Capital Markets Update – Q3 2025

Capstone Partners Q3 2025 Capital Markets Update

Economic Normalization Prompts Gradual M&A Revival

The private capital markets have gradually improved through Q3 2025 and into year-end, supported by interest rate cut clarity and a normalization of ongoing geopolitical headlines. Tariff volatility, diminished consumer and business confidence, and the absence of interest rate cuts in early 2025 led to notable hesitation among dealmakers, resulting in a pullback in merger and acquisition (M&A) activity during Q2 2025. However, the M&A landscape has steadily gained momentum as trade policy changes were digested, the macroeconomic environment proved resilient, and acquirers became more comfortable transacting amid uncertainty. Consumer financial health has continued to diverge. The lowest income quartile has faced mounting financial strain from both slowing wage growth and rising credit distress. At the same time, the higher income households have remained financially stable as large increases in net worth have outpaced inflation and run-ups in the Public Equity market have supported spending capacity. Gross Domestic Product (GDP) increased 3.8% in Q2 2025, inflation has steadied around 3%, though still above the Federal Reserve’s (Fed) 2% target and the federal funds rate has seen 50 basis points (bps) of cuts through September and October, according to the Bureau of Economic Analysis and the Bureau of Labor Statistics. Notably, the federal funds effective rate stands at 4.1% as of October 1, below the historical mean (4.6%) and median (4.3%) dating back to 1954, according to the St. Louis Fed. These indicators point to a gradually improving backdrop for M&A activity moving into the final quarter of 2025 and into 2026.

M&A activity in the middle market accelerated quarter-over-quarter (QoQ) in Q3 2025 for the first time since Q4 2024, gaining 4.2% and rebounding from a steeper decline in Q2 2025 which was attributable to a pause in dealmaking as the breadth and magnitude of tariff announcements surprised market participants. Total deal volume year to date (YTD) is on pace to achieve the first full-year year-over-year (YOY) growth in M&A activity since 2021. Private strategic transaction activity has risen YOY through YTD, demonstrating business owners remain willing to execute on inorganic growth strategies to bolster competitive positioning in the current environment. Public strategic buyers have been the only buyer cohort to see YOY declines in middle market deal volume to date. These buyers have prioritized organizational readiness for varying operating conditions stemming from tariff exposure, emphasizing risk mitigation and shareholder value creation through internal investments in artificial intelligence (AI) infrastructure—capital deployment that competes with funds available for M&A.

The flight to quality and scale themes that emerged in 2024 have remained pervasive YTD, with average enterprise value paid by acquirers rising 4.1% YOY to $72.8 million, notably $22.3 million higher than the average enterprise value paid over the 2006 to 2024 period. All buyer types have targeted larger transactions to date apart from public buyers who saw this average decline marginally (-1.9% YOY). However, public buyers paid an average enterprise value of $87.2 million in YTD Q3 2025, landing $22.1 million higher than the average from 2006 to 2024. Valuations have held steadily between 9.0x and 9.5x EV/EBITDA since 2023, a level only seen in 2009 and reflective of the depressed acquisition appetite following a record year in 2021 that was exacerbated as the Fed tightened monetary policy in 2023. Multiples will likely revert toward the mean (10.8x EV/EBITDA) as buyers benefit from interest rate cuts and macroeconomic clarity.

Private equity (PE) firms have finally tapped more aggressively into robust levels of dry powder to deploy capital into new platform investments, with these deals rising 14.4% YOY. Add-on activity has largely kept pace with the prior year but failed to match platform dealmaking’s more stark gains as fund managers have prioritized exits and new platforms to make distributions and meet capital deployment mandates. While add-on activity has fallen from a peak of 4,635 transactions in 2021, the number of add-on transactions closed in YTD Q3 2025 (2,467) is above full-year tallies from 2006 to 2017, indicating fund managers have continued to execute robust roll-up strategies in the post-zero interest rate environment.

PE exits have remained depressed through much of 2025, as noted in Capstone’s H1 2025 Private Equity Index report, but showed momentum in Q3 2025. The prolonged exit drought—most acute in 2023 and 2024 but continuing into 2025—has strained fundraising as sponsors face challenges securing limited partner (LP) commitments while liquidity stays locked due to extended portfolio holding periods or unfulfilled capital deployment mandates on prior funds. If exits were to continue at the current pace (954 in the past four quarters), it would take about seven years for the backlog of portfolio companies aged four years or older—or beyond normal hold times—to clear out. As a result, exits are expected to accelerate as rate cuts have been widely telegraphed; the dealmaking backlog appears to be improving, LPs are demanding distributions, and the asset class must raise capital for new funds.

Overall, Q3 2025 data strongly suggests improving dealmaking sentiment. While there remains some pockets of the market yet to break out of the doldrums, risk-appetite across the buyer universe has begun to recover. Interest rate cuts, resilient macroeconomic indicators, exit and capital deployment pressure among PE, and renewed inorganic growth ambitions among public buyers’ post-tariff related operational adjustments have lifted expectations for robust M&A activity in 2026. The true impact of tariffs on various sectors, the broader economy, and the private capital markets remains largely unknown. Greater clarity on mid- to long-term trade effects should emerge in early 2026 as pre-duty inventory cycles through and inflation trends become more visible.

Download our full Q3 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
• Commentary from Capstone’s Financial Advisory Services Group on strategic planning for value creation.