The 2025 edition of the Katten Middle-Market Private Equity Report was issued Thursday to the unintended fanfare of far-reaching tariffs and a stock market collapse.
In some ways, it was a fitting backdrop of disruption, since the survey itself was disrupted.
The survey is based on 114 responses gathered in December, a time of post-election optimism. But the early volatility of the new administration compelled the Katten Muchin Rosenman team to question whether the the bullishness of the early data had survived post-inauguration turmoil.
They conducted a mid-March “flash survey” of 40 additional respondents and more than 60 percent replied that their outlook had worsened since the beginning of the year.
So, it’s against that backdrop that what follows should be considered. And, as the Katten folks warn, the outlook reflected in the data is “complex.”
It’s no secret that heading into 2025, many PE investors were bullish on their prospects for the year, even though 2024 had not been unkind to the middle-market with the third best levels of buyouts ever: an estimated 3,470 valued at $352.5 billion, according to Pitchbook.
Still, in the Katten survey, 87 percent predicted an increase in all-equity deals during 2025 over 2024, including platform acquisitions (83%) and add-ons (87%). The share of the most bullish views (“significantly more confident”) grew to 57 percent from only 18 percent in the 2022 Katten survey. And when asked about expectations of their own organization, 37 percent said they expect to acquire primarily platform companies, 28 percent said they expected primarily add-on acquisition and 30 percent said they are expecting to invest in both.
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Respondents primarily included PE investors (78%), independent sponsors (11%) and family offices (11%) involved in middle-market deals defined by a range of $25 million to $500 million.
Respondents were also optimistic about the 2025 market for exits, which have been in a well-advertised slump over recent years. A remarkable 8 in 10 respondents predicted an increase in exit activity in 2025 over 2024, but 37 percent said finding those exit opportunities would be a challenge.
Where do they expect to find their deals? Business services (67%) ranked atop a long list of interests, especially those that cannot reasonably be cut.
“PE investors view business services as an area of focus because, in many cases, such services are required and cannot be deferred— consider security services, commercial landscaping, waste management, property management, janitorial and the like,” writes Katten partner J. David Washburn in the report.
“Demand for data and IT-related services is also strong, given the non-core nature of the function, the exponential growth in data complexity and the significant opportunities presented by mining both public and private data.”
As a result, technology remained a favorite (56%), followed by financial services (49%) and energy (47%), which is increasingly associated with technology. Falling significantly in popularity from Katten’s 2022 survey are healthcare (35%) and real estate (32%), with education (30%), media and entertainment (22%) and sports (17%) rounding out the bottom five of the 12 sectors cited.
However, two of those sectors, healthcare and sports, deserve a closer view.
The decline in mid-market PE interest in healthcare, for instance, was attributed to increased scrutiny of PE rollups in the Biden administration. And among those respondents who see high interest in healthcare, 93 percent expect that to change under Trump. Not reflected, however, is the effect of recent cuts and threatened cuts in Medicaid, Medicare and funding in health-related research.
On the upside, sports PE is entering an entirely new era with high interest in sports wagering, niche and women’s sports and a broader view of sports-adjacent investment opportunities (real estate development, streaming, branding, etc.). And sports-related investment is emerging as one of the fastest-rising sectors in middle-market PE.
But buried, even in that December optimism, were some lingering concerns that may be coming to fruition. While 44 percent cited the regulatory environment under Biden as a major (“to a large extent”) impediment to dealmaking in 2024, nearly the same number (42%) expected regulation to continue as a concern — but with perhaps different concerns — under Trump.
“Heading into 2025, the impact of the new administration on dealmaking expectations was undeniable. It was widely viewed as a boon to M&A and the U.S. PE sector specifically,” reads the Katten report.
“Yet the shakeups accompanying significant Trump administration moves on Inauguration Day and beyond have increased uncertainty for business leaders and dealmakers alike — at least in the short term — as evidenced by increased market volatility in the early months of this year.”
“The lingering economic and regulatory uncertainty our respondents flagged heading into 2025 has intensified, with unpredictability around tariffs and the broader macroeconomic picture presenting steeper than anticipated hurdles for M&A.”
Their conclusion: “The outlook for middle-market PE in 2025 is complex …”