USA – ILLINOIS Trends and Developments Contributed by: Mitchell Roth, Michael Shaw, Andrew Silver and Peter Shepard, Much Shelist, P.C.
Trends and Developments in Private Equity and M&A in the United States and Illinois: The Middle Market’s Moment In the wake of a subdued 2024 and a slow start to 2025, there has been a steady uptick in M&A deal activity, particularly in the middle market. Over the past several months, deal flow has vastly increased across most markets, and industry participants – including funds, sponsors and strategics – appear increasingly optimistic about a more robust M&A environment for the remainder of 2025 and into 2026. The tension between optimism for future deal flow and the drag of existing portfolio overhang was a defin - ing feature of the M&A market of the past few years. Although there were several instances when the M&A market was poised to jump forward, certain macro- economic policies and political realities restrained growth. However, the story of this recent rebound appears to have significant tailwinds and is shaped by various market factors, including: (i) extended fund life cycles pressuring exits and promised returns to investors, (ii) a narrowing of valuation expectation gaps between buyers and sellers, which has persisted since the frothy pandemic M&A market of 2020-2022, (iii) post-pandemic revenue normalisation, which led to right-sized valuations, (iv) aggressive activity from strategics in certain sectors, (v) cooling of tariff-related issues and a strong belief that interest rates will be reduced in the near term, and (vi) a wide-ranging con - fidence in the continued growth of the economy. With these drivers, the middle market is poised for increased activity in the months ahead. Structural Challenges and Market Drivers There have been several challenges that have shaped the M&A market’s path over the past few years, par - ticularly as it relates to the middle market: • Extended fund life cycles: In light of the factors referenced above, many private equity fund vintages have exceeded their initially intended exit timelines. The lack of deal flow in the market has caused funds and sponsors alike to hit some speed bumps in their respective roll-up acquisition strategies. Without a steady flow of achievable add-on oppor - tunities, private equity funds have been forced to
delay the achievement of certain EBITDA thresholds that would yield the targeted return to their inves - tors upon the sale of the overall platform. This delay has resulted in a buildup of unsold assets, a shift in deal strategy and structure, and increased pressure to find attractive exit routes in 2025 and 2026. As a result, sponsors that would typically be in the mar - ketplace to both market and sell their current plat - forms and raise new funds for future investments are instead continuing to search the market for the necessary add-on acquisitions and organic growth opportunities to achieve the necessary EBITDA thresholds that maximise their investments. • Valuation normalisation and realignment of expec - tations between buyers and sellers: During the pandemic M&A run, an influx of capital and other pandemic-era earnings caused the earnings for many middle-market businesses to jump, which naturally led to an increase in valuations. Although such capital and earnings were temporary, sellers, investment banks and business brokers took this as a new baseline, which led to a new high-water mark for the valuations of middle-market companies. Although the fuel for such valuation increases dried up as the pandemic tailed off, this new baseline remained stubborn, and the valuation gap between buyers and sellers remained present for years to come. While recent valuations and exit multiples are certainly relevant for demarcation in certain indus - tries, in 2025, seller expectations have now moder - ated where revenue and EBITDA have normalised or even declined, making it easier to find middle ground in negotiations and to right-size valuations back to pre-pandemic levels. As buyers and sellers see their views on valuations get closer, the environ - ment for getting deals done will get more active. • Strategic buyer aggressiveness: Corporate strate - gic buyers with strong balance sheets have taken advantage of the quieter market to make acquisi - tions at competitive multiples. Such strategics, especially those that are not public companies, have the long-term outlook and cash reserves to offer competitive (though not overly inflated) multiples for their acquisition targets, but are not beholden to the public markets or anxious equity holders to overpay for companies. This is especially visible in industries such as healthcare services, niche manufacturing and distribution,
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