It’s no secret that PE funds have been compelled to hang on to their investments in portfolio companies for longer periods of time in recent years, but an FTI Consulting article from last summer suggests that exits are likely to be even tougher to come by over the next few years:
[T]he exit transaction stalemate likely will worsen over the next couple of years, as the investment vintage years of 2021-2022 represent a high watermark for the number of U.S. buyout deals done and transaction multiples paid — even higher than multiples paid in 2017-2019 per PitchBook —which is attributable to a ZIRP monetary policy that propelled valuations at the time but is now long gone.
As the investment year buyout cohort of 2021-2022 approaches its five-year holding period, sponsors will be forced to reckon with market valuation multiples that in many instances are appreciably lower than those they bought-in at while potential buyers contend with borrowing rates that are materially higher than rates in the pre-QT period. Sponsors will need to assess this deal environment and decide what actions are most sensible relative to their investors’ expectations.
FTI says that this means it’s likely that funds’ average holding periods for their portfolio company investments will continue to trend longer as these 2021-22 transactions mature and “the harsh reality of lower exit multiples becomes more evident to sponsors.”
– John Jenkins
PwC’s US Deals 2026 Outlook notes that middle market activity was “underwhelming” in 2025, and cites the sector’s vulnerability to tariff shocks and enhanced immigration enforcement as key factors that created additional uncertainty for middle market companies during 2025. While less volatility in these areas and a more favorable interest rate environment may help improve the middle market climate in 2026, PwC says a lot depends on what PE firms do. Here’s an excerpt:
The potential middle-market swing factor for 2026 is the role of private equity buyouts and exits. PE firms now hold more dry powder and older portcos than during prior large-deal cycles, which could drive additional volume if financing conditions remain favorable.
But valuation gaps are still making it harder for funds to exit and provide returns to limited partners—in turn putting pressure on fundraising. While many funds have capital to invest, they remain cautious. We also believe that shifts in PE buyer behavior, including the use of platform roll-up strategies, help explain some of the decline in middle-market deals.
PwC says that competition for quality middle-market assets is likely to pick up, with more large funds turning to the middle market to find opportunities. It suggests that smaller funds will likely need to focus on specific sectors or subsectors to remain competitive, and may seek to differentiate themselves by bringing in operating partners to help strengthen their portfolio companies.
– John Jenkins
The ABA recently announced the publication of its 2025 Private Target Deal Points Study. The Study was last updated in 2023, and this excerpt from the ABA’s announcement highlights some of the changes in market practice observed since then:
– Earnouts: Earnouts became less prevalent and displayed some buyer-friendly features. Use of earnouts decreased from 26% during the period covered by the 2023 Study to 18% during the period covered by the 2025 Study. Earnouts are often used to address valuation gaps, and this data point suggests that valuation gaps narrowed somewhat during the period covered by the 2025 Study.
– RWI: The use of representations and warranties insurance (RWI) increased compared to the prior Study. 63% of deals during the period covered by the 2025 Study referenced RWI (our proxy for whether a transaction utilized RWI) as compared to 55% of the deals during the period covered by the 2023 Study.
– No Survival Deals: Deals that provide that representations and warranties do not survive closing increased from 30% in the prior Study to 41% in this Study. This increase is likely related to the increase in RWI deals.
– Indemnification for “Actual” vs. “Alleged” Breaches: Indemnity coverage for alleged breaches increased from 17% from to 27% in this year’s Study; this appears to also be driven by an increase in RWI deals.
– Single vs. Double Materiality Scrape: The use of double materiality scrapes increased from 69% to 82% in the prior study. Again, this increase appears to be related to the increase in the use of RWI.
This edition of the Study added several new data points, including how often transaction expenses are included in post-closing purchase price adjustments, how often deals that include the definition of “Material Adverse Effect” specify that a fact or condition existing at the time of signing the acquisition agreement could constitute an MAE, how often the failure/inability to adequately defend a claim could result in a loss of the indemnifying party’s right to control defense, and how often fraud is included in purchase agreements as a standalone indemnity.
The 2025 Private Target Deal Points Study is available for download without charge by members of the ABA’s Mergers & Acquisitions Committee (which members of the ABA Business Law Section can join without additional charge).
– John Jenkins
Several states have recently enacted extended producer responsibility (EPR) statutes making manufacturers responsible for the entire lifecycle of their products, most notably with regard to end-of-life management issues like recycling and disposal. This DLA Piper blog reviews the key due diligence issues raised by these EPR laws and points out that they raise significant valuation, pricing, and integration issues, particularly in packaging intensive sectors. Here’s an excerpt from the blog’s discussion of where parties should consider addressing EPR concerns in their deal terms:
– Representations and warranties. Specify representations on producer status under each state regime, PRO registration and membership, completeness and accuracy of material volume reporting, timely payment of dues, absence of notices or penalties, and compliance with labeling and recyclability standards. These include provisions that 1) require the representations to be re confirmed at closing (i.e., bring downs), 2) apply “knowledge” qualifiers where appropriate, and 3) measure materiality against a defined “Material Adverse Effect” – all specifically for EPR matters.
– Covenants. Address 1) pre-close registration and reporting, where required; 2) maintenance of data systems and controls; 3) cooperation for audits and historical substantiation; and 4) interim restrictions on packaging and material changes that could alter dues. Establish post close remediation plans with milestones for redesign and PRO compliance.
– Pricing mechanics. Address working capital treatment for accrued or unbilled dues, targeted purchase price adjustments for known schedules and assessments, and earn-outs linked to redesign milestones or eco modulation credits. Size short tail escrows to audit or reassessment cycles.
The blog also suggests using specific indemnities to address pre-closing liabilities with separate baskets, caps and survival provisions aligned to statutory lookbacks and producer responsibility organization audit windows. It says that parties should also address producer status issues in co-packer, private label and license agreements if a counterparty’s non-compliance threatens market access, and establish termination and price adjustment provisions triggered when verified EPR costs exceed agreed caps at various milestone points during the transaction.
– John Jenkins