Now Is the Time for the Middle Market
McKinsey recently released a report on private equity in 2025 (Private Equity Emerging from the Fog). Let’s take a specific look into the middle market – a segment that we at Finquest believe will be gearing up for significant opportunities in the coming year.
Large-Cap Deals Are Leading the Recovery
If 2024 taught us anything, it’s that large buyout transactions (above $500 million in enterprise value) have made a decisive comeback. The surge has been fueled by lower financing costs, improved access to capital, and renewed investor confidence. Valuations in the large-cap space are back to 2021–2022 levels – strong, competitive, and (all things being equal) indicative of where the market is headed. But while the headlines focus on large-cap deals, the middle market isn’t far behind.
The Middle Market Is Next in Line
We’ve seen it before. When large-cap valuations rise, the middle and lower-middle market follow. The trickle-down effect is real, and there’s every reason to expect that midmarket companies – typically trading at lower multiples – will see a multiple expansion soon. Fundraising data backs this up: despite an overall decline in fundraising, midmarket funds ($1 billion–$5 billion in AUM) have remained remarkably resilient. Investors are eyeing midmarket deals, and with financing conditions improving, we’re set for an upswing in M&A activity. Add-on acquisitions, in particular, will be a major driver of growth, helping companies scale faster and achieve operational synergies. And notably, LPs are seeing improved distributions, with outflows from sponsors surpassing capital inflows for the first time since 2015, according to the McKinsey article. This shift could encourage further capital commitments to midmarket funds, reinforcing the segment’s ability to capitalize on the broader recovery.
Key Value Drivers in 2025
Let’s talk about what really drives private equity value creation. It boils down to four factors: valuation multiples, leverage, growth, and margin expansion. Over the last few years, operational performance (growth and margin improvement) has taken center stage – that’s why the size of portfolio teams doubled across funds. But 2025 will bring a shift: leverage and valuation multiples should start to contribute again to value creation. This is good news. Better financing conditions and improved market sentiment mean funds have more levers to pull when it comes to maximizing returns.
The Increasing Role of M&A
The long-term trend has seen add-on acquisitions steadily gain share over traditional platform investments. The past couple of years saw a slowdown, but now, the landscape is changing. With the backlog of portfolio companies waiting for exits at an all-time high (according to the PE Harvest Report by Sutton Place Strategies), M&A will become even more central to value creation. The large-cap rebound will ripple through the middle and lower middle market, closing the buy-sell valuation gap and enabling more transactions.
Winning in M&A: A Strategic Approach
With deal activity ramping up, execution will separate the leaders from the laggards. It’s not just about finding targets – it’s about finding the right targets. The best firms will proactively map the universe of potential investments, establish early relationships, and take a strategic, forward-thinking approach. Simply put, you want options before you need them. On the exit side, a solid, well-activated M&A pipeline for a portfolio company will be a game-changer when pitching potential buyers. Being prepared isn’t just a competitive advantage, it’s now a necessity.
Outlook for 2025
The stage is set. Large-cap deals have started to stream back in (the increased chatter around investment bankers’ bonuses also points to this), and the middle market is positioned to follow. As financing conditions ease, investor appetite grows, and M&A activity accelerates, 2025 is shaping up to be a year of opportunity. The firms that lean in, think strategically, and act decisively will be the ones who win.
As always, if you’re looking for a competitive edge in deal sourcing, I’d be happy to discuss how we can support your M&A strategy. Feel free to reach out to me at tanguy.lesselin@finquest.com.
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About the author:
Tanguy Lesselin is CEO and Co-founder of Finquest, a Fintech he set up to disrupt the world of deal sourcing in the middle market. Prior to Finquest, Tanguy was a consultant at The Boston Consulting Group and advised on post-merger integration and JV projects in pharma and aerospace. He has built Finquest to become the leading deal sourcing provider, harnessing the power of data, AI, and people to help their private equity and corporate clients identify off-market M&A opportunities across the globe.
Tanguy has been featured on CNBC, Bloomberg, and Reuters and is a frequent keynote speaker on Fintech and private equity.
