Private Equity Trends from Broker Groups
- Brandon Chicotsky
- 5 days ago
- 11 min read
Private equity in 2025 is evolving, with key trends shaping the market:
Deal Activity: Lower mid-market deals (companies with less than $25M EBITDA) are steady, while add-on acquisitions dominate, making up 75.9% of Q2 buyouts. Deal volume rose 17%, and value surged over 40% compared to 2024.
Fundraising Challenges: Larger firms attract most capital, while smaller managers face scrutiny. New investor options, like 401(k) access to private markets, are expanding retail participation.
Exit Strategies: Continuation vehicles are now mainstream, addressing valuation gaps and liquidity needs. M&A and IPO exits have slowed due to high interest rates and valuation mismatches.
Financing Shift: Private credit now accounts for 90% of U.S. middle-market loans, offering flexibility in a tight credit environment.
Operational Focus: Firms are prioritizing earnings growth through cost-cutting, AI-driven efficiencies, and smarter pricing strategies.
For business owners: Clean financials, focus on EBITDA growth, and prepare for alternative deal structures. For investors: Partner with managers delivering strong returns and leverage flexible financing options. Brokers should guide clients on readiness and realistic valuations while maintaining strong buyer networks.
Market Performance and Capital Movement
Deal Activity in the Lower Mid-Market
Private equity deal activity saw a strong uptick in the first half of 2025, with deal volume increasing by 17% and deal value jumping over 40% compared to the previous year [4]. However, beneath these numbers lies a shift in how deals are being structured. The surge was largely fueled by major transactions in industries like retail, transportation, energy, financial services, and infrastructure. Meanwhile, the lower mid-market - businesses generating less than $25 million in EBITDA - experienced steadier activity [4][1].
One key trend is the growing dominance of add-on transactions. In Q2 2025, these deals made up 75.9% of all buyout activity, a noticeable rise from the five-year average of 72.5% [1][4]. This indicates that private equity sponsors are prioritizing bolt-on acquisitions to expand existing platforms and strengthen pricing power, rather than creating new standalone investments. For example, Moss Adams merged with Baker Tilly to form a top-six U.S. CPA firm, and Hometown Food Company's $600 million acquisition of Chef Boyardee illustrates a focus on acquiring established, cash-generating brands [1]. For family-owned businesses in the lower mid-market, this trend opens up opportunities to integrate into larger platforms, particularly in sectors like services, distribution, and light manufacturing.
Although deal flow remains healthy, broker groups report that deal-making has slowed compared to pre-2024 levels. This is due to valuation mismatches and tighter financing conditions [1][3]. Sellers often hold out for higher multiples, while buyers stay disciplined, leading to longer negotiations and more deals falling through. Still, businesses with solid fundamentals, clean financial records, and clear growth potential are closing deals at appealing prices - especially when positioned as add-ons or carve-outs [1][3]. These shifts in deal structures are shaping the broader fundraising and investment landscape.
Changes in Fundraising and Investor Participation
As deal structures evolve, capital flows are following a divided path. Larger, well-established firms are attracting the bulk of the capital, leaving smaller managers facing tougher scrutiny [2]. Institutional investors are now prioritizing higher DPI (distributions to paid-in capital) and quicker payouts over traditional IRR metrics [2]. This shift reflects growing dissatisfaction with the liquidity crunch caused by over $1 trillion of NAV tied up in older private equity vintages, which limits distributions and reinvestment opportunities [2].
On a positive note, individual and retirement investors are gaining more access to private markets. In April 2025, Apollo and State Street launched a fund allowing 401(k) participants to allocate up to 10% of their portfolios to private markets [4]. A month later, Empower, which oversees $1.8 trillion for 19 million U.S. retirement savers, announced plans to include private credit, equity, and real estate in some retirement accounts [4]. These initiatives are expanding the investor base and increasing retail capital flow into private equity, which helps sustain deal activity even amid market volatility. For lower mid-market businesses, this underscores the importance of having clear and defensible business models to attract both institutional and retail investors.
Private credit has also emerged as a major force, now dominating 90% of U.S. middle-market loan issuance, up from just 36% a decade ago [6]. This provides flexible, non-bank financing options in today’s high-interest-rate environment, where traditional bank lending remains limited. Such financing is offering more pathways for lower mid-market deals to move forward [1][3].
Exit Methods and Liquidity Options
Continuation Vehicles for Portfolio Exits
As market conditions evolve, exit strategies have shifted to address new challenges. Private equity firms are increasingly relying on continuation vehicles as a key strategy in 2025. These vehicles enable sponsors to move one or more portfolio companies from an older fund into a new structure, giving existing investors two options: cash out immediately or reinvest their stake in the new fund for continued exposure [3][5]. To ensure fairness, pricing in these deals is validated through independent valuations and third-party capital [3][5].
Continuation vehicles provide flexibility for both general partners (GPs) and limited partners (LPs). GPs can extend their management of assets, while LPs can choose between immediate liquidity or staying invested - an approach that addresses over $1 trillion in locked net asset value (NAV) and helps navigate valuation and financing challenges [2][3][5]. Once considered niche, this strategy has gained mainstream acceptance, largely due to constraints in traditional exit methods caused by valuation gaps and financing difficulties [1][3][5].
To ensure these deals are successful, best practices now focus on managing conflicts. This includes competitive bidding processes with multiple secondary buyers, requiring GPs to co-invest in the new vehicle, and maintaining transparency with existing investors [3][5]. LPs, however, have become more discerning, supporting continuation deals only when they involve high-quality assets, fair pricing, and a clear alignment of interests. These shifts reflect broader market pressures such as tighter financing conditions and valuation disparities [2][3]. This growing reliance on continuation vehicles highlights the challenges facing more traditional exit routes like mergers and acquisitions (M&A) and initial public offerings (IPOs).
Decline in M&A and IPO Exits
M&A and IPO exits have slowed significantly, driven by rising interest rates that have increased financing costs and widened valuation gaps [1][3][8]. Many sponsors are holding onto assets longer, unwilling to sell at discounted prices - especially those acquired during the valuation highs of 2021. Compounding the issue, stricter U.S. antitrust policies have made large strategic deals even more complex, further delaying decision-making [1][3][8].
IPOs are facing similar hurdles. Volatility in public markets and skepticism toward highly leveraged offerings have drastically reduced opportunities for sponsor-backed listings compared to the boom years of 2020–2021 [3][7]. Only top-performing assets in sectors like infrastructure and established technology have managed to secure favorable terms in public markets [3][7]. As a result, most private equity-backed companies are opting for private sales, continuation vehicles, or dividend recapitalizations instead [1][7]. For smaller businesses generating under $25 million in EBITDA, intermediaries like God Bless Retirement report longer deal timelines and more selective buyer interest, with many owners choosing to delay sales amidst ongoing valuation uncertainties [1].
To address these challenges, firms are turning to dividend recaps, NAV-based credit facilities, and partial secondary sales as alternative liquidity options [1][2][5]. These tools allow sponsors to refinance portfolio company debt and distribute cash dividends to their funds, providing liquidity while retaining ownership [1]. This shift has fueled growth in the secondary market, where total deal value has surged 42% in the first half of 2025 [5]. What was once considered a backup option has now become a primary channel for liquidity, reflecting the sector's ability to adapt to changing conditions.
Industry Sectors and Regional Activity
This section delves into how specific industry sectors and regional dynamics are shaping deal activity, building on earlier trends in market performance and capital flows.
Active Sectors in the Middle Market
During the first half of 2025, private equity activity zeroed in on sectors like retail, transportation, energy, financial services, and infrastructure. These areas drove both deal volume and value as sponsors took advantage of favorable credit conditions [4]. Meanwhile, health, technology, and industrial sectors also stood out, showing promising growth opportunities [1].
A notable trend across these industries was the dominance of add-on acquisitions, which made up 75.9% of buyout activity in Q2 2025 - an increase from the five-year average of 72.5% [1][4]. These acquisitions allowed sponsors to scale operations and improve efficiency. For instance, in financial services, Focus Partners Wealth's $9.6 billion acquisition of Churchill Management Group marked a significant expansion in wealth management capabilities [1]. In consumer goods, Hometown Food Company's $600 million purchase of Chef Boyardee - valued at approximately 1.3x EV/sales - capitalized on steady input costs within the food and beverage sector [1].
The retirement and financial services sector also saw considerable attention as private equity broadened its reach into alternative asset classes. In April 2025, Apollo and State Street launched a fund enabling 401(k) participants to allocate up to 10% of their portfolios to private markets. Similarly, Empower announced in May 2025 a partnership to integrate private credit, equity, and real estate options into retirement plans managing $1.8 trillion in assets for 19 million participants [4].
These sector-specific developments are complemented by geographic factors that further shape the deal landscape.
Geographic Patterns in Deal Activity
Regional deal activity is being shaped by regulatory and trade considerations, adding another layer to sector trends. While detailed U.S. regional data remains sparse in broker reports, broader policy discussions are clearly influencing investment patterns. Many companies are delaying asset spin-offs as they await clarity on U.S. tariff policies and international trade regulations. This uncertainty around trade exposure is playing a significant role in the timing and structure of deals [1]. Additionally, European institutions are reassessing their U.S. investments due to policy risks, which is impacting the flow of international capital into American markets [2].
As regulatory uncertainties ease, carve-out transactions are expected to pick up pace in the latter half of 2025 [1]. For smaller businesses in the lower mid-market - those generating less than $25 million in EBITDA - firms like God Bless Retirement are leveraging their nationwide reach and strategic international partnerships to navigate both domestic and global deal environments effectively. This approach ensures these firms remain competitive across diverse geographic markets.
Operations and Valuation Issues
With changes in exit strategies, the focus has shifted to operational efficiency as the primary driver of value creation. High interest rates have pushed firms to rethink how they create value, moving away from the old reliance on inexpensive debt. As rates are expected to remain elevated through 2025, the traditional playbook of leveraging cheap capital is no longer viable.
Adapting Operations to a High-Rate Environment
Private equity sponsors are now under pressure to deliver annual earnings growth exceeding 4% to hit their internal rate of return (IRR) targets [1]. This marks a significant shift from financial engineering to genuine operational improvement. To achieve these goals, firms are implementing smarter pricing strategies, refining product positioning, and ramping up the use of AI to fuel growth [1]. Instead of leaning on leverage, sponsors are focusing on cutting costs and pursuing strategic add-on acquisitions to create operational efficiencies.
Bridging the Buyer-Seller Valuation Divide
As exit strategies evolve, one of the toughest hurdles remains aligning valuations between buyers and sellers. Disagreements arise over factors like future earnings potential, the scope of operational improvements, and acceptable discount rates. Sponsors have had to become more flexible in their valuation approaches to work through a growing backlog of businesses ready for exit [1].
To bridge these valuation gaps, creative solutions are being employed. These include earnouts, contingent payments, and third-party valuations to align incentives and mitigate risk. Continuation funds have also become essential tools, enabling sponsors to refinance aging funds, provide distributions to investors, and maintain operational control until target valuations are met [1][3]. For smaller businesses in the lower mid-market, particularly those generating less than $25 million in EBITDA, services like God Bless Retirement offer certified business valuations. These valuations establish credible baseline figures, helping parties negotiate more effectively and productively.
Conclusion
Summary of Main Trends
The U.S. lower mid-market private equity space experienced a notable rebound in the first half of 2025, with deal volume climbing by 17% and deal value surging over 40% compared to prior periods [4]. Add-on acquisitions dominated buyout activity, making up 75.9% of Q2 2025 deals - well above the five-year average of 72.5% - as firms prioritized scaling their existing platforms [1]. Meanwhile, traditional exit routes like M&A and IPOs have become less viable, with continuation vehicles and secondary transactions stepping in as mainstream liquidity solutions. Over $1 trillion in net asset value remains tied up in older private equity vintages, pushing firms toward longer hold periods and more creative exit strategies [2]. Private credit now plays a commanding role in middle-market financing, growing from 36% to nearly 90% of the market over the last decade [6]. In today’s high-interest-rate environment, sponsors are shifting their focus from financial engineering to operational improvements, aiming for annual earnings growth above 4% to meet return expectations [1].
Practical Steps for Business Owners and Investors
These emerging trends call for a proactive approach. Business owners planning to sell within the next 12 to 36 months should start by cleaning up their financials, establishing monthly KPIs, and addressing issues like customer concentration or management gaps at least 18 months before going to market. Prioritize EBITDA growth through recurring revenue, diversification, and pricing power, and ensure your valuation reflects current market realities rather than pre-2022 multiples. Be open to alternative deal structures, such as earnouts, seller notes, or rollover equity, to bridge valuation gaps. Partnering with a specialized business brokerage that understands lower mid-market private equity processes can help maintain confidentiality, manage buyer outreach, and structure competitive transactions. For smaller businesses generating less than $25 million in EBITDA, firms like God Bless Retirement provide certified valuations and tailored buyer sourcing, working discreetly with CPAs and financial planners to guide owners through the process.
For private equity buyers, the focus should shift to partnering with managers who have strong DPI (Distributions to Paid-In) records and leveraging buy-and-build strategies to accelerate capital returns. Instead of relying on multiple expansion, prioritize sector expertise and operational synergies to drive value. Utilize private credit and flexible capital structures to customize financing terms while mitigating downside risks. With longer holding periods becoming the norm, robust value-creation strategies are essential. Additionally, the growing secondary and continuation-fund markets present opportunities to manage portfolio liquidity and recycle capital efficiently.
Brokers, on the other hand, need to adapt to these market changes by evolving from traditional matchmaking roles to becoming advisors on transaction readiness and value creation. Help clients prepare by building detailed data rooms, refining equity narratives, and identifying operational improvements before going to market. Maintaining strong relationships with PE funds, private credit providers, independent sponsors, family offices, strategic buyers, and secondary platforms will allow brokers to offer sellers a range of strategic options. Educating sellers early on realistic valuation expectations and deal structures - like earnouts or rollover equity - can help avoid surprises and facilitate smoother transactions.
FAQs
What impact are continuation vehicles having on private equity exit strategies?
Continuation vehicles are changing the game for private equity exit strategies, giving firms more flexibility and the ability to extend their investment horizons. With these structures, firms can retain high-performing assets for longer periods, fine-tune returns, and better adapt to market dynamics before making an exit.
By setting up intermediate holding entities, continuation vehicles simplify deal structuring, help lower tax obligations, and offer greater control over when exits occur. This strategy allows private equity firms to extract more value while meeting the shifting priorities of investors and stakeholders.
How does private credit support financing for middle-market businesses?
Private credit serves as a crucial financing option for middle-market businesses, stepping in when traditional bank loans aren't on the table. It offers tailored funding solutions that help companies expand operations, finance acquisitions, or restructure existing debt.
By bridging the space between senior debt and equity, private credit provides businesses with the resources to pursue their objectives while keeping their financial footing steady. Its ability to cater to specific financial requirements makes it a valuable resource for companies facing unique challenges.
Why are private equity firms increasingly using add-on acquisitions?
Add-on acquisitions are becoming an increasingly favored strategy for private equity firms, offering a quicker and more streamlined approach to scaling their portfolio companies. By bringing smaller businesses under the umbrella of an existing platform, firms can broaden their market share, introduce new revenue streams, and strengthen operational capabilities.
This approach also helps cut risks and improve cost efficiency by capitalizing on synergies between the acquired business and the parent company. In many cases, add-on acquisitions are viewed as an effective way to increase deal value while keeping complexities in check.
