Middle Market Momentum Outpaces the Mega-Deal Buzz
By Mark Coleman and Seth Goldblum
Last quarter we touted that, even amid macroeconomic turbulence, cautious strategic buyers and selective sponsors, middle market private equity would do what it does best – adapt and move forward. Q3 proved exactly that. Following a choppy start to the year, activity regained its footing as inflation moderated, rate expectations steadied, and financing markets loosened their grip. While large cross-border deals are still wrestling with headwinds, a flurry of mega deals lifted overall U.S. deal value. But the real momentum sits in the middle market, quietly powering a strong comeback and putting 2025 on pace to be the second-best year on record. As the broader market works to regain confidence, the middle market is showing how adaptability fuels momentum.
Why The Middle Market Surges
Through the 2nd quarter, middle market deal value climbed 18% YoY to nearly $100 billion across almost 1,000 deals (according to lagging middle market-specific data), putting 2025 on pace to be the second-strongest year on record. It’s no coincidence. Middle market companies’ domestic focus and service-oriented models help insulate them from tariff disruptions and cross-border volatility. Financing conditions have remained supportive. Private credit markets are open and highly competitive, with lenders competing for mandates and driving tighter spreads. Equity contributions have eased to 46% of buyout value, down from 51% in 2023 – reflecting renewed confidence in both credit markets and the Fed’s rate trajectory.
Valuations have largely reset to pre-pandemic levels, averaging about 12x EBITDA, and sponsors continue to be creative in deploying capital. One clear example is the evolution of the traditional “platform” concept – once defined by scale and stability but burdened by high leverage in recent years. Today, many sponsors are starting smaller and scaling faster through add-ons, which now represent roughly three-quarters of buyouts, many under $25M in enterprise value. In effect, the definition of a “platform” has shifted from mature anchor investment to simply the first deal.
The result: a middle market that keeps moving – recalibrating, adapting, and getting deals done while others wait for confidence to return.
Liquidity Lags and the Fundraising Freeze
If middle market deal activity is the bright spot of Q3, fundraising remains the shadow behind it. Private equity firms continue to face headwinds raising new funds, even after offering fee breaks and early-bird incentives to entice investors. Stalled exits and limited LP distributions – just 11% of NAV in FY24, implying a 10-year cash recycle timeline – have constrained available capital. For many managers with aging portfolios, the lack of recent realizations makes it harder to inspire confidence and secure new commitments. Still others point to an increasingly overcrowded market where too many managers are chasing the same dollars – dollars that are now flowing toward firms with proven track records and forward-looking strategies.
Some managers are still waiting out uncertainty ahead of their next raise, while others are adapting by stretching their deployment timelines – from an average of 18 months out to between three or four years. This measured pacing allows for more deliberate capital deployment and reduced pressure amid macro shifts, AI-driven disruption, and higher financing costs. Aligning with a slower growth cycle resets expectations in a market no longer buoyed by quick valuation jumps and cheap debt.
Meanwhile, following the recent rule change, some firms are turning to retail investors and 401(k)-style evergreen funds to tap new sources of capital. This shift opens the door for everyday savers to invest in private companies for the first time. For private equity firms, it offers a potential new wave of long-term funding.
The Exit Linchpin is When Pricing Meets Reality
If fundraising is tight, exits are the real pressure point. The depth of today’s exit challenges is easy to overlook, often masked by steady deal activity. Historically, GPs have operated under the assumption that holding an asset long enough would eventually yield the right price. That may hold true for individual firms, but when everyone holds liquidity dries up. After several years of muted exits, limited partners now want cash back more than they want high returns. Yet many GPs continue to wait, hoping for better conditions to deliver their target outcomes – a dynamic that only compounds fundraising pressures.
So what exit options remain for middle market sponsors, and how can they improve their odds? IPO markets are still sluggish and strategic buyers remain cautious amid policy and rate uncertainty. Continuation funds have provided partial relief, but most LPs now prefer full cash distributions. That leaves sponsor-to-sponsor deals – up by count in FY25 and still one of the most active and reliable exit channels moving forward.
For exit momentum to return, valuations will continue resetting, narrowing the bid–ask gap as GPs accept current market realities. Greater policy clarity and renewed confidence could further unlock activity – reducing downside risk and bringing both strategic and sponsor buyers back to the table.
Sources: Pitchbook: Q3 2025 US PE Breakdown (October 2025) Pitchbook: Q2 2025 US PE Middle Market Report (September 2025) Financial Times: Private equity fundraising slides as sector’s downturn deepens (August 2025) Financial Times: Bain Capital says buyout firms must be more cautious as growth slows (October 2025) Bain & Company: Dry Powder – The Private Equity Podcast: Private Equity’s Liquidity Wake-Up Call (June 2025)
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