Overall M&A Market Commentary
The M&A deal activity reached what appears to be a market bottom during the first three quarters of 2025, continuing the downward trend from 2024 but stabilizing at this low level. Both the number of deals and their total value in the first three quarters of 2025 fell to less than half those recorded during the same time period in 2024. Despite this decline, there are reasons for cautious optimism in the market.
Consumer confidence remains strong, leading to resilient spending patterns. Companies are consistently investing in capital equipment as they seek higher earnings. In addition, banks and other financial institutions continue to offer ample credit. Private equity (“PE”) firms and family offices still hold considerable uninvested funds, and strategic buyers have significant cash reserves and borrowing power. While these conditions appear promising for a rebound in M&A activity in 2026, so far, the pace of actual M&A transactions remains slow.
One year into the new presidential administration, rapid and frequent changes continue across government operations, regulations, immigration policies, and tariffs, all seemingly intended to support economic growth. Furthermore, the administration remains active in foreign affairs, including matters related to Gaza, Ukraine, Venezuela, Greenland, Iran and other regions. Domestically, tensions are rising in places such as Minnesota, Oregon, and Illinois, with Immigration and Customs Enforcement upholding federal immigration laws that appear to be unpopular with segments of the population. Although all these developments may not directly have an impact on M&A activity, they may serve as distractions and introduce an additional measure of uncertainty to the market.
In 2025, the U.S. economy successfully achieved what many considered a soft landing, avoiding the recession and inflation spike that some economists had predicted would result from new tariff policies. Economic growth unexpectedly reached 4.3% in the third quarter, up from 3.8% in the second, rebounding from a contraction in 1Q25. Robust consumer spending and increased investment, especially those fueled by artificial intelligence and new growth opportunities, along with the passage of the “One Big Beautiful Bill,” helped offset the effects of tariffs. The Atlanta Fed forecasts that GDP will climb further to 5.3% in the fourth quarter. Most economists, including the Atlanta Fed expect full-year GDP growth to be about 2.0% for 2025. Looking to next year, Atlanta Fed President Raphael Bostic predicts U.S. GDP growth will exceed 2.0% in 2026, pointing to ongoing U.S. economic resilience.
Supporting the assertion of continued economic resilience, the National Federation of Independent Businesses (“NFIB”) Small Business Optimism Index rose in December to 99.5 above the 52-year average of 98. At the same time, the NFIB uncertainty index fell seven points to its lowest reading since June 2024. Bill Dunkelberg, the chief NFIB economist stated, “2025 ended with a further increase in small business optimism, while main street business owners remain concerned about taxes, they anticipate favorable economic conditions in 2026 due to waning cost pressures, easing labor challenges, and an increase in capital investments.” The U.S. economy continues to demonstrate resilience, with GDP growth surpassing expectations and economists noting a reduced likelihood of recession.
Due to the extended collection period for private company M&A market data, our reporting reflects a one-quarter lag. Consequently, the market commentary provided below primarily addresses results through the third quarter of 2025. Any fourth quarter 2025 information used to project trend lines in this edition is considered preliminary and will be comprehensively evaluated in the subsequent quarterly newsletter.
A wide range of buyers are eager to make acquisitions. PE firms have significant investment capital available and must invest it within set timeframes. Strategic buyers are financially strong and continue to look for new growth opportunities. Because there are fewer sellers than buyers, demand for deals surpasses the number of high-quality companies for sale. Consequently, sellers who are well-prepared and have solid company fundamentals can draw considerable interest and secure premium outcomes.
M&A Market Activity
The M&A market has yet to recover following its post-pandemic peak in 2021. Although there was notable market optimism both before and after the November 2024 election, transaction activity unexpectedly slowed as participants awaited further clarity on the impact of policy changes, including tariffs, regulation and immigration policy introduced by the new presidential administration. As a result, M&A market activity throughout the first three quarters of 2025 has remained subdued.
Currently, there is plenty of available capital and strong interest in mergers and acquisitions throughout the market. Business owners remain optimistic about the future, though they still face short-term uncertainties. The new administration has taken an assertive stance on reducing regulations, altering immigration policy, and using tariffs to promote domestic manufacturing. These efforts aim to shift the nation’s economic priorities and boost both U.S. manufacturing and employment. Despite these initiatives, political compromise remains challenging, contributing to ongoing political unrest and uncertainty in the U.S. As a result, the M&A market, which typically reacts negatively to uncertainty, has experienced a decline in activity, as indicated by our deal market data.
PE funds and strategic buyers continue to demonstrate strong interest in mergers and acquisitions. These entities possess significant resources and capital to facilitate such transactions. To maximize their assets and achieve desired returns, they are encouraged to increase activity within the M&A market. However, the principal challenge remains the limited availability of acquisition opportunities due to a scarcity of sellers.
There are positive indicators ahead. The growing number of business owners approaching retirement will likely drive increased demand for liquidity events, such as selling their businesses. Likewise, PE funds hold a significant number of mature portfolio companies that will require exit strategies. These factors are expected to enhance deal supply and stimulate M&A market activity. With sustained deal demand and a projected rise in saleable companies, current trends suggest that the M&A market could experience an upswing in 2026.
In 3Q25, middle-market deal volume remained flat at $14.0 billion, matching 2Q25 levels, and the number of deals closed was also unchanged. M&A volume stayed low throughout the first three quarters of 2025, with early 4Q25 data indicating this trend will continue.
The average middle-market deal size remained at $70.0 million in both 3Q25 and 2Q25. YTD 2025 saw an average of $71.7 million, up from $52.1 million in YTD 2024. Lower-middle-market M&A deals are increasingly trending toward larger transactions in 2025.
Despite the stagnation in deal volume, the market remains characterized by cautious optimism. Many industry participants express hope that increased stability in political and regulatory environments will help unlock more transactions later in the year. Advisors and intermediaries report that the pipeline of potential deals is growing, even if actual closures are delayed due to ongoing uncertainties.
The current environment favors proactive preparation by potential sellers, positioning them to act quickly when market conditions improve. Many advisors recommend that sellers begin preparations now so that sellers can quickly take advantage of favorable market conditions once they emerge.
Generally, the PE exit activity follows overall M&A deal trends, but this year, the 2025 PE activity during the first three quarters was more robust than in the overall M&A market. In 3Q25, PE exits by dollar value more than doubled, increased by 101.2% compared to 2Q25, while the number of PE exits only increased by 14.1% from the same period. This indicates that PEs are starting to achieve liquidity in larger portfolio companies in 3Q25. PE funds have been behind in returning cash to their limited partners, which could explain the increased deal volume. Limited partners need their cash back, and the funds seem to be meeting that demand.
PE funds specialize in buying and selling companies, actively participating in diverse deal markets and often leading the M&A sector. They acquire and sell portfolio companies at optimal times to maximize returns and must invest and exit within set periods—typically seven to 10 years—to return capital to investors. This time constraint drives ongoing evaluation of exit strategies and swift decision-making.
In 2023, the median holding period for PE portfolio companies reached seven years due to delayed asset sales amid market uncertainty. By 2025, this dropped to around six years as conditions improved, though a significant backlog of unsold companies remains, with a third of these companies held over five years. PE funds used recapitalizations and structured deals to create liquidity and pull cash from the holdings, but total company sales still provide the most direct exit. As the deal market recovers, these long-held companies are expected to increase future deal activity, with early signs of PE sales already emerging in late 2025.Strategic and financial buyers remain active in buying companies through M&A but are cautious due to market uncertainty. Due to uncertainty, well-performing companies attract the most buyer interest. Sellers should prepare thoroughly to achieve strong valuations, manage competitive sales, and handle detailed due diligence. With strong buyside demand, improving market conditions and the backlog of unsold companies, 2026 could be the start of a significant escalation in the M&A market.
Middle Market Deal Valuations
M&A deal valuations have stayed within a narrow range in recent years. While smaller company valuations eased over the last two quarters, larger deals saw a sharp increase in 3Q25. The data may be inflated, as higher-quality deals with premium valuations continue to close in the current market skewing the valuation data higher.
- 3Q25, deal valuation multiples for transactions under $25.0 million were recorded at 6.4x, representing a modest increase compared to the long-term average of 6.2x for this segment.
- Deal valuation multiples for large middle-market transactions (over $50.0 million) in 3Q25 reached 8.9x, which is notably higher than the sector’s long-term average of 8.2x.
- Finally, 3Q25, valuations within the $25.0 to $50.0 million middle segment were reported at 6.5x, which is below the five-year average of 6.9x.
PE funds have significant undeployed capital, and strategic buyers are selectively pursuing acquisitions. Although M&A activity has slowed down and new deals are fewer, demand for high-quality targets remains strong. This supply-demand gap allows quality sellers to achieve higher valuations, but only well-prepared companies succeed through rigorous due diligence and longer negotiations.
Private Equity versus Strategic Valuations
Strategic buyers make up about two-thirds of M&A deals, including PE portfolio companies seeking add-on acquisitions. Their capacity for cost and revenue growth synergies lets them offer higher prices, if they choose to do so, than typical financial buyers.
Since 2020, strategic premiums in the M&A market have generally declined, except for a brief period in 2022 and a short reversal in 2023. This declining trend continued into early 2025, but 3Q25 saw a significant increase in the strategic premium. The low transaction volume in recent years may have distorted the data and contributed to both the decline and the surge in 3Q25 strategic premiums.
In the past five years, PE buyers have consistently made deals with average EBITDA multiples around 7.3x, likely due to reliance on debt financing and lender oversight enforcing valuation discipline. In contrast, strategic acquirers’ prices have been more volatile, reflecting changing synergies and the strategics’ willingness to pay more to secure deals.
In Prairie’s experience, for transactions valued at less than $50.0 million, middle market valuations typically fall one to two EBITDA multiples below the levels presented in the chart below.
Middle Market Leveraged Buy Out Capitalizations
Commercial banks are pursuing new credit opportunities, with refinancing and expansion driving lending in 2025. A sluggish M&A market means fewer deals for lenders and buyers. Since early 2025, lending terms have become more aggressive, benefiting issuers in the short run.
Private credit markets—such as business development companies (“BDCs”), asset-based lenders, and private credit funds—are becoming more significant, actively seeking new deals and offering better terms to riskier borrowers. While these loans are generally more expensive with higher debt service costs, increased private credit activity is boosting overall debt availability, encouraging aggressive lending, and sometimes lowering credit spreads.
The maximum aggregate debt for transactions remained stable at approximately 49.5% of the typical leveraged capital structure in 3Q25. Over the past five years, a 50-50 allocation between debt and equity has consistently been maintained.
Mezzanine funds are key players in leveraged deals. Although this financing method has its benefits, it comes with high interest rates that can put pressure on a company’s cash flow. Mezzanine financing is particularly important in middle-market buyouts when obtaining senior debt is challenging. While interest-only and payment-in-kind (“PIK”) structures remain common, today’s market also sees equity co-investments being used to better match mezzanine returns with the deal’s risk level.
Overall Comment on the Financing Markets
The 2025 economy has demonstrated resilience and remains one of the most stable worldwide. In 2Q25, the economy grew at an annual rate of 3.8%, a significant rise from the 0.6% contraction in 1Q25. Consumer spending, which makes up a large part of the economy, drove the growth in 2Q25 GDP. Full-year 2025 GDP growth is projected to slow, with estimates between 1.7% and 1.9%. This expected slowdown is linked to potential effects of tariffs and other policy uncertainties. The escalating tariff conflict between the U.S. and China in October, along with the government shutdown, is likely to make the final quarter of 2025 quite eventful.
Although the initial Liberation Day tariff announcement caused a drop of more than 12.0% in the equity markets in April, the major equity indices recovered and, by the end of September, reached record levels. It is interesting to note that after six months of increased tariffs, inflation has not risen significantly, with many economists suggesting that inflation will occur later. This bears an eerie resemblance to earlier predictions that inflation would be transitory following the massive stimulus injected into the economy during the pandemic. Time will tell.
The credit markets started the year with a substantial rise in new business capacity. However, the absence of deals involving acquisitions, mergers, and corporate growth has left lenders’ demand for opportunities unmet. Because of the low deal volume, lenders have become more aggressive with credit prices and deal terms, creating a market that favors issuers. With extra capacity and fewer new deals, lenders are now more open to story credits and smaller deals, mainly because they have more available time.
The Fed lowered interest rates by 100 basis points through three cuts in 2024. So far in 2025, the Fed reduced rates by 25 basis points in September and is likely to make one or two more cuts later in the year. These reductions have led to declines in the Prime Rate and the SOFR curve. These rates serve as the basis for adding a credit spread to determine the borrower’s interest rate. Lower rates will decrease financing costs and increase potential debt capacity for new deals. This could further boost higher M&A valuations and raise loan demand once tariff uncertainty diminishes.
Banks, non-bank lenders, insurance companies, SBA funds, BDCs, and the rapidly growing Private Credit funds all hold substantial capital and are eager to issue new loans. So far, their options have mainly included refinancing deals and a limited number of growth capital and capital expenditure loans. If the M&A market recovers as expected, it could energize a highly active capital market and result in even more loan growth later in 2025 and into 2026.
Preparation is essential in any market, but it becomes even more important in the current economic environment. All borrowers should create detailed business plans that show lenders how the Company will handle inflation, shrinking profit margins, revenue fluctuations, tariffs, and other business challenges, including interest rate changes. Since lenders expect repayment, borrowers must clearly communicate their plans to ensure this. With thorough preparation, creditworthy and qualified borrowers will be better positioned to attract funding. Borrowers should also be prepared for a potentially lengthy financing process and may face more cautious and more expensive capital options.
Total U.S. Middle Market Loan Issuance
- Lower interest rates and reduced recession fears made borrowers more comfortable with the environment and increased their demand for new credit in 2024. This credit was used to refinance high-cost debt, fund growth, and support capital projects. As a result, U.S. leveraged loan issuance in 2024 rose sharply to $1663.0 billion, surpassing all totals from the post-COVID years and even the years just before COVID.
- Loan issuance through August 2025 matched the volume issued through August 2024, leading to expectations that the full-year 2025 loan volume will meet or exceed 2024 levels. This remains true despite decreased M&A activity and tariff uncertainties. Lenders are eager to pursue lending opportunities and are finding ways to manage the uncertainty.
- Bank lenders continue to focus on relationship banking, providing lines of credit for corporate borrowers, and prioritizing areas where they have a competitive advantage, such as operational needs like payroll and checking accounts. After nearly six months, the new tariffs have not significantly affected the economic environment. However, due to ongoing uncertainty, banks and other lenders remain cautious when issuing new loans and are selective with leveraged transactions. Private credit funds are also active and looking for new credit opportunities.
Interest Rate Environment
The Fed funds rate was reduced by a total of 100 basis points in 2024, ending the year at 4.25% to 4.50%. In 2025, the Fed funds rate decreased by 25 basis points.
So far, the tariffs imposed since April 2025 have had a limited impact on rising inflation, and the annualized GDP growth for 2Q25 was strong at 3.8% but slowed in 3Q25. With GDP growth decelerating and a cooling labor market, some economists have suggested one or possibly two more interest rate cuts this year. While the government remains shut, it will be more difficult for the Fed to analyze the economy; however, alternative data sources are available.
The interest rate environment returned to normal in late 2024, with an upward-sloping yield curve signaling more typical inflation expectations. By the end of 2024, the 2-year to 10-year spread was a positive 33 basis points, and it remained positive at 56 basis points as of September 30, 2025. The shift toward a more upward-sloping yield curve indicates a normal interest rate environment.
Middle Market Debt Multiples
- The average total debt leverage in middle-market deals increased slightly in 2Q25, rising to 3.9x from 3.7x in 2024 and 3.6x in 2023.
- Mezzanine capital remains an essential part of leveraged capital structures. Although it is more expensive than senior debt, its return structure aligns with the risk profile of companies operating in uncertain economic conditions like those we face today.
- Over the past five years (2018-2023), mezzanine debt averaged 0.7x EBITDA in the standard capital structure. During 2Q25, mezzanine leverage rose slightly from 0.6x in 2024 to 0.8x EBITDA, marginally above the long-term average.
- The senior debt markets improved in 2024, but since our market data is a quarter behind, we are still evaluating the 2Q25 market. So far in 2025, the lending market has withstood tariffs and other uncertainties and continues to actively pursue new loan opportunities.
- Similar to the M&A market, we anticipate more tariff-driven shifts in the lending markets for the remainder of 2025.
Terry Bressler is a Managing Director Emeritus and can be contacted at 312.348.1323 or by email, tbressler@prairiecap.com.
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