Trends and Developments in Private Equity and M&A in the United States and Illinois: The Middle Market’s Moment

In the wake of a subdued 2024 and a slow start to 2025, there has been a steady uptick in M&A deal activity, particularly in the middle market. Over the past several months, deal flow has vastly increased across most markets, and industry participants – including funds, sponsors and strategics – appear increasingly optimistic about a more robust M&A environment for the remainder of 2025 and into 2026.

The tension between optimism for future deal flow and the drag of existing portfolio overhang was a defining feature of the M&A market of the past few years. Although there were several instances when the M&A market was poised to jump forward, certain macro-economic policies and political realities restrained growth. However, the story of this recent rebound appears to have significant tailwinds and is shaped by various market factors, including: (i) extended fund life cycles pressuring exits and promised returns to investors, (ii) a narrowing of valuation expectation gaps between buyers and sellers, which has persisted since the frothy pandemic M&A market of 2020-2022, (iii) post-pandemic revenue normalisation, which led to right-sized valuations, (iv) aggressive activity from strategics in certain sectors, (v) cooling of tariff-related issues and a strong belief that interest rates will be reduced in the near term, and (vi) a wide-ranging confidence in the continued growth of the economy.

With these drivers, the middle market is poised for increased activity in the months ahead.

Structural Challenges and Market Drivers

There have been several challenges that have shaped the M&A market’s path over the past few years, particularly as it relates to the middle market:

• Extended fund life cycles: In light of the factors referenced above, many private equity fund vintages have exceeded their initially intended exit timelines. The lack of deal flow in the market has caused funds and sponsors alike to hit some speed bumps in their respective roll-up acquisition strategies. Without a steady flow of achievable add-on opportunities, private equity funds have been forced to delay the achievement of certain EBITDA thresholds that would yield the targeted return to their investors upon the sale of the overall platform. This delay has resulted in a buildup of unsold assets, a shift in deal strategy and structure, and increased pressure to find attractive exit routes in 2025 and 2026. As a result, sponsors that would typically be in the marketplace to both market and sell their current platforms and raise new funds for future investments are instead continuing to search the market for the necessary add-on acquisitions and organic growth opportunities to achieve the necessary EBITDA thresholds that maximise their investments.
• Valuation normalisation and realignment of expectations between buyers and sellers: During the pandemic M&A run, an influx of capital and other pandemic-era earnings caused the earnings for many middle-market businesses to jump, which naturally led to an increase in valuations. Although such capital and earnings were temporary, sellers, investment banks and business brokers took this as a new baseline, which led to a new high-water mark for the valuations of middle-market companies. Although the fuel for such valuation increases dried up as the pandemic tailed off, this new baseline remained stubborn, and the valuation gap between buyers and sellers remained present for years to come. While recent valuations and exit multiples are certainly relevant for demarcation in certain industries, in 2025, seller expectations have now moderated where revenue and EBITDA have normalised or even declined, making it easier to find middle ground in negotiations and to right-size valuations back to pre-pandemic levels. As buyers and sellers see their views on valuations get closer, the environment for getting deals done will get more active.
• Strategic buyer aggressiveness: Corporate strategic buyers with strong balance sheets have taken advantage of the quieter market to make acquisitions at competitive multiples. Such strategics, especially those that are not public companies, have the long-term outlook and cash reserves to offer competitive (though not overly inflated) multiples for their acquisition targets, but are not beholden to the public markets or anxious equity holders to overpay for companies. This is especially visible in industries such as healthcare services, niche manufacturing and distribution, CPGs, service-based businesses and software/technology, where strategic fit justifies paying a higher multiple. Further, many corporate strategic buyers have taken a page from private equity firms and bulked up their internal M&A teams, which can facilitate transactions at the speed of funds and sponsors, but have the added advantages of being able to leverage the strategic’s brand, synergies and historical operating strengths. We expect this advantage to continue in the years to come in the middle market.

The Middle Market as the Growth Engine

Chicago, Illinois is one of the pillars of the middle market and is home to several national leaders of funds, sponsors and strategic buyers. The middle market is proving more resilient than the large-cap space in the current M&A environment for numerous reasons, including:

• Broader buyer universe: Middle-market targets attract both financial sponsors and strategic buyers, expanding the competitive field. This variety of buyers offers unique deal constructs and opportunities for sellers, both entrepreneurial and sponsor-backed alike. Chicago is home to a wide variety of both of these types of buyers, who are very active in the middle-market space.
• Financing and deal structure flexibility: Middle-market deals are the right size to be financed through a blend of cash, seller financing, earn-outs and appropriate leverage, allowing such deals to be less dependent on the tight-credit markets. Additionally, certain funds have utilised their equity and internal cash reserves to take advantage of middle-market opportunities without taking on additional debt. There is increased optimism regarding rate stabilisation in the near future, which helps with the cost of capital and certainty of deal structure, which had been negating factors in the recently stagnant deal market.
• Operational value-add potential: Private equity funds and other financially backed sponsors often identify tangible operational improvements in middle-market companies that can drive outsized returns. One of the pillars of sponsor-backed buyers has been the ability to make strategic additions to the C-suite and to add a plethora of resources to assist the back-office and revenue-driving operations of sellers. Buyers need to understand how they will add synergies and efficiencies to the target in order to create value during the buyer’s hold period.
• Synergised growth via acquisition: Financial sponsors have the resources to acquire similarly situated sellers that help grow the platform in various ways, including geographical reach, accretive operational growth and increase in market share. The ability to create synergised value across a platform through add-on acquisitions has always been a critical vehicle to achieve certain valuation thresholds that would yield the desired exit value for the platform. In addition, as a portfolio company increases in EBITDA, a sponsor can hope to achieve an increase in the multiple it receives at an exit. As the M&A market continues to open up, so too does the opportunity for sellers to realise the benefit of synergised valuation potential from private equity fund buyers, including by investing alongside the buyer in its investment in the platform.

Buyer/Seller Dynamics and the Narrowing Gap

In 2025, the tone of negotiations is shifting between buyers and sellers. While headline multiples in some industries have softened, competition for high-quality middle-market assets remains intense. Strong sellers – those with a diversified customer base, healthy market share, recurring revenues and clean financials – can still command premium prices over other sellers. In years prior, sellers were acutely aware of the pandemic-level valuations in their respective sectors and, as such, were unwilling to stray from such lofty expectations as the market plateaued. Conversely, buyers could not justify such high multiples when performance was either stagnant or on the decline due to various market conditions. As we head into the back half of 2025 and into 2026, that gap between seller expectations and buyer hesitation is narrowing dramatically. From the sellers’ point of view, time and space away from the frothy valuations of several years ago has now been superseded by hard financial data on their performance and what the market will reasonably call for upon a sale. Furthermore, there is a level of uncertainty over the long-term economic outlook, which may cause middle-market companies, especially those that are family-owned and do not have robust succession plans, to take the best offer available now to ensure a healthy exit. On the other hand, buyers have the opportunity to put capital to work that was aggressively raised on the heels of the frantic M&A market of 2020–2022. Buyers have struggled to put those dollars to work through M&A over the past several years, as it competes against the trepidation to overpay for underperforming target companies. As multiples on valuations have retracted in certain sectors, buyers have been able to right-size their offer structure to today’s middle-market seller.

Sector Spotlights

Manufacturing, distribution, industrials and CPGs

Illinois’s manufacturing strength, especially in food processing and precision components (including consumer packaged goods), is attractive to both strategic consolidators and financially backed sponsor platforms. Tariff-sensitive importers and exporters are navigating pricing and supply chain adjustments, but domestically focused producers remain in demand. Additionally, brands with strong regional footprints, loyal customer bases and potential for geographic expansion continue to draw middle-market investor interest, especially in the food and beverage industry.

Healthcare services and life sciences

With a strong base of hospitals, research institutions and healthcare service providers, Illinois is a hotspot for middle-market healthcare deals. Regulatory stability and recurring revenue models make this sector particularly appealing. We have seen steady deal activity in this space and expect such to continue through the end of 2025 and into 2026.

Technology and SaaS

While large tech transactions have slowed nationally, niche software providers and IT services firms remain attractive to both private equity and strategics, with Chicago’s growing tech corridor providing fertile ground. With the ever-evolving influence of artificial intelligence, the innovation and market sophistication could lead to an increase in deal activity.

Service-based business

A core part of any M&A market, service-based businesses continue to be attractive for acquisition growth. Industries such as transportation, landscaping, waste services, home care, HVAC, pavement repair, information technology and professional services have been lucrative middle-market targets in recent years, and we expect them to continue to be one of the pillars of the next surge of M&A activity. Companies providing critical, recession-proof environmental services have had a strong attraction for acquisition, not only in Illinois, but throughout the country. Companies with efficient operations, substantial market share and essential service offerings remain strong M&A targets in today’s market.

Where We See the Middle Market (And Where It’s Going)

The US M&A market is transitioning from a period of hesitation to one of cautious optimism, with the middle market at the forefront of this shift. While certain risks remain, such as tariff policies, election-year political uncertainty and potential shifts in credit conditions, financially backed sponsors with flexible investment mandates, strong operational capabilities and sector expertise will be best positioned to navigate these uncertainties.

For private equity firms and financially backed sponsors, the current environment calls for a disciplined but proactive approach: seeking assets with defensible market positions, focusing on operational efficiencies, and being prepared to move quickly when high-quality opportunities arise.

For strategic buyers, now more than ever, the opportunity is ripe to leverage strong balance sheets to secure market share, enter new geographies, or acquire capabilities that would be costly to develop organically.

For sellers, valuation recognition, market expectations, clear financial reporting and preparedness for diligence will increase the likelihood of achieving a favourable outcome upon a sale. As 2025 progresses, the middle market’s combination of nimbleness, flexibility and growth potential makes it the most promising ground for dealmakers seeking to capitalise on the next wave of M&A activity.