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Middle Market M&A Poised to See Steady, Gradual Reopening in 2026
Key Takeaways:
Expect gradual middle market M&A recovery in 2026, driven by private equity deployment, eventual exit activity, and continued strength in large cap dealmaking.
Private equity reemerged as a dominant force, ending a three-year lull with five consecutive quarters of platform acquisition growth and near-record participation in middle market deals.
Interest rate cuts and improving CEO confidence will be critical catalysts for transaction activity. Monitoring monetary policy and preparing for strategic moves could be important as financing conditions ease.
Liberation Day Chills Middle Market Dealmaking Activity
The long-anticipated release of U.S. dealmaking did not fully materialize in 2025 as drags on the economy chilled activity, however, transactions by large, capitalized companies flourished, private equity buyers mobilized, and CEO sentiments showed improvement as the year progressed, all factors that provide a backdrop for a gradual reawakening of the middle market in 2026. The market was not entirely silent in 2025, but middle market deals that did close were typically either true industry leaders that received strong valuations from a competitive buyer pool or average companies that faced headwinds to close.
The three-year merger and acquisition (M&A) downcycle started to turn through Q1 2025 with a 6.6% year-over-year (YOY) increase in middle market deal volume. Q1 2025 marked the first time there had been three consecutive quarters of YOY middle market M&A growth since 2021. (Of note, Capstone Partners’ definition of the middle market includes deals where the transaction value is not disclosed or is less than $500 million in enterprise value.) The building momentum quickly dissipated as tariff policy fog spread in Q2 and impaired decision making for both buyers and sellers. Following the Liberation Day announcements on April 2nd, Q2 deal volume relapsed into a 1.2% YOY decline. The result was a continuation of a challenging market, which has now dragged into its fourth year and has continued to buck the precedent timeline of 12-24 months for a decline in M&A. This decline has created a backed-up deal market that will not dissipate, rather, it will continue to accumulate and look for an opportunity to unleash. Overall middle market volume through Q3 still eked out a positive YOY volume gain of 1.9%, with the increase driven by the strong Q1, resilient financial buyer activity throughout the year, and select hot pockets in the market where volume surged for quality companies. Collectively, these drivers filled the void of the 16.5% YOY decline in public company dealmaking that challenged year-to-date (YTD) Q3.
Deal Volume for Large Transactions Surges Year-Over-Year
While the middle market has struggled to gain traction amid unsteady tariff and geopolitical outlooks, U.S. transactions above $1 billion in enterprise value (EV) have resurged. Solid earnings growth, strong balance sheets, and increasingly favorable access to capital due to interest rates cuts have created a favorable backdrop for mega mergers. Additionally, the pro-merger policy shifts and more permissive antitrust posture of the current White House Administration has served to rejuvenate deal activity for large, leading companies.
“When President Trump nominated me, he entrusted me with the responsibility of ensuring that ‘our competition laws are enforced, both vigorously and FAIRLY, with clear rules that facilitate, rather than stifle, the ingenuity of our greatest companies,’” U.S. Assistant Attorney General Gail Slater, Head of the Department of Justice (DOJ) Antitrust Division, said in a September speech to Ohio State University Law School.1
“That has been the guiding principle of my enforcement philosophy. The Division’s job is to call balls and strikes and let the free market do its job, not to decide which companies win and which companies lose. In my tenure at the Division, we have worked to expedite our review of transactions, and we have reintroduced early terminations. The vast majority of mergers do not give rise to competitive concerns, and in those cases, we aim to get out of the way quickly.”
This philosophy shift has been apparent in deal activity. Through Q3 2025, M&A volume for large cap players increased a sizeable 36.8% YOY. This uptick followed a 9.7% increase from full year 2023 to 2024, which was the first positive activity since 2021. Notable 2025 deals that cleared DOJ antitrust scrutiny included UnitedHealth Group Incorporated’s (NYSE:UNH) 2023 announced acquisition of home care provider Amedisys for $3.3 billion and Nippon Steel North America, Inc.’s 2023 announced acquisition of United States Steel Corporation (NYSE:X) for $14.9 billion. The wave of activity in the upper echelon of the deal market bodes well for M&A energy to trickle down into the middle market.
Private Equity Buyers Reenter the Market in 2025, Strong Catalyst for Stable Middle Market Resurgence
Another notable force moving the markets in 2025 has been the definitive resurgence of private equity buyers. After three years of sitting on the sidelines, reluctantly hoarding ~$1.6 trillion in dry powder and waiting for improved market timing, pressure from limited partners (LPs) to deploy capital mounted. Sponsors initially opted to use stop gap measures such as dividend recapitalizations to ease investor demands. Finally, platform acquisitions began to comeback en masse in Q4 with a 42% YOY increase followed by a 43% YOY increase in Q1 2025. This resurgence came after 10 consecutive quarters of negative YOY growth that began in Q2 2022. Platform activity in Q3 2025 marked the fifth consecutive quarter of positive YOY growth. Middle market add-on acquisitions have similarly been completed with discipline in the moving market. Year-over-year gains of 3.1% (Q1), 3.5% (Q2), and 0.7% (Q3) created the first three quarters of consecutive add-on activity growth since 2022. These movements amid the tepid economic environment and strategic buyer wariness have solidified the sponsor community’s conviction to reenter the middle market.
In addition to volume growth, financial buyers have driven premium valuations as they outbid strategics on an average EBITDA multiple basis to gain M&A market share and satisfy capital deployment mandates. Sponsor activity significantly lifted transaction values in Q3, advancing 23.5% quarter-on-quarter (QoQ) to an average $83.9 million in enterprise value while public strategic average deal value increased 4.2% QoQ to $83 million and private strategics moved down market, declining 17.9% QoQ to $52 million. On an average purchase multiple basis, sponsors paid 12.0x EV/EBITDA through Q3 2025 while private strategics paid an average of 9.8x and public strategics an average of 8.6x during the same period.
Sponsor reengagement is a long awaited and key catalyst for stable middle market resurgence, as data analysis of historic M&A buyer composition reveals. In 2006, private equity buyers completed 22% of total middle market transactions. This percentage has ballooned and peaked in 2022 (45.5%) before retreating slightly (~43%) and then expanding again to a near-record high of 45% as of Q3 2025. Capstone launched its Middle Market Private Equity Index in November 2025 to better track the growing asset class and evaluate buyer preferences. The Index aggregates proprietary private equity market data on a quarterly basis, indexing the values to 100 with a base quarter of Q1 2006. Through this methodology, Capstone is able to provide sponsors, portfolio businesses, and private business owners with a unique perspective on the general health of private equity market activity. The report also provides an in-depth analysis on M&A valuations and volume by sector within 10 of Capstone’s primary coverage industries, identifying emerging hot spots for private equity buy-side activity through H1 2025. Access to download the proprietary intelligence and subscription option to future releases is available on Capstone’s website. The report highlights that while private equity have returned as active buyers, exit activity has continued to fall each year since 2021. While best-in-class portfolio exits in 2025 have enabled sponsors to maintain internal rate of return (IRR) levels, this continued selectivity could hinder return distributions and limited partner (LP) relationships. When pent-up exit demand unleashes, private equity’s dual-sided investor mandate to both deploy capital (acquire companies) and return capital (sell companies) will increase deal supply in the middle market and further propagate a bustling transaction marketplace.
While many industries across the middle market faced YOY volume declines of 20% or more through Q3, key segments, opportunity zones, and many services companies saw double digit M&A volume growth and commanded premium purchase multiples. Deal volume in the Aerospace, Defense, Government, & Security (ADGS) industry increased 21.7% YOY through Q3. Transactions were bolstered by the global demand for mission-critical solutions and equipment due to rising geopolitical tensions. Defense spending and government contracts further insulated ADGS companies from macroeconomic volatility. Sectors where Capstone bankers specialize that saw positive M&A activity included Training & Simulation; Security Solutions; and Air, Land, Sea, Space (ALSS) Systems; and Tactical Products. The Industrials industry recorded a 30% YOY decline in deal volume through Q3. Transactions that did occur were often driven by public company divestitures and portfolio realignments amid tariff and supply chain disruptions. Industrials companies with U.S. sourcing and/or reduced tariff exposure continued to attract strong buyer interest. Additionally, Industrial Services providers such as HVAC Services and Industrial & Environmental Services (I&ES) saw double digit growth and strong private equity interest. Pockets of the Healthcare industry recorded deal activity driven by underlying secular trends such as the aging U.S. population, rising prevalence of chronic conditions, and the shift to value-based care; M&A activity proliferated in both Behavioral Healthcare Services and Medical Device Outsourcing. Regulatory shifts under the One Big Beautiful Bill (OBBB) Act may further serve to fuel near- and long-term M&A momentum in sectors such as Home Care as Medicaid funding eligibility requirements shift and operators make strategic acquisitions to buffer bottom lines. The Consumer industry experienced a 26% YOY volume decline through Q3. Dealmaking in many sectors was defensive in nature, with companies seeking to slough off non-core or low-growth assets in the challenging economy. Distressed sales and bankruptcies were also peppered throughout the industry. Some challenged sectors saw private equity buyers scoop in to claim attractive opportunities even amid falling deal volume. This was the case in areas such as Automotive Aftermarket (-15.8% YOY M&A volume through Q3 volume, +7.7% private equity platform activity); Restaurants (-28.9% M&A, +100% platform activity); and Home Goods (-25% M&A, +6.3% platform activity). These opportunistic platform entries into Consumer segments indicate sponsors’ long-term growth expectations and are precursors to further add-on acquisitions in 2026 and beyond as they deploy buy-and-build strategies. Other sectors of the Consumer industry that profited from ongoing shifts in consumer behavior with YOY deal volume gains were Vitamins & Supplements and Outdoor Recreation & Enthusiasts. Additional services pockets of the market that gained positive transaction momentum and attracted strong interest from financial players (and in some cases strategics as well) included Architecture & Engineering (A&E) Services; Construction Services; Accounting Services; HR & Staffing Services; and Healthcare Information Technology (HCIT) Services. Companies that operate in areas that garnered 2025 buyer interest even despite market volatility are well positioned to explore exit opportunities in the near-term while the supply side of the M&A market remains low and buyers hungry.
Capstone’s Business Owner Survey Highlights CEO Strategies
Reaching or enhancing profitability has continued to serve as a leading goal for operators, as many CEOs await market clarity and continue to climb out of a period of elevated interest rates, supply chain pressures, and significant inflation. Capstone Partners’ Middle Market Business Owners Survey revealed that profitability is the leading operational initiative for middle market business owners over the next 12 months, as noted by 22.2% of CEOs surveyed. Improving efficiency and implementing artificial intelligence (AI) and machine learning tools will also be pertinent operational initiatives for 2026, as identified by 16% and 11.2% of owners, respectively. Among total CEOs surveyed, the lion’s share (45.3%) emphasized performance improvement support as the most useful resource in support of their primary operational initiative, followed by capital investment (31.4%) and strategic partnerships (23.2%). The share of business owners that require performance improvement support increased 3.4% compared to the prior year as CEOs seek to maintain margins and enhance operational efficiencies amid a difficult macroeconomic environment and ongoing trade headwinds.
Amid the challenging environment, middle market business owners have increasingly explored capital markets transactions to accelerate company growth, secure personal liquidity, and optimize capital structure. In 2025, 57.4% of surveyed CEOs completed at least one capital markets transaction in the past 12 months, a 13.3% YOY increase. Interest rate cuts have supported this expansion, evidenced by CEOs debt capital securements rising 5.8% YOY to 24.4%. Equity capital raises have remained the most popular growth lever YOY, pursued by 29.9% of CEOs in 2025. In addition, 21.7% of CEOs divested assets, 17.5% acquired another business, and 7% sold their company. Complex capital markets deal proceedings have pushed many business owners to hire an investment banker; these CEOs have completed capital markets transactions at a higher rate than those without an advisor.
Business Owners Show Increased Demand for Capital Markets Solutions Amid Dynamic Macroeconomic Environment
Question: Which of the following business strategies have you enacted over the last 12 months? Source: Capstone Partners’ Middle Market Business Owner Survey, Total Sample Size (N): 401
CEO Sentiment Will be Key for 2026 M&A Reopening
Heading into 2026, the restoration of CEO confidence will be an important fundamental for middle market M&A reopening. In 2025, CEO confidence dropped from 60% in Q1 to 34% in Q2, according to The Conference Board Measure of CEO Confidence™.2
This weakness was in line with the M&A drop-off after April 2nd. Since then, CEO confidence increased to 49% in Q3 and dropped slightly to 48% in Q4 – remaining in negative territory with a reading below 50%. The Federal Reserve’s interest rate cuts of 25 basis points in both September and October bode well for improved CEO confidence improvements in 2026. Interest rate cuts should help to address two key pain points for middle market business owners. The first is to boost economic spending and ease inflation; CEOs’ ranked inflation as their top concern for company growth for the third consecutive year in Capstone’s 2025 Middle Market Business Owner Survey. The second is to support hiring; a concern reported by more than 60% of business owners in Capstone’s survey. Capstone analyzed in its piece “Why the Fed Funds Rate Matters” that CEO confidence levels appear to spike and remain relatively high when the Fed Funds Rate is in the range of, or below 2%. Currently, the Fed Funds Rate remains well above that at 3.75%–4.00%. While many factors are at play and correlation does not directly imply causation, Capstone additionally found that when the Fed Funds Rate is at or below 2%, quarterly middle market deal volumes were also 22% higher. With more rate cuts on the table in 2026, CEO confidence could continue to repair and M&A volume be boosted going forward.
In conclusion, the middle market is likely to see a steady, yet gradual reopening of M&A in 2026. Private equity will continue to deploy capital with conviction through buy-side opportunities and will eventually supply more deals to the market through exit activity. Public and private company buyers and sellers who have focused on strategic portfolio restructuring and tariff risk mitigations in 2025 will slowly adapt to moving dynamics and reenter the market. For companies in select areas—including ADGS and Services sectors—a clear exit window is already open. Owners who are evaluating strategic options for 2026 are prioritizing performance improvement initiatives to grow company profitability and improve efficiencies with technology including AI. In addition to a resurgence in sponsor buyer activity and large cap dealmaking, key indicators that will continue to expand M&A volume will be interest cuts and CEO confidence.
Capstone Partners will continue to closely monitor the evolving market and partner with companies in their strategic decision-making to maximize financial outcomes at every stage of the corporate lifecycle.
