A view from Chris Reeves, our Managing Director of Client Services:
As we put a bow on Q1 2025, what’s the best word (“tariffs” doesn’t count) to describe private equity’s approach to the current environment in the middle-market—defined by uncertainty, complexity, and intense competition? Some things remain consistent (value creation, disciplined investment approach & execution), a few notable shifts are emerging across deal strategy and portfolio management.
In my opinion, the best word to describe the current approach is ‘Creativity’. Here are four key trends we’re seeing in early 2025—and what they might mean for how you operate in the quarters ahead.
1. Tariffs Are Back—And They’re Complicating the Forecast
You get a tariff! You get a tariff! Everybody gets a tariff! To put it lightly, the ongoing trade negotiations (wars?) are creating ripple effects across diligence models, pricing assumptions, and supply chain strategies. We’re seeing firms try their best to factor in a new layer of geopolitical and regulatory unpredictability—especially in sectors like industrials, consumer goods, and manufacturing.
What to consider:
- Build flexibility into operating models. Assume tariffs have and will shift again and assess how resilient your portfolio is to pricing pressure or sourcing disruption.
- During diligence, scenario modeling around cost pass-through and margin compression is no longer optional—it’s table stakes.
- Consider regional diversification or nearshoring as part of long-term portfolio strategy.
- Take a deeper look into potential non-traditional value creation levers early to help win deals and drive to targeted outcomes during the investment lifecycle.
This doesn’t mean totally hitting the brakes—but it does mean driving with fog lights on.
2. Add-On M&A Is Still Active—Especially at the Smaller End
Despite a tighter financing environment and higher bar for platform deals, add-on activity continues in the lower middle market. Sub-$100M deals remain accessible, and they often offer speed, strategic tuck-ins, and operational synergy with existing platforms.
What to consider:
- Smaller sellers may start to face additional valuation pressure, so there’s opportunity if integration is thoughtfully planned.
- Maintain discipline around integration planning and cultural alignment—those are the hidden costs that kill value if rushed.
- PE firms are leaning on trusted advisors and ops teams early to ensure value capture isn’t left to chance.
Even modest acquisitions are playing a big role in creating scale and narrative strength ahead of future exits.
3. Data Assets Are Becoming Exit Multipliers
There’s growing recognition that strong data infrastructure and insight capabilities can materially impact exit valuations. Buyers want buttoned-up visibility into KPIs, customer behavior, operational levers, and growth potential—and that means data maturity matters.
What to consider:
- Treat data as a value creation lever, not just an IT project. Firms are investing in analytics, dashboards, and clean data layers now to support better storytelling during exit processes.
- Portfolio companies with clear customer metrics, margin insights, and performance dashboards are commanding stronger interest and pricing.
- It’s not about having “big data”—it’s about having the right data, easily accessible and well visualized.
- If you plan to address that pesky AI question – clean data is where you start.
Think of it this way: In today’s market, clean data is like a clean balance sheet. It inspires confidence.
4. Bidding Strategies Are Getting More Creative (Out of Necessity)
In a highly competitive market, firms are challenging themselves to find innovative ways to stretch their bid ranges without taking on unmanageable risk. From earnouts to seller rollovers to contingent value rights, deal structures are consistently more dynamic today to keep firms in contention. We’re also being approached about new concepts to create flexibility in the bidding process.
What to consider:
- Know where you’re willing to flex (structure, timing, performance-based elements) and where you won’t, but start the dialogue on creative non-traditional approaches now.
- Consider the potential impact and opportunities of digital value creation – such as operational enhancement and GenAI – in industries centered around physical products that have historically seen limited adoption of new tech.
- Don’t underestimate the power of transparency and speed during negotiations. Sellers are favoring certainty over highest headline price in some cases.
- Many sellers are overburdened and exhausted by the diligence process. Having a playbook focused on improving speed and efficiency can help you stand out to the seller and get the deals done.
Deals are still getting done—but it’s not just about how much you pay. It’s how you make the math and the process work smartly.
In Summary
Q1 2025 was a dynamic and highly complex environment for middle-market private equity. Firms that stay agile, operate with precision, and evolve their strategies—both on the deal and portfolio optimization side—are best positioned for strong outcomes.
I’m cautiously optimistic about deal activity for the remainder of the year. The underlying market fundamentals are relatively strong and the demand is there. We see Q1 looking more like a pause for recalibration and clarity vs a total reset for the year. Here’s to fairer winds and following seas for the rest of 2025.
