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Business Post – February 26^st, 2023

Melior Equity Partners co-founders Peter Garvey and Jonny Cosgrave, two of the most experienced deal makers in Ireland, look at deal volume and business valuation trends over the past two years and give their forecast for the rest of 2023.

In December last year, Peter Garvey and Jonny Cosgrave said yes to an offer they couldn’t turn down. The co-founders of Melior Equity Partners, the Dublin-based private equity firm, had received a number of offers to buy BHP Insurance, a corporate insurance brokerage business they had bought themselves just over a year before, in August 2021.

It wasn’t part of the original plan to sell the insurance company so soon after acquiring it, but the offer on the table was simply too good to pass up.

“Normally we hold our investments for about five or six years. We acquired BHP as a buy and build play, thinking that we could build something to sell on to the consolidators in the insurance industry,” Garvey told the Business Post.

“We spent a lot of time trying to acquire other businesses in that space, but we were getting a little frustrated because we were getting outbid on acquisition opportunities. The market for insurance companies was just so hot.

“And then we got a tap on the shoulder from a number of players to see if we wanted to sell BHP. We got some very good offers and we decided to go ahead and sell. We made almost three times our money in under a year-and-a-half on that deal. We were pretty happy.”

Garvey and Cosgrave are two of the most experienced deal makers in Ireland. Having previously worked in M&A and corporate finance roles in London, the pair returned to Ireland in 2014 to lead the Carlyle Cardinal Ireland Fund (CCIF), which was a €292 million fund backed by Cardinal Capital, the Dublin-based alternative finance fund, and Carlyle, the US private equity giant.

Over a six-year period investing the CCIF fund, Garvey and Cosgrave oversaw 11 deals to acquire Irish businesses in a range of sectors, including well-known companies such as Carroll’s Cuisine, Lily O’Brien’s, McCauley Pharmacy and AA Ireland.

The pair went on to establish Melior in January 2020 and raised a new €160 million fund from a variety of backers, including Carlyle and three of the US fund’s original founders: Bill Conway, David Rubenstein and Daniel D’Aniello.

On top of its acquisition, and subsequent sale, of BHP Insurance, Melior has completed two further deals in the past year, acquiring majority stakes in Salmon Software, the Dublin-based treasury management software company, and Rose Confectionery, a sweets, snacks and freeze pops manufacturer in Co Offaly.

With around €100 million of the Melior fund still to be deployed, Garvey and Cosgrave said they are targeting six or seven more deals over the next three years. The M&A investment market has, however, seen enormous change and volatility in the two years since Garvey and Cosgrave first founded the firm.

An influx of international capital, coupled with a bull run in the technology space, drove business valuations to record levels in almost every sector over the last two years. Unsurprisingly, this saw deal volumes almost double in the same period as more and more business owners took the opportunity to de-risk and take some cash off the table.

An analysis carried out by Melior shows there were over 300 deals completed in Ireland during 2021 and again in 2022 – significantly higher than the previous three years, which averaged 180 deals a year between 2018 and 2020.

The last six months, however, have seen a significant readjustment in the corporate finance landscape as interest rates began to rise and Central Banks tightened monetary policy. According to Melior’s figures, the number of M&A deals completed in Ireland last year was down 5 per cent at just over 300 transactions.

Cosgrave said 2022 was a tale of two halves, with a significant slowdown in deal volumes in the final months of last year.

“In the first half of last year there was still a lot of optimism in the market. Deal volumes in the first six months of last year were up 8 per cent year on year, with over 150 transactions completed,” Cosgrave said.

“But the second half of the year was a completely different story due to the war in Ukraine, record energy prices, high inflation and rising interest rates. This combination saw deal volumes for the second half of last year fall 16 per cent on the same period in 2021, and I expect that trend to continue this year.

“There’s still a lot of strategic capital and private equity money out there in the market looking to be invested. But deals are taking longer to complete. I think deal volumes will probably fall to the low 200s this year, but will still remain above pre-pandemic levels.”

‘Equity is stuffed with cash’

Aside from the higher volume of deals, Garvey and Cosgrave said the rise in activity in the market drove company valuations to very expensive levels. The surge in business valuations during 2021 and early 2022 even prompted Denis O’Brien, the billionaire founder of the Digicel Group, to encourage business owners to sell up.

“Right now the markets are so hot, private equity is just so stuffed with cash, that they’re trying to buy businesses all over the world,” O’Brien said in December 2021.

“This is a time where people can sell their businesses at higher multiples than they ever, ever expected. I’m always a great believer that if somebody gives you a big valuation of your business, take it. In the space of a year, things can change, and you can spend the next five years with your business and not grow the value of it.”

The M&A market is quite different in the 12 months since O’Brien made those comments, and valuations are now starting to correct. That said, acquiring companies is still quite expensive when compared to the long-term average, according to the Melior co-founders.

“Valuations got quite frothy over recent years, but with all the volatility last year from the war, higher interest rates and all that stuff, we estimate valuations came back about 15 per cent on average in 2022,” Garvey said.

“But if you compare last year’s figures with 2020 or before the pandemic, valuations were still about 10 per cent higher. So valuations were quite frothy and now they’re coming down a bit, particularly in the second half of last year. But they’re still above long-term valuation averages.”

In the last 12 months, Garvey and Cosgrave said the valuations for tech companies alone had plunged 50 per cent from their peak, which underscores the uncertainty that continues to hang over the global tech industry.

“There were a lot of companies out there that had good underlying business models, but the founders drove their business way too fast such that the quality of people or revenue they added over that time was just lower. And so, the incremental return is lower,” Cosgrave said.

“Interest rates at zero created a massive misallocation of capital. How that will unwind itself should present opportunities.”

Garvey and Cosgrave said that Melior will likely complete two or three deals this year, with a number in the pipeline that are at an advanced stage. The firm typically invests €10 million to €35 million in equity into a company, depending on its size.

Garvey said the firm generally goes for businesses in any sector that are owner-founder led and are making at least €2 million in profits.

“The types of companies we like are recurring revenue technology businesses, healthcare businesses and, to a lesser extent, financial services firms. We’re also very comfortable buying what are classed as more traditional businesses in the food sector,” he said.

“Sometimes we will invest in businesses that are break-even but have really good growth stories, but in general we go for profitable companies. We don’t do distressed acquisitions. We don’t feel that’s a space that we’re properly resourced to do as it can be quite labour intensive.

“We’re very much growth capital investors. We want to sit down with management teams to create a plan with them that they will drive to double or triple the size of the business in a four- or five-year period. We’re really looking for four or five shots on goal to make that happen.”

The pair said their investment offer to business owners is both a means to help them take some cash off the table, and also help de-risk important business decisions for the future growth of the company.

“A lot of Irish entrepreneurs have an illiquid asset that is very valuable but very concentrated. If we come in, it allows the business owner to take some cash off the table, but we also want owners to roll in a big chunk of equity alongside us. We want them to be highly motivated,” Garvey said.

“We talk about creating the conditions for growth in a business. That’s fundamentally about getting a business owner to change their appetite for what they see as risk but what we see as sensible business decisions.

“We used to worry about business owners not coming into work the next Monday after we did a deal. But actually what we find is that they come to work the next week and they’re ready to go. It gives them the chance to take a good bit of money off the table and go again.”