2025 Middle Market M&A Outlook

In M&A, the only constant is change, right?

We know it can’t be that simple, so we’re continuing an annual tradition by surveying our private equity contacts about M&A over the past year and the one to come. They swim in these waters every day, and we’re paying attention to the thought-provoking answers they returned.

But before we gaze ahead, let’s review . . .

Where we’ve been

M&A watchers had high hopes that 2024 would see a major rebound after the post-2021 slump. For PE players, the reality largely lived up to those hopes, with notable increases over 2023 in the number and value of deals.

The increase in activity was largely thanks to lower interest rates and a rosier macroeconomic outlook for much of the year. The federal funds rate currently sits 100 basis points lower than it did even in early September, which has made financing more attractive and brought buyers’ and sellers’ value expectations closer together.

Still, Q4 was a bit quieter for PE dealmakers than previous quarters. Some groups may have declined to pursue new transactions while they waited to see how November’s election shook out. 

After a January that appeared to extend the quiet streak, Class VI launched our annual survey.

What private equity is thinking

We asked active PE investors more than a dozen questions designed to gauge their reaction to 2024 and their beliefs about what’s coming in 2025. Respondents work on acquisitions in a range of industries, but they all focus on middle market deals.

What insights did we pull from the results? Here are some topline takeaways:

• Buyers continue to engage in a flight to quality in which top-grade assets receive fevered competition and high valuations—and these assets are becoming scarcer, making the feeding frenzy even more intense.
• Auction processes are increasingly common, with a large majority of respondents saying they engaged in moderately more or significantly more of them.
• Industries will react differently to prevailing market forces, which will affect how businesses in those sectors are valued in the coming year. For example, lingering inflation concerns and tariff-related disruptions could lower discretionary spending—and valuations—in the consumer goods sector more than in business services.

Overall, we were surprised by the number of responses that were a variation on “about the same” or “remain consistent.” We expected this for many of the questions comparing Q4 2024 to Q3—dealmakers were in wait-and-see mode leading up to and immediately following the election.

But even many of the predictions for 2025 are in the “remain consistent” category, reflecting the cautious approach of our PE contacts. Deal activity has ticked up, rates are loosening, and business leaders expect a more favorable tax and regulatory environment, but some of the new administration’s economic proposals might contribute to hesitancy to make big M&A maneuvers—time will tell.

Why this matters to entrepreneurs

Owners are busy with day-to-day tasks—not everyone can stay updated on the moves that investors in their industry are making.

But this is potentially useful information whether you’re in a growth phase or considering a sale. Understanding the buyer mentality can reveal what makes your business valuable, and how you might improve that value.

Deal flow

Very few respondents saw higher deal activity in Q4 than in Q3. But compared to 2023, few respondents saw lower overall deal flow in 2024, showing the year-over-year improvement even with a slow quarter finishing out the year.

Deal quality

“About the same” was the most common answer to both questions. This likely reflects the continuation of the flight-to-quality trend we saw starting in 2023. Many large funds still haven’t exited from assets they scooped up in headier times, so these funds are now competing for smaller assets than their usual investment thesis would indicate. This trend will likely continue until we see large-scale PE exits.

Auction process 

The flurry of auction activity is another byproduct of big PE funds playing downmarket. When asked for additional comments, our respondents commonly discussed that there was a lot of money chasing fewer top-quality businesses, which fueled intense bidding competition and drove up valuations.

Leverage 

Leverage reads in the final quarter of the year continued to improve over the prior quarter, signaling optimism that lenders will help deals get done at valuations that narrow the bid-ask spread.

Over half of respondents observed an increase in leverage reads from lenders at the end of 2024 compared to the year before. This jump is supported by an increase in deal closings and valuation multiples in 2024; lenders had a larger appetite for dealmaking activity after the Fed steadied the tumultuous interest rate environment.

Deal structure and terms

Our results revealed a fairly even split between PE buyers who experienced moderately more seller-favorable deal structures and those who saw structures and terms as moderately more buyer favorable. Still, nearly half of all responses were “about the same.”

Valuations

Among the respondents who focus on consumer deals, there’s a common belief that company valuations will decrease moderately or stay consistent. This may reflect worry about proposed tariffs, some of which have already been implemented—the consumer goods sector is especially at risk from supply chain disruptions that trade wars can bring.

On the other hand, many of those surveyed see a rosier picture for business services owners. This category is less susceptible to supply chain woes and valuations tend to live within a narrower range than for consumer companies, so tariffs wouldn’t necessarily affect these firms as much.

Respondents generally expect valuations in the industrial and manufacturing sectors to remain fairly steady, although aggregate deal activity in the sector may be largely dependent on the ongoing tariff policy, which stands out as the top concern among investors in the space in 2025.

The technology sector saw a nice rebound last year. Sector deal value was up 32% over a challenging 2023, when companies were hit hard by rising interest rates that created a gulf between buyers’ valuation capabilities and sellers’ expectations after a number of white-hot years in tech M&A. In 2025, buyers expect valuations in the space to remain consistent with the prior year’s averages, with a continued focus on AI tech and the new administration’s deregulation around the sector.