the current economic environment has impacted M&A activity. Here to share his insights, I want to welcome back a returning guest, Sunil Sharma, who's our National Leader of Transaction Services practice at BDO Canada. He has extensive transaction experience and due diligence, mergers and acquisitions and capital advisory support. He's a proven track record of supporting financial sponsors, public companies and private businesses on their investment and divestiture decisions, and has advised on more than 300 transactions during his career, with an aggregate deal value of more than $2 billion. Sunil, welcome back to Accounting for the Future.
Sunil Sharma:
Thanks for having me, Anne-Marie. Great to be back.
Anne-Marie Henson:
Yeah, I can't believe it's already been three years since the first time we spoke. Time flies. And it feels like a lot has happened in the past few years with regards to deal activity, but yet there's still a lot of uncertainty out there. So, when we spoke before in 2022 markets, were starting to experience a downturn in the post-COVID era, where we can remember the valuations of 2020 and 2021 really large exits go-publics and private equity deals. How does that market compare with today in 2025?
Sunil Sharma:
Yeah, not too dissimilar really. I mean, 2025 is from a public market's perspective, been a tale of two cities. So, you have, since President Trump's inauguration mid-January, the US stock market primarily driven by the same large US tax stocks have seen an increase in volatility, and they did reach a bit of a peak and prices have since declined. Whereas equity markets outside of the US performed quite strongly in Q1. And I think not too disimilar from 2022, 2025 we entered the market with certain US stocks being overpriced and specifically again in the tech sector. And around the world, many have been more fairly priced or even at bargains. And so, I think what we've seen so far in 2025 is a reversion to the mean for some of these higher priced US stocks. And that shift has been exacerbated by the tariffs, especially over the last little last few weeks after Liberation Day. We've certainly seen a big decline in the stock market and seen that shift come across much quicker than maybe would've been a more gradual flatlining after higher valuations in 2024.
Anne-Marie Henson:
Yeah, thanks for providing that context. It certainly feels like for different reasons, the environment today is not that dissimilar to where it was a few years ago. I want to ask you about one thing in particular before we move on to my next question. You talked about markets outside of the US actually doing quite well in Q1. We're sitting here in Canada, which is a pretty close neighbor to the United States. So, inevitably we're really highly influenced by the economic policy of the United States. So, what do you think of Canada and how we've done over the past few months?
Sunil Sharma:
Yeah, I mean I think you're bang on. I think we've been able to generally perform better than the US stock market just given we were better priced heading into 2024, but we similarly have seen that same kind of impact from the US market. So, much of our economy is tied to the US. And so, even if you're not directly impacted by tariffs, there's such a huge far-spanning indirect impact. So, we've seen that in 2025 happen as well. But better positioned to withstand that as we entered the market relative to the US. And again, some of the US players who came in overvalued and then got hammered over the last four to eight weeks.
Anne-Marie Henson:
Yeah, no, that makes sense. Thanks for providing a bit of that insight. I want to ask you a little bit, you've already talked a bit about this, but maybe to ask for a little bit more detail about your insights into interest rates that have previously been quite high have come down a little, but economic conditions, geopolitical uncertainty. What impact are they having on public market activity? And I know we're going to talk a little bit about the go-private market, but I think to understand that you sort of need to start with what the public market is today. So, how do you say that has impacted the markets?
Sunil Sharma:
Yeah, I think heading into 2025, again, it's been a tale to have so far. Heading in to 2025, a lot of the things that you mentioned around interest rate declines, stability from a geopolitical perspective were all meant to be positives when it came to the IPO market and public markets heading into the year. And I think what we've seen so far is some of that might have bear fruit in the early days around President Trump's inauguration. But since then and a lot of the commentary around tariffs has inevitably created a significant amount of worldwide uncertainty.
And initially it started with the USMCA, and Canada and the US, and now it's filtered into Europe and then it's gone into China. So, you could see how significant of a global issue that this has become. And I think as a result of that uncertainty, a lot of that promise people had heading into 2025 has tempered a bit. I think people were expecting 2025 to be a strong year from an IPO perspective. And the amount of uncertainty that's occurred, the ripple effects that has on unemployment and other things, public market sentiment is down. And so, I think a lot of folks have started to think about putting their plans for IPO in 2025 on pause until there's more certainty in the market.
Anne-Marie Henson:
Yeah, that makes a lot of sense. And I guess we've talked a lot about the impact of Trump's election in the United States and some of his policies. We do have a Canadian election coming up actually. By the time we release this podcast, perhaps we'll know who the next Prime minister is. Do you think that has an impact on a company's plans for exit or IPO as well?
Sunil Sharma:
Yeah, it's a good question. I mean, I certainly think not as much as the US market and the impact it has globally. But I certainly do think that there's a significant amount of topics that are up for debate and will go in one direction or the other potentially, depending on how our election results. And so, you could see there's been a lot of pro-investment policies that Pierre Poilievre has come out with that could hopefully result in more funding coming into Canada, more innovation, helping solve some of our productivity issues. And so, you could see that I generally would think given he's a conservative, that would bode well for the public and private markets in capitalism in general. Now, obviously Mark Carney is, I think, a little bit more pro-capital than the previous liberal government, but it's TBD around if the policies end up supporting some of that. And so, I do think that there could be if the conservatives are successful, a boost in the Canadian markets as well.
Anne-Marie Henson:
Great. No, that's good to know. Thanks for sharing that. And although 2025 so far has been, I think, a difficult time for the public markets and IPOs in general, it always provides an opportunity. And I know I read your bio at the beginning, but one thing that I didn't mention was in addition to all of these things that you do on a day-to-day basis, you're also BDO's national private equity leader and have been for the past couple of years now. So, it seems like this market could be a great opportunity for private equity in this space. And I wanted to ask your thoughts on how they're approaching the market currently. So, are they actively seeking public companies perhaps right now at a valuation that could be really attractive to them to take them private? Or do you think there are strategic players that are maybe playing a bigger role in this space?
Sunil Sharma:
Yeah, I mean, I think both. I mean certainly from a private equity lens and almost 50% of deals valued at $5 billion or more in North America were public to private deals. And so, I think private equity funds are often looking at the public markets for opportunities. And I think that's also partially driven by let's say inefficiencies or misalignment in the private markets. So, you are seeing a valuation gap between seller and buyer in private companies. And despite of a lot of the demographic trends around wealth transfer and baby boomers retiring, that gap from a valuation perspective still exists and is making it more difficult to get deals done. Certainly making it more difficult in the environment that we're in currently, where effectively sellers at the moment, don't want to accept a concession on price around any tariff risk and want the buyer to bear that risk. And for obvious reasons, they're uncomfortable with that.
And so, as a result of some of the inefficiencies and challenges we're seeing in the private markets and there continues to be a record amount of dry powder out there. Private equity funds are increasingly looking to the public markets to look for undervalued assets, and see assets where they can make an impact and then look to take them private. And we had several in Canada over the last 12, 15 months. Parkland Corporation was taken private by Birchow. Fairfax took Steve Country private. MDF Commerce was taken private by KKR. So, there's at least a handful or a dozen of take privates that have happened with Canadian public companies. And I could see that trend continuing to exist in the next little while as there's opportunity amongst the public markets.
Anne-Marie Henson:
Yeah, that's really interesting, Sunil. I want to ask you about something, this valuation gap that you're talking about. You mentioned tariffs being one of them, perhaps buyers seeing it as a risk and sellers not wanting to dilute or decrease their valuation as a result. Is there anything else you see that could explain why there's still such a big gap in the private market between the sellers and the buyers, and what they're willing to come to the table to?
Sunil Sharma:
Yeah, I mean I do think the gap shrunk relative to where it was a couple years ago for sure. And I think there's been a little bit more alignment, a little bit more openness to structure on deals we've certainly seen. But you still also have sellers who are anchoring to valuations of the pandemic times where things were a little out of control and valuations were at record highs. And they always hear their neighbor across the street sold their business for $50 million, but they'll always hear the top line price and don't know what the structure and other transaction considerations are there. So, I still think there's a little bit of that as well. And I think there's still the overall geopolitical uncertainty. There's other factors that are there that buyer and sellers haven't quite gotten on the same page.
I was quite optimistic heading into 2025 with an election of our own Canada and either way, a likely more capital friendly government likely to be in place or administration to be in place. So, some political certainty, interest rates coming down and seeing that valuation gap bridge. I thought we were in for a pretty strong year from an M&A perspective. But unfortunately, the threat of tariffs and the uncertainty that's created has not only created a slowdown in activity, but it's also had private equity funds and business owners have to look inwards. So, even if you've thought about selling your business or looking to make an investment, you currently have to look at your other portfolio companies from a PE fund perspective or a business owner needs to say, "Well, shit, I need to manage this supply chain issue or this end market issue." So, folks' attention has moved back inward to manage their business through the uncertainty that's been created.
Anne-Marie Henson:
Yeah, great. Thanks. That makes a lot of sense actually. I want to talk a little bit about, I guess the different types of transactions we can see in a go-private situation. So, you could have a private equity firm that takes company private or there are times where we've seen an industry player acquiring a public company. So, high level, what are the major differences between those two types of transactions?
Sunil Sharma:
Yeah, I mean in the private equity example, inevitably you'll be going private equity, obviously if it's a competitor or another corporate acquirer, it could be public to public potentially. But if you're looking at the major differences, you'd see from a private equity owner or a corporate owner, one is the managing team and what their roles will be. If they're being acquired by a private equity fund, the expectation most likely is that they remain with the business, they continue to lead and push the business forward on the strategy that they come up with and with the private equity fund. If they're being acquired by a strategic or corporate acquirer, it's possible that they're not needed and their roles become redundant. It's possible that the company that's been acquired is now a division of a larger organization. And so, they have a less meaningful role in the business and they take more of a backseat. Or it's potential that it's so highly synergistic that they're not ready, and then they're not needed and they're able to move on from the business post closing.
And then I think when you're going, whether it's PE or not, obviously going from public to private, there's a significant shift in regulatory requirements with filings and things of that nature. But I'd say whether you're going to a private equity company or private equity fund or you're being acquired by a corporate competitor, I think some of the major differences are around management team and their roles, and then governance. And if you happen to remain public, then not as much necessarily changes depending on what the individual role within the company is, but you'll still have the same regulatory requirements, you'd still have the same governance requirements from an investor perspective. And dealing with your ultimate owner will be the same, whereas that changes quite a bit from a private equity perspective.
Anne-Marie Henson:
Yeah, that makes a lot of sense. And I guess when private equity firms today are looking at a potential take private transaction, what exactly would make, I know you just talked before about undervalued assets in the public market, and that could be very attractive to a private equity fund. But what else do you think would make a public company a really nice target for a PE fund?
Sunil Sharma:
Yeah, I mean, I think a lot of the same factors, whether public or private will certainly factor in. So, valuation, recurring cash flow, low CapEx, strong balance sheet, industry dynamics, making sure there's a clear path to exit. I think a lot of those factors ring true, whether it's a public company they're taking private or just a private investment. Where I see a larger difference is when it comes to management and management's objectives. In particular when you have a public company, management might have a three, five year strategy that they're quite keen on executing, but don't think that that type of business or strategy necessarily is going to be of interest to the public markets. There's not going to be a lot of confidence or excitement from a capital markets perspective, which is a significant consideration when you're a public company. Making sure that there's excitement and interest from an investor base is really important.
Whereas for the private equity fund, having a aligned strategy is really important. And so, when there's a management team that's there and they're looking around and saying, "Well, we want to do this, we want to do that." But ultimately that's not right for capital markets or the public market sentiment, to me, that's a right business that could potentially go-private because if they can align with the private equity fund around what that strategy looks like and how that can create value, that becomes really exciting to a private equity fund. They are really good at long-term value creation versus just managing towards sentiment. And they're willing to make investments, whether that's through technology or otherwise that maybe aren't best for the P&L, but are best for long-term value creation. And so, those types of businesses can be quite interesting from a take private consideration perspective by private equity funds. And so, making sure that alignment's there, and management's a little bit more excited about this form of capital than their existing form of public capital.
Anne-Marie Henson:
Yeah, that's really, really interesting actually to hear you explain it in that way. If I am on the public company side then, what are some of the things that I would need to think about before executing that go private transaction?
Sunil Sharma:
Yeah, I mean, I think again, it boils back to what are your objectives for this business and what is the right form of capital and governance to help you achieve those objectives. When again, you're thinking about potentially going private or partnering with the private equity fund, the expectations are different. And you will have meetings with your board and your private equity investors on a routine basis around making sure strategy is being executed and being fulfilled. Whereas the governance and the roadshow from a public company perspective are a little bit different. And so, making sure that, one, management is willing to deal with a more hands-on investor from a actual strategy perspective. And that's not only just accountability, but I think that also is having an investor that can help you execute your strategy, whereas from a public company perspective that's not necessarily there.
And then making sure that the types of capital that you're looking at, because the difference between public and private capital are the right ones that also help you think about your objectives. So, I think those are the things that folks would need to be thinking about when it comes to what the right direction of the business is, ultimately, what are your objectives and which form of capital and expertise helps you achieve those objectives. In Canada as well, I think the size thing is important, too. If you're thinking of going public or IPO, like you have to be of a certain size now to warrant that level of attention and interest. So, I think that's another important consideration if you do want to go public is, are you big enough?
Anne-Marie Henson:
Right. No, I think what's interesting for me in hearing you say this is ultimately, whether you're owned by private equity or you're owned by a bunch of retail investors or shareholders on a public market, the goal is always maximizing shareholder value. I just think in one environment in the public markets, that relationship is almost more short-term and immediate. We've all seen it where public companies have their earnings call, they don't hit their budget or do as well as they expected, and there's an immediate drop in their share price. Whereas the private equity firms obviously want to realize gains on their investments, but they're willing to be a little bit more patient about it. There's a holding period where there's a lot more possibility to invest, like you said, in technology and expanding your operations, maybe even doing additional acquisitions to be able to realize that value in the future.
Sunil Sharma:
Yeah, absolutely. I think you're totally right. And I think you see that long-term value creation is, I think, one of the reasons why take privates can be interesting to private equity funds because they know some of those companies have been under invested in from a value creation perspective, because they got to manage investor sentiment on a quarterly basis. And it's really hard to see ROI if you're just limiting yourself on a quarter to quarter basis. And so, we've seen private equity funds, for example, persistence capital took neighborly pharmacy public, and then brought to private again, because they thought that they would be better suited back as a private company to execute what would've been the growth strategy that they have versus being sitting in the public market. So, I think there's a lot of different case studies and examples around this exact scenario. So, I think going back to the original question, it ultimately comes down to, is there that alignment there?
Anne-Marie Henson:
Yeah. One final question for you, Sunil. I'm going to ask for you to tell me what your prediction is for the coming 12 months. So, I know you see firsthand what's happening in the market and the impact on companies, on private equity firms and the public markets. But what do you see happening over the next 12 months in this environment?
Sunil Sharma:
Well, Anne-Marie, I'm one for one on predictions. I thought Rory McIlroy would win the Masters. And after a roller coaster of a Sunday that I'm just coming down from, he did. So, I'd like to think this next prediction holds true as well. I try to be as optimistic as I can. And I think when we look from an M&A perspective, Q1 didn't start off as many people would've hoped and thought. And I think a lot of the same fundamental characteristics exist around being optimistic. They've just been overshadowed by a potential trade war, which personally I don't think can last that long. Now, it's already lasted maybe longer than some would've hoped or thought. But I think even it's not even that there's a trade war, I think it's the uncertainty that can create that gets attached to it. When you don't know whether they're on or off, or no one wants to necessarily sell their business in that environment. No one wants to write a $50 million equity check around a business that has exposure to those types of tariffs.
So, I think once people understand what it is and what it's going to be, whether it's back to regular scheduled programming or some tariff environment, that can then be underwritten into deals. And coupling that with if interest rates remain low, you have an election in Canada that creates some more stability. There's still a ton of dry powder out there. And you do have certain funds that have been on the sidelines or not been as active as deploying as they'd like to be. They didn't get caught up in the mess of the pandemic years where valuations were really high and they remain quite disciplined in that period.
Coming out of that pandemic environment, things haven't been as active as they would've hoped, although they've been up relative to past years. So, maybe they've done one or two deals and they need to be only a quarter deployed through their fund. And so, I think there's still going to be immense pressure to deploy capital that sets in towards the back half of this year. And so, all of the dynamics still exist for us to have a strong M&A market. And so, I am hopeful that that happens in the back half of 2025.
Anne-Marie Henson:
I hope your prediction is correct. And it is funny to believe that a few years ago when we had this conversation, I don't think we were predicting that we'd be here today with as much uncertainty as there still is. So, it would be nice to see the markets pick back up and these transactions come back to the forefront to help companies and business owners realize values on their own investments.
So, Sunil, thank you so much for your time and your input today. I hope our audience appreciated this discussion. If you liked the episode, make sure you leave a comment or a review, and click to follow or subscribe button to stay tuned for next episodes. Thank you to our listeners for tuning in today and to all of our episodes. I'm Anne-Marie Henson, and this has been BDO's Accounting for the Future. We'll see you next time.