Capital Markets Update – Q2 2025

Capstone Partners Q2 2025 Capital Markets Update

Middle Market M&A Dips in Q2 2025, Asset Sales and a Strong Q1 Buoy Year-to-Date Volume

Middle market (less than $500 million in enterprise value) merger and acquisition (M&A) volume contracted year-over-year (YOY) in Q2 2025. Despite the YOY quarterly decline, a dramatic influx of asset/real estate sales, coupled with a strong Q1, heavily influenced overall deal volume gains year to date (YTD) despite market uncertainty related to trade policy developments in Q2. These sales rose from 180 in YTD Q2 2024 to 1,813 in YTD Q2 2025. Cautious optimism demonstrated by strategic buyers in Q1 2025 has slowly faded into a wait-and-see environment as buyers and sellers monitor geopolitical news and an evolving macroeconomic environment. Buyers of all types have engaged in fewer transactions, placing heightened emphasis on thorough due diligence processes and robust portfolio management.

M&A activity is expected to remain selective, at least until buyers and sellers alike see economic and geopolitical uncertainty subside. Recent tariff escalations have prompted corporate realignment, vertical integration, and divestiture activity. Agreements with trade partners are expected to give buyers and sellers much awaited relief and re-open the M&A market. Private equity (PE) acquirers will likely remain fastidious amid the choppy macroeconomic backdrop and muted exit environment. However, the Federal Reserve’s (Fed) potential for interest rate cuts, coupled with improving credit spreads, is expected to unlock capital.

PE activity continued to gain momentum through YTD Q2 2025 compared to 2024. PE deals rose 9.6% YOY through Q2 though activity has remained subdued as 2024 saw the lowest level of sponsor dealmaking since 2017. Macroeconomic volatility tempered a PE M&A rebound, evidenced by a 5% quarter-over-quarter (QoQ) decline in financial buyer activity in Q2 2025. The fundraising environment continued to cool in YTD Q2 2025 with total PE capital raised falling 20.6% YOY and fund count dropping 23% YOY. PE capital raises are expected to remain slow until exit visibility improves and the market gains clarity around key headwinds, such as tariffs, inflation, and policy changes.

Average Disclosed Enterprise Values and Purchase Multiples Tick Higher

The average disclosed enterprise value continued to tick higher, rising 3.7% YOY to $73.1 million through Q2. Buyers have remained disciplined, opting to pursue larger targets with a high conviction to realize synergies or an exit. Total disclosed middle market M&A value jumped to $68.4 billion through Q2, $6.8 billion more in total M&A value than the prior year period. The average middle market purchase multiple increased to 10.2x EV/EBITDA through Q2 2025, compared to the YTD Q2 2024 average multiple of 9.7x. On a quarterly basis, the average EBITDA multiple paid for middle market businesses rose to 11.5x in Q2, up from 9.1x in Q2 2024, and remained well above the historic average of 10.8x. Private equity (PE) firms paid an average multiple of 13.1x EV/EBITDA for middle market businesses in Q2, hinting that sponsors have begun moving up market for businesses they believe will provide stronger returns on an eventual exit.

Industry Spotlight: Aerospace, Defense, Government & Security

While broader middle market M&A volume only increased 2.6% YOY through Q2, the Aerospace, Defense, Government & Security (ADGS) industry notched a remarkable 19.6% YOY increase. In this Q2 report, Capstone Partners’ Head of ADGS, Managing Director Tess Oxenstierna, provides insight into trends and drivers behind the industry’s outsized growth. Capstone prides itself on having industry specialists who understand Air, Land, Sea & Space (ALSS) Systems; Command, Control, Communications, Computers, Intelligence, Surveillance & Reconnaissance (C4ISR); Commercial Aerospace & Aviation; Government Services; Physical & Cybersecurity; and Training & Simulation (T&S); and recently released its 2025 ADGS Annual Report & M&A Outlook. Our ADGS team is experienced in translating government contracting to capital providers, and we partner with investors and large-to-small cap companies to optimize value in a competitive market.

The U.S. Government and private sector continue to invest in Air, Land, Sea & Space Systems, consolidating a fragmented and M&A target-rich subsector. Government contractors are actively seeking to shore up key suppliers to ensure surety of supply for critical systems, within the backdrop of an unprecedented full year Continuing Resolution.

Tess OxenstiernaManaging Director, Head of Aerospace Defense, Government & Security, Capstone Partners

Download our full Q2 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
• Commentary from Capstone’s Financial Advisory Services Group on due diligence in PE M&A strategy and quality of technology analysis.