Sean Stevens, co-head of Fasken's corporate group, says private equity will be a key driver
This year will be strong for M&A activity in Canada, with middle-market deals set to dominate amid ongoing political and economic uncertainties, says Sean Stevens, co-leader of Fasken’s capital markets and mergers & acquisitions practice group. Stevens spoke with Canadian Lawyer about a report his firm recently released on what to expect on the M&A and private equity front in 2025.
“Mega deals are harder to…put into place, particularly in a period of uncertainty like we have right now,” Stevens says. He points to lingering challenges such as inflation, interest rate volatility, and geopolitical tensions, which make valuations for large transactions particularly sensitive. “A 5 percent shift in a mega deal’s valuation is a huge amount of money,” he says, whereas middle-market transactions are “easier to arrive at” regarding value alignment. Stevens notes that the sector has already seen a resurgence, particularly in late 2024, as buyers and sellers found common ground after a prolonged standoff over valuations.
Private equity is expected to take a leading role in this middle-market activity. According to Stevens, firms are sitting on unprecedented “dry powder” levels, with some estimates pegging unspent capital at nearly a trillion dollars. This and renewed fundraising efforts position private equity as a driving force in Canada’s M&A market. “We saw…an uptick in the fourth quarter, but that barely put a dent in what’s available,” he says. The appetite for dealmaking extends beyond private equity firms, with surveys by groups like KPMG indicating that corporations also view M&A as essential for their growth strategies. Stevens says this sets the stage for robust activity on both fronts: “Private equity [will return] to being the real driver of the M&A market in Canada, but we’ll also see a lot of corporate activity.”
However, the landscape for foreign transactions is becoming increasingly fraught. Stevens highlights growing national security scrutiny from Canadian regulators, particularly in sectors such as mining, which are deemed critical to the country’s interests. “Deals that we never would have thought touched on national security are being looked at,” he says. This includes transactions involving critical minerals, government contracts, and sensitive data, all under heightened review. Canada’s more activist approach to foreign investment screening makes deals more complicated and protracted, adding layers of uncertainty.
Stevens advises sellers to factor regulatory risk into their decision-making, suggesting that deal certainty may be worth sacrificing a premium. “Sometimes, it makes sense to take a little bit less money with higher deal certainty,” he says, noting that domestic buyers or WTO-compliant acquirers are likely to face fewer hurdles.
Deal complexity is another defining feature of the current environment. Stevens notes that regulatory oversight has expanded significantly in recent years, requiring deeper due diligence and innovative deal structures. One area that has gained prominence is cybersecurity and data privacy. “You need to look at the history of breaches [and] data protection…even in what you might call the old economy sectors,” he says, emphasizing the universal nature of these concerns. Stevens also highlights the growing use of contingent considerations, such as earn-outs tied to future performance. “These are challenging to arrive at, requiring careful negotiation of metrics and operational restrictions,” he explains, attributing the trend to continued market uncertainty.
Cross-border deals, particularly those reliant on US-Canada trade, face additional challenges due to geopolitical tensions. Stevens warns that activity in sectors like manufacturing and automotive, which are heavily integrated with US markets, may temporarily freeze if trade uncertainties escalate. “People are going to stop and take a look and see what’s going to happen,” he says, referencing potential tariffs and retaliatory measures as factors creating an overhang of uncertainty.
Despite these hurdles, Stevens remains optimistic about the long-term outlook for M&A activity. He points to stabilizing inflation and interest rates as positive indicators for the market. “When you strip off the overhang of economic uncertainty, the signs point to robust dealmaking conditions ahead,” he says. However, he cautions that navigating this environment will require creativity and thoughtful planning. He stresses the importance of risk-sharing mechanisms and strategic sector selection, urging clients to “protect yourself from those [risks], whether it’s risk sharing, [or] avoiding certain sectors.”
Fasken’s latest report on M&A trends underscores this complexity, noting that deal structures are becoming more intricate, and transactions are taking longer to close due to regulatory hurdles. Stevens says his firm has adopted a proactive approach, leveraging expertise from its government relations and international trade groups to help clients navigate evolving challenges. “We have a government relations group closely monitoring developments and providing regular updates to clients,” he explains. This includes anticipating potential trade disputes, regulatory bottlenecks, and sector-specific challenges.
Stevens says the natural resources sector is one bright spot for 2025. While middle-market transactions will dominate, he sees potential for mega deals in areas like mining, particularly as demand for critical minerals like copper continues to rise. “You may see some mega deals in the natural resources sector,” he says, adding that rising commodity prices could make these deals viable despite the broader uncertainties.
Ultimately, Stevens views the current environment as an opportunity for well-prepared companies to gain an edge. “Business has to carry on,” he says, noting that acquisitions remain critical for many firms’ growth strategies. By navigating risks thoughtfully and leveraging creative solutions, he says companies can capitalize on the favourable conditions emerging beneath the uncertainty.
