DealLawyers.com Blog

Capstone Partners recently published its Middle Market Private Equity Index for the first half of 2025. This excerpt says that there’s something amiss in middle market M&A, as a strange “barbell effect” has taken hold over the past few years:

The PE community has been bleating about the lack of “quality” deals. This apparent scarcity and bifurcation in capital deployment has caused some strange buyer behavior to emerge. High “A” quality companies attract dozens, and in a few cases hundreds, of initial indications from PE firms. Many at “A+” prices. These companies would transact in any market condition. Then there are the wipeouts—distress and bankruptcy situations in which lenders force the issue and equity owners cannot kick the can any further. These deals close at any price because owners have to do something.

But what about the unwashed masses in the middle? Many fundamentally solid businesses, particularly those with a visible if perhaps fixable flaws attract little-to-no interest from the Institutional Capital market. Put this another way: PE investors are content to pay outrageous prices for great businesses, but seemingly unwilling to pay a medium price for a mediocre “B” or “C” grade business.

Capstone says that if the industry wants to break the logjam of sponsor-owned assets, PE funds need to roll up their sleeves and do the hard work of price discovery for these B and C grade businesses.

– John Jenkins