Economic Cycles and M&A in Private Equity
- Brandon Chicotsky
- 7 days ago
- 13 min read
Private equity deal-making is deeply tied to the economy's ups and downs. Here's what you need to know:
Economic cycles impact M&A activity across four phases: expansion, peak, contraction, and trough. Each phase influences deal volume, pricing, and financing conditions differently.
During growth periods, low interest rates and strong confidence drive higher valuations and more deals. In contrast, downturns create tighter credit, lower valuations, and fewer transactions.
The valuation gap - a frequent challenge in recessions - has been narrowing since late 2025, improving conditions for deal-making.
Private credit is now a major financing source, especially for mid-market firms, offering flexible terms when traditional bank loans are scarce.
By 2026, the recovery phase is gaining momentum, with private equity firms holding $3.9 trillion in capital and focusing on high-quality deals.
For business owners, understanding these trends is essential for timing exits, structuring deals, and navigating the M&A landscape. God Bless Retirement offers tailored support for lower mid-market businesses, connecting sellers with buyers and ensuring confidentiality throughout the process.
How Economic Cycles Affect Deal Volume
Private equity deal activity tends to move in sync with economic cycles - picking up during periods of growth and slowing down during downturns. Historical data shows an 82% correlation between economic trends and private equity deal volume [9]. When GDP grows and corporate profits are strong, sellers feel more confident, and buyers find it easier to secure financing. This creates a feedback loop that drives mergers and acquisitions (M&A). Let’s break down how these cycles influence deal volume during both growth and contraction phases.
Deal Volume During Expansion and Peak Phases
During economic expansions, low interest rates and investor optimism pave the way for larger acquisitions and higher levels of capital investment. This environment often leads to record-breaking deal activity. For instance, in 2021, global M&A activity peaked with about 41,300 deals, fueled by sustained economic growth and abundant available capital [7][8][9]. Key industries like technology, financial services, and healthcare saw particularly high activity, as investors sought out high-margin assets and businesses with recurring revenue models [8][9].
This momentum carried into 2025, following a slowdown in 2022–2023. A notable example is the September 2024 acquisition of AirTrunk, a data center operator, by Blackstone and the Canada Pension Plan Investment Board for $16.3 billion. This deal capitalized on growth trends in artificial intelligence and cloud infrastructure [12]. By the third quarter of 2025, private equity deal value in the U.S. hit an all-time high of $177 billion, largely driven by "megadeals" worth $5 billion or more [10]. While the total number of deals didn’t match 2021’s peak, these massive transactions made up a significant share of the overall deal value.
Deal Volume During Contraction and Trough Phases
Economic downturns, on the other hand, bring challenges that dampen deal activity. Factors like declining buyer confidence, tighter financing conditions, and wider valuation gaps slow the pace of transactions [9][11]. Companies often hesitate to make large investments when faced with negative economic forecasts, which can be triggered by rising interest rates or geopolitical uncertainty [2].
The 2022–2023 period highlights this effect. As the Federal Reserve raised interest rates to combat inflation, global private equity deal volume dropped by 26% to $2.4 trillion in 2022, while the number of deals fell 15%, totaling just under 60,000 transactions [7]. In 2023, U.S. private equity activity declined further, with deal count down 16% and total value shrinking by 25% [12]. The median holding period for private equity-backed companies hit a record 7 years in 2023, as firms struggled to find favorable exit opportunities in a tough market [12].
Downturns also bring the "denominator effect", where falling public market valuations force institutional investors to reduce new commitments to private equity funds. This creates a cycle of reduced capital availability, fewer deals, and delayed exits [7].
Recovery typically begins when creative deal structures emerge to bridge valuation gaps. By December 2025, 66% of general partners reported that valuation gaps - the biggest hurdle to dealmaking in 2024 - had narrowed significantly [10][11]. This shift allowed deal activity to bounce back, though the recovery was concentrated in larger, higher-quality transactions rather than a broad surge in volume. By 2025, global M&A value climbed to $3.0 trillion, a 31% increase from 2024, even as the total number of deals remained steady at around 33,000 [8].
Pricing Changes Across Economic Cycles
Pricing trends are a key factor in shaping private equity valuations, closely mirroring shifts in deal volume. Economic cycles have a profound impact on valuation multiples: during periods of growth, optimism and accessible credit drive multiples higher, while downturns - characterized by rising interest rates and tighter liquidity - push them lower.
When interest rates are low, debt becomes cheaper, and discount rates decrease, allowing buyers to pay more for assets[7][17]. On the flip side, economic contractions often lead lenders to tighten their purse strings, reducing available leverage and forcing pricing corrections[7][17]. Investor sentiment also plays a pivotal role. In times of economic expansion, confidence fuels competitive bidding and elevated prices. During downturns, however, caution takes over, leading to more conservative offers - even when the underlying fundamentals remain unchanged[18][6]. Let’s break down how these dynamics unfold during growth periods and recessions.
Valuation Multiples During Growth Phases
In economic expansions, favorable conditions lift valuations across the board. Growth phases are marked by heightened valuation multiples, while economic slowdowns typically bring adjustments. For instance, in 2021, private equity buyout entry multiples hit a record 13.2x EBITDA, with public market multiples climbing even higher to 14.6x EBITDA[7]. These lofty figures were fueled by near-zero interest rates and abundant liquidity, which intensified competition for high-quality assets. The momentum carried into 2025, with U.S. syndicated loan issuance reaching a record $404 billion by Q3, while global private equity deal value surged to $310 billion. This narrowing of valuation gaps between buyers and sellers was largely attributed to improved financing conditions post-2023, as noted by McKinsey[14].
Competition among buyers often amplifies these trends. Take the January 2025 deal where Blackstone acquired a majority stake in Citrin Cooperman, an accounting firm, from New Mountain Capital. The transaction was valued at a 15x EBITDA multiple, a notable jump from the 11x EBITDA multiple New Mountain had paid in 2021[13].
Valuation Multiples During Recessions
Recessions, on the other hand, bring a reversal of these dynamics. Rising interest rates increase debt costs and discount rates, while reduced liquidity limits leverage, leading to lower purchase prices[7][17]. A clear example of this was the 2022 slowdown, when private equity buyout entry multiples fell from 13.2x EBITDA in 2021 to 12.9x EBITDA, and public market multiples dropped from 14.6x EBITDA to 12.0x EBITDA[7]. Sellers, clinging to the pricing expectations of boom times, often found themselves at odds with buyers, who adjusted their offers to account for higher financing costs. This mismatch directly impacted deal valuations[1][16].
Interestingly, such periods can present opportunities for buyers with strong financial resources. As Saad Adada, CFA at Mnaara, pointed out:
The greatest returns often emerge when conventional wisdom says retreat - but only for those prepared with specialized expertise and patient capital[18].
For those with the agility and foresight to act, market downturns can be a chance to acquire quality assets at reduced prices, even as traditional exit options become more limited.
Financing Conditions and Leverage Across Economic Cycles
Grasping how economic cycles influence financing conditions is key to understanding private equity deal-making. Shifts in the economy directly affect the availability and cost of debt, which in turn reshape how deals are structured. For instance, during periods of economic growth, low interest rates and ample credit allow for higher leverage ratios and reduced capital costs. This creates a competitive lending environment, where banks are eager to provide financing, enabling private equity firms to pursue highly leveraged deals[7].
However, the scenario changes when central banks raise interest rates. In such cases, banks tighten lending to non-investment-grade borrowers, leading to a drop in deal volumes[7]. A notable example occurred during the credit tightening of 2022, when global private equity performance dipped into negative territory for the first time since 2008, recording a -9% return through September[7]. Additionally, rising rates often trigger the "denominator effect", which reduces private equity commitments[7][19]. By 2024, global private equity fundraising had fallen to $680 billion - a 30% decline from the previous year and the lowest level since 2015[19]. These fluctuations in financing conditions highlight the stark contrast between growth periods and economic downturns.
Financing During Growth Periods
Economic expansion brings opportunities for more aggressive deal-making. Lower interest rates restore market confidence, narrow valuation gaps, and support bold underwriting approaches[5][20]. With cheaper debt and declining discount rates, buyers can justify paying higher prices for assets. As Vivek Bantwal, Head of Global Financing Group at Goldman Sachs, pointed out:
Financial sponsors have been relatively quiet the last two years... We are starting to see that dynamic change with more constructive markets[20].
The numbers back this up. In the first half of 2025, U.S. private equity deal value rose by about 8% year-over-year, reaching over $195 billion, even though deal volumes remained steady[5]. At the same time, U.S.-based private equity funds saw their dry powder decrease from a record $1.3 trillion in December 2024 to roughly $880 billion by September 2025, as firms actively deployed capital into deals[5]. The financing environment during this period was described as "benign", with improving new-issue loan values and increasing leverage ratios[14][5].
Financing Challenges During Downturns
Economic downturns, on the other hand, present a very different set of challenges. When traditional bank financing becomes scarce, private equity firms often turn to private credit as an alternative. For example, during the credit crunch of late 2022, private lenders funded more than 80% of middle-market private equity transactions[7]. By early 2025, the private credit market had grown to $3 trillion, with projections estimating it could reach $5 trillion by 2029[21].
Private credit offers several advantages over traditional bank loans. It provides floating interest rates, which help hedge against inflation, faster execution, and more flexible terms. These features make it an increasingly attractive option, especially as banks face stricter regulatory requirements[21][19]. Ashwin Krishnan, Head of North America Private Credit at Morgan Stanley Investment Management, summed it up well:
Private credit has filled a lending void... providing real-time interest rate protection compared to investments like fixed-rate bonds[21].
The data supports this shift: senior direct lending losses remain lower than those seen in leveraged loans and high-yield bonds[21].
This shift in financing dynamics is particularly impactful for mid-market businesses. When bank credit tightens, private lenders step in with customized deal structures, such as mezzanine and junior capital, to bridge valuation gaps and keep transactions moving forward[21][19]. For businesses with under $25 million in EBITDA, understanding and utilizing these alternative financing options is critical for navigating economic downturns and seizing new opportunities. These evolving conditions highlight the importance of being flexible and strategic in private equity transactions, especially for lower mid-market businesses.
Mid-Market Private Equity in the 2026 Recovery Phase
By 2026, falling interest rates and steady trade policies are giving mid-sized businesses some breathing room, helping them improve their forecasting and profit margins[22][23]. Private equity firms, armed with plenty of capital, are stepping in to fuel the recovery. After years of slower activity, there's now a surge in demand for deals, with projections showing a 5% increase in deal volume for the year[3]. However, the rebound isn't uniform across all sectors.
A "K-shaped" recovery is taking shape. Tech-enabled mid-market companies are thriving, while businesses without clear differentiation are struggling to keep up[26]. Among U.S. General Partners, 73% expect deal activity to rise, and 66% say the gap between buyer and seller valuations has narrowed, making it easier to finalize transactions compared to previous years[3][10]. Josh Smigel, Private Equity Leader at PwC US, summed up the optimism:
Clearer conditions and stabilizing policy are restoring confidence. With ample capital and significant backlog, private equity is positioned for an active deal market in the near term[5].
Opportunities for Lower Mid-Market Businesses
The recovery brings unique opportunities for smaller mid-market firms. Private credit has become the dominant financing option, now representing 90% of middle-market loan issuance, a massive jump from 36% a decade ago[17]. This shift allows for tailored financing solutions that traditional banks often overlook. On top of that, the average cost of funding for private equity middle-market loans has dropped by 3 percentage points from its peak, making acquisitions more affordable[26].
For private equity-backed platforms, lower mid-market companies are attractive targets to boost margins. To win investment, these businesses need to show strong operations and embrace technology, moving beyond traditional financial restructuring. Over 50% of mid-market portfolio companies are now using AI, applying tools like automated coding and predictive pricing to gain an edge[26]. David N. Miller, Managing Director at Morgan Stanley, highlighted this trend:
The benefits of AI are now cascading into mid-sized private companies, which are leveraging these tools to drive efficiency, accelerate product development, and enhance customer engagement[26].
For business owners looking to sell, working with specialized brokers can simplify the process. God Bless Retirement (https://godblessretirement.com) offers services tailored to this segment, including certified valuations, buyer sourcing, and connections to CPAs, financial planners, and private equity experts. Their family-led approach ensures confidentiality while matching sellers with buyers who understand the nuances of lower mid-market deals.
Emerging Trends in PE M&A
Technology is reshaping private equity deal-making in 2026, aligning with the broader recovery trends. By late 2025, 45% of M&A professionals were using AI, enabling faster document reviews in virtual data rooms and cutting down on the time spent on manual audits[24]. Advanced analytics are also helping firms uncover hidden value and spot promising targets that traditional methods might miss.
This tech revolution extends beyond deal sourcing. 51% of private equity firms are hiring data scientists and AI experts, and 53% plan to strengthen their expertise in digital transformation within the next year[15]. These hires reflect a shift toward using AI not just for speed but for deeper, data-driven due diligence that tests deal assumptions against various economic scenarios.
Firms are already seeing results. For example, Brookfield's use of AI reduced repair call times by 15–20% and boosted sales by 25%[4]. However, AI also brings its own challenges - 20% of strategic dealmakers have walked away from deals due to concerns about how AI might impact a target company's business model[24].
Private credit continues to play a growing role in funding mid-market transactions. In June 2025, KKR provided $600 million in flexible capital to India’s Manipal Group to support its expansion, showcasing how private lenders are stepping in where traditional banks are hesitant[4]. Meanwhile, regulatory changes are opening up 401(k) retirement plans to private equity, with 61% of General Partners exploring products for this market[25][4][10]. In April 2025, Apollo and State Street introduced a fund allowing investors to allocate 10% of their 401(k) portfolios to private markets, potentially unlocking a massive new capital source for mid-market investments[4].
Adopting AI, leveraging data, and prioritizing operational efficiency are becoming essential for attracting private equity interest. As Eric Janson, Global Private Equity and Principal Investors Leader at PwC US, observed:
While continuing to do deals where strong conviction exists, we are also seeing some of the largest private capital players using the current uncertain market to look inward, improve their efficiency and capabilities[4].
These trends emphasize the importance of agility and readiness as mid-market businesses navigate the shifting landscape of the recovery phase. The ability to adapt quickly will be critical as private equity evolves to reshape deal-making strategies.
Conclusion
Economic cycles play a pivotal role in shaping private equity M&A, influencing everything from deal volume and pricing to the availability of financing. During periods of economic growth, valuations rise, and competition heats up. Conversely, downturns often present opportunities for strategic buyers to secure deals at lower prices, paving the way for stronger long-term returns. Historical data reveals that companies making acquisitions during recessions have experienced median shareholder returns outperforming their industries by up to 7% within a year[2]. Understanding where we are in the economic cycle is critical for making informed decisions.
Looking ahead to 2026, the recovery phase brings both opportunities and challenges. While global dry powder stands at an impressive $3.9 trillion, capital deployment has become more selective. Buyers are focusing on creating operational value rather than relying solely on multiple expansion. Additionally, AI readiness has emerged as a key factor in valuations. As Ramzi Ramsey, Senior Managing Director at Blackstone Growth, highlights:
Companies who are viewed to benefit from AI tailwinds are seeing outsized multiples and deal activities; companies where AI is viewed to be a detractor... may have no bid.[1]
For lower mid-market business owners, timing remains crucial. Though valuation gaps have recently narrowed, achieving success still hinges on strong fundamentals, solid operational performance, and creative deal structures[3]. In such a dynamic environment, working with experienced advisors can make all the difference. God Bless Retirement (https://godblessretirement.com) specializes in guiding businesses with under $25 million EBITA through the complexities of the M&A process. They provide certified business valuations, connect sellers with qualified buyers, and offer access to a network of CPAs, financial planners, and private equity experts. Their family-led approach ensures personalized, confidential guidance tailored to the current market landscape, helping business owners position themselves effectively regardless of economic conditions.
The bottom line? Economic cycles will continue to influence M&A activity, but business owners who stay informed, adapt to shifting conditions, and partner with seasoned advisors can achieve success in any market phase.
FAQs
How do economic cycles impact mergers and acquisitions in private equity?
Economic cycles have a noticeable impact on private equity M&A activity. When the economy is booming, deal volumes typically climb, company valuations rise, and financing options are more readily available. On the flip side, during economic slowdowns, deal-making often tapers off as valuations decline and securing financing becomes more difficult.
Even so, private equity firms often uncover opportunities in tough times. By honing in on undervalued assets and employing strategic planning, these firms can still generate solid returns, even in a downturn. This ability to thrive in different economic conditions underscores how private equity can adapt to shifting market landscapes.
How does private credit support private equity financing during economic downturns?
During tough economic times, private credit becomes an essential option when traditional bank lending dries up. As banks impose stricter lending standards, private credit funds step in to fill the gap, ensuring that private equity firms still have access to the capital they need.
This approach helps private equity firms keep deals moving forward and provide ongoing support to their portfolio companies, even when broader financial conditions make traditional financing harder to secure.
How is AI helping private equity firms during economic recovery?
AI is reshaping the way private equity firms operate, especially during periods of economic recovery. By processing massive amounts of market data, AI provides actionable insights that can transform decision-making. One standout advantage is its ability to speed up deal sourcing. Instead of spending weeks manually researching, firms can use AI to quickly pinpoint companies with strong growth potential and stable cash flows. This allows them to zero in on high-quality opportunities and allocate their capital more effectively.
Another game-changer is how AI streamlines due diligence and valuations. By automating the analysis of financial statements, market trends, and comparable transactions, AI not only reduces the risk of errors but also accelerates the entire deal process. This ensures more accurate pricing - an essential factor in uncertain financing environments. On top of that, AI-powered tools can simulate various economic scenarios, enabling firms to stress-test investments and fine-tune their strategies after closing deals.
For boutique firms like God Bless Retirement, adopting AI brings a competitive edge. It enhances their ability to offer confidential matchmaking, deliver precise, data-driven valuations, and stay ahead in a market where speed and accuracy are paramount.
