Capital Markets Update – Q4 2025

Capstone Partners Q4 2025 Capital Markets Update

Winter Warning From Boston

When asked to write a piece to recap the Merger and Acquisition (M&A) markets last year and provide some expectations for 2026, my first thought was, “Stick a fork in my eye.” My response, however, was “Sure thing,” said with a smile even. But I’m from Boston and it’s dead-winter, so here is what you can expect: bluntness (if not flippancy); a punishing use of metaphors (that don’t relate in any way); no care for statistical support (there is enough of that in this and other reports); and a flicker of hopeful, “We will get ‘em next year,” (leftovers from the Bambino Curse). If nothing new, I hope you either get a chuckle or can at least feel my pain as a long-time M&A soldier. There is a lot to cover, so here we go…

2025 M&A Market: A Wild Ride to a Promising 2026

If 2024 felt like trying to run an M&A process on a dial-up modem, 2025 was the year someone finally upgraded the Wi-Fi. Not perfect, not seamless, but at least the spinning wheel of death wasn’t haunting every conversation. For all its noise (tariffs, surprise policy zigs and zags, and inflation readings that kept everyone guessing), 2025 was ultimately a year the middle market (less than $500 million in enterprise value) regained its footing. As we slide into 2026, the momentum feels real, tangible, and frankly long overdue. As someone who’s been doing this for 37 years, I’d call 2025 a “good-enough” year with pockets of excellence. And good-enough is sometimes all this industry needs to light the fuse for a much stronger one.

Macroeconomic Backdrop: Someone Finally Stopped Moving the Goalposts

The Federal Reserve (Fed), after two years of making markets feel like they were driving on a gravel road, finally settled into something resembling consistency. The three rate cuts totaling 75 basis points (bps) in 2025 didn’t ignite an instant bonfire of deal activity, but they did restore confidence (the most precious commodity in our business). Rates found a resting place in the mid 3% range, which was not low enough for CFOs to start tap dancing, but low enough for lenders to sharpen pencils and sponsors to underwrite without needing smelling salts. Then there were tariffs, the recurring guest star in the 2025 drama. Every time a new tariff announcement rolled in, it froze cross-border deal traffic faster than a winter blizzard in Boston during rush hour. Due diligence sections ballooned with tariff matrices, supply chain sensitivity charts, and hedging scenarios that would make a mathematician grunt. But ultimately, the market learned to live with the new normal. Domestic, asset-light companies with minimal import exposure suddenly found themselves cast as “safe harbors,” and buyers responded accordingly.

Private Credit: The Capital Markets’ Main Character

If 2025 had a breakout star, it was private credit. Direct lenders didn’t just show up, they arrived with fresh term sheets, tighter execution, and a swagger that said, “We’ll close this before a bank finishes its committee memo.” The cost of capital eased, certainty of execution ruled, and sponsors loved every minute of it. Meanwhile, the Syndicated Loan market played peekaboo all year: wide open one quarter, then jammed the next. For M&A, that meant if you wanted reliability, you weren’t dialing a bank. You were texting a direct lender on a Sunday night and getting a response before kickoff. This shift wasn’t temporary. Private credit has become the bouncer at the door, the one who decides who gets into the financing party, how quickly, and with what terms. Heading into 2026, they’re still standing there with a reinforced clipboard.

Valuations: Quality Stayed Expensive, Everything Else Not So Much

Here’s the plot twist many didn’t expect—valuations stayed strong. Not 2021 strong, but strong enough that sellers with real businesses (meaning margins, scale, predictable revenue, and a management team that didn’t terrify buyers) got paid handsomely. Buyers opened-up for defensible, service-heavy, recurring revenue models. Lower quality assets—different story. That part of the market saw buyers sprint toward diligence, find one too many surprises, and politely excuse themselves from the table. If you were selling something cyclical, tariff exposed, or mysteriously “under invested”, the process often felt like trying to sell a used car with the check engine light on. But the upper half of the market was solid, competitive, and sometimes downright lively (like the good old days).

Private Equity: Add-Ons Took Over the Universe

Private equity (PE) kept doing what PE does: adapt. When platform opportunities were tight, they doubled down on add-ons, which by now make up the great majority of sponsor deal activity. Buy-and-build is no longer a strategy; it’s the default operating system. Sponsors loved platforms that came pre-wired with an integration roadmap, adjacency targets, and systems modern enough that onboarding a new acquisition didn’t require prayer. Firms leaned hard into industries where roll ups work: Business Services, Specialty Healthcare, Information Technology (IT) Services, and certain Industrial niches. The appetite was there, as was the discipline. The one area that lagged was fundraising. Limited partners (LPs) were more selective, creating bottlenecks for emerging and mid-size funds. But the dry powder already raised is still ginormous, which means 2026 will be defined by deployment (vs. hesitation).

Sector Pulse: Who Thrived in 2025

• Healthcare & Medical Technology (MedTech) surged in the back half of the year, with big strategic deals reopening the market and sponsors chasing anything with reimbursement clarity and recurring demand.
• Technology-Enabled Services were the belle of the ball with sticky revenue, high margins, and predictable growth (PE catnip).
• Transportation & Logistics (T&L) had a rougher year thanks to tariffs and freight recession dynamics, but specialized operators still attracted interest.
• Industrial Products was sharply bifurcated: automation and engineered components drew strong bids while commodity-driven manufacturing struggled.

Blurb on Antitrust: A Return to Reason

Thank you 2025 for a surprisingly pleasant development: antitrust reviews became more predictable. The era of block-first and ask-questions-later softened. Regulators demonstrated more openness to structural remedies, carveouts, and reasonable timelines. Deals with clear market logic and limited concentration concerns resumed flowing without fear of Kafkaesque process traps. There were no free passes, but the environment felt significantly less adversarial than in years past.

What Sellers Learned in 2025

The song remains the same. Three lessons, which never really go away but sometimes get dampened, pushed to the front of the line in 2025:

1. Clean financials win. Fast diligence equals more bidders.
2. Recurring revenue is the closest thing you have to a superpower.
3. Storytelling matters. Buyers don’t just purchase numbers; they purchase momentum, clarity, and vision.

2026: A Year with Real Momentum

Given that I have retired from making bold predictions of the return to power for middle market M&A, I do not say this lightly, “2026 looks legitimately promising.” I’m not pointing to bubble-level mania (like up 30% in volume), but it already feels different in the early months. Beyond our deal closing bells ringing on nearly a daily basis, we expect healthy, broad-based activity driven by:

• Rate stability.
• Massive PE deployment pressure.
• Private credit’s continued dominance.
• Backlog of prepared sellers.
• More predictable regulatory review.
• Better alignment between buyer and seller expectations.

I’ve lived through enough cycles to know that M&A hates uncertainty more than anything. For the first time in several years, it feels like the fog is lifting (at least enough for me to share positive sentiments again). 2025 laid the groundwork, and 2026 is shaping up to reap the benefits. We are certainly putting our money where our mouths are, having just doubled-down in December of 2025 with the acquisition of TM Capital and focused industry groups from Janney Montgomery. Boy, wouldn’t it be nice if the market growth rate matched our expansion (30%). We shall see, but in the meantime (on behalf of all M&A dealmakers), I’m saying to 2026, “Bring it on—we are ready and waiting.”

Download our full 2025 Capital Markets Update Report Publication:

Request instant access to the full Capital Markets Update for a deep dive into recent Middle Market activity and trends including:

• Key considerations for middle market business owners regarding dry powder levels, buyer appetite, lending conditions, and M&A pricing trends.
• An update on middle market valuations across 12 key sectors.
• An overview on Growth Equity and Credit market conditions, featuring Capstone’s Equity Capital Advisory and Debt Advisory Groups
• Select insights from Capstone’s 2025 Middle Market Business Owners Study and 2025-2026 Trends in Global M&A Survey Report, produced with our international partner platform, IMAP.