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.”
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.
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).
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.
The Fried Frank team recently released an activism outlook for 2026. Here’s what they’re predicting based on 2025 trends:
– M&A-Focused Campaigns on the Rise
– Emerging Activists Targeting Smaller Companies
– Private Settlements Over Public Proxy Fights
– Retail Investor Engagement Takes Center Stage
– Potential Changes to Quarterly Reporting Requirements
The first four are continuations of existing trends, but the last one of course is new. If the move away from quarterly reporting pushes forward, the Fried Frank team expects “activists may push companies to maintain quarterly reporting or otherwise report more frequently than semi-annually.” The alert suggests, “Even before any rule is adopted, boards should consider their position on this issue and be prepared to articulate their rationale.”
Programming Note: We’re starting our holiday blogging schedule tomorrow, which means that, absent some earth-shattering developments, this blog won’t be back until after January 1, 2026. Happy holidays, and best wishes to all of our readers for the new year!
First, the Act authorizes, but does not require, the Secretary to issue regulations prohibiting U.S. persons, including their controlled foreign entities, from knowingly engaging in covered national security transactions involving a prohibited technology.
Separately and regardless of whether any such prohibitions are adopted, the Act directs the Secretary, within 450 days of enactment, to issue regulations requiring 30-day post-transaction notice if a U.S. person or its controlled foreign entity knowingly engages in a covered national security transaction in a prohibited technology (unless the transaction has been prohibited by the Secretary pursuant to the discretionary rulemaking authority noted in the preceding sentence) or a notifiable technology.
The interplay of these restrictions is not entirely clear, but it would appear the Act only requires a notification regime, with Treasury to decide whether to prohibit any transactions.
This is implied above, but in case it’s not clear, the alert says:
The Act does not amend the existing Outbound Investment Rule but, rather, authorizes the Secretary to amend, terminate or supersede the rule and requires any such rulemaking to provide a reasonable timeframe for compliance. Accordingly, any expansion of the scope of prohibited or notifiable transactions under the Act would occur through subsequent Treasury rulemaking.
It does contemplate new rulemaking expanding the scope of the regime. For example:
Certain key terms under the Act differ from and expand on the operative definitions under the Outbound Investment Rule, including with respect to the targeted countries, targeted technologies, and targeted investment transactions by U.S. persons.
The Act generally authorizes the Secretary to exclude any category of transactions determined to be in the U.S. national interest or transactions below a de minimis value. The Act expressly provides for certain exceptions similar to, but not exactly the same as, many of those provided under the Outbound Investment Rule . . . The Act does not include reference to exceptions currently provided under the Outbound Investment Rule for (i) acquisition of a voting interest in a covered foreign person upon default or other condition involving a loan made by a syndicate of banks in a loan participation, subject to certain conditions on the U.S. person lender or (ii) a U.S. person individual’s receipt of employment compensation in the form of an award of equity or the grant of an option to purchase equity in a covered foreign person or the exercise of such option. As noted above, however, the Secretary has discretion to except categories of transactions determined to be in the U.S. national interest.
The Act specifies new exceptions not included under the Outbound Investment Rule.
– Spin-offs remained popular in 2025, and that trend is expected to continue with multiple large spinoffs expected to be completed in 2026, including Honeywell’s spin-off of its aerospace technology business. Tax rules for spin-offs continue to evolve as the Trump administration takes a more flexible approach than the prior administration.
– Contingent value rights (CVRs) have reemerged as consideration mechanisms in public deals; 27 deals this year have included a CVR, a nearly four-fold increase from 2024. Given the prevalence of CVRs in pharmaceutical and biotech M&A and the level of activity in those industries, we expect to continue to see more CVRs in 2026.
– Sovereign wealth funds, particularly those in the Middle East, remain active participants in major transactions, principally as equity investors in U.S. and European dealmaking. Such funds have been particularly active in pursuing strategic transactions in AI, data centers, semiconductors and sports and entertainment.
– Hostile and unsolicited takeovers and over-bids made headlines in 2025, including offers launched by Paramount Skydance for Warner Bros. Discovery, QXO for Beacon Roofing and Novo Nordisk for Metsera. These transactions are part of a modest increase in hostile and unsolicited M&A activity over the prior year, both in the U.S. and globally, in part driven by valuation fluctuations, sympathetic shareholders looking for exit opportunities and efforts to scale or secure “crown jewel” assets.
Wachtell also discusses several notable 2025 developments, including the reemergence of mega deals, the rise in PE deal volume, the growth in bank M&A, the evolving regulatory environment and the emergence of the federal government as a dealmaker.
According to a recent FactSet blog, M&A deal activity and spending declined last month, and most of the sectors tracked by FactSet have seen a decrease in activity compared to the comparable period of 2024. This excerpt has the details:
U.S. M&A deal activity decreased in November, going down 24.8% with 1,012 announcements compared to 1,346 in October. Aggregate M&A spending decreased as well. In November 13.7% less was spent on deals compared to October.
In terms of M&A deal activity, 7 of the 21 sectors tracked by FactSet saw an increase in M&A deal activity over the past three months relative to the same three-month period one year ago. The six sectors that witnessed the largest increases in M&A deal volume were: Technology Services (889 vs. 702), Commercial Services (466 vs. 409), Non-Energy Minerals (115 vs. 65), Industrial Services (241 vs. 196), Miscellaneous (23 vs. 15), and Retail Trade (99 vs. 91).
On the other hand, 13 of the 21 sectors tracked by FactSet saw a decrease in M&A deal activity over the past three months relative to the same three-month period one year ago. The five sectors that witnessed the largest declines in M&A deal volume were: Finance (692 vs. 780), Producer Manufacturing (184 vs. 235), Distribution Services (137 vs. 187), Consumer Services (208 vs. 236) and Health Technology (100 vs. 127).
With the ongoing tussle between Paramount and Netflix over Warner Bros and the recent fight between Novo Nordisk and Pfizer over Metsera, “deal jumping” is having a bit of a moment. That makes this Cooley blog, which addresses the key considerations a potential topping bidder should keep in mind before jumping a deal, particularly timely. This excerpt discusses the importance of following the roadmap laid out in the merger agreement:
The roadmap agreed between the target and the original buyer must be followed by both the target and topping bidder. Most public company merger agreements provide that a fiduciary out may not be exercised if the topping bid arose out of a breach (sometimes negotiated to be a “material breach” or “willful and material breach”) of the no-shop provisions by the target or any of its representatives.
Given this, it is essential that the topping bidder instructs all of its directors, officers, advisors and other representatives only to engage with the target and its representatives in close coordination with the advisor team, as errant interactions with the target can kill a deal jump before it ever gets off the ground. The topping bidder – if successful – becomes the successor to any claims regarding how the target ran its process, so any missteps by the target, especially with a jilted original buyer, will be scrutinized more heavily than in a plain vanilla transaction.
In addition to the risk of being on the hook post-closing for the target’s process violations, potential topping bidders should also consider the risks of tortious interference claims arising out of failing to follow the rules of the game. That’s a topic that Cooley addresses in its blog, and one that I’ve blogged about a couple of times over on the old “John Tales” Blog.
We recently put the finishing touches on the annual update for the Practical M&A Treatise. This 966-page resource covers a broad range of topics, including the mechanics of an M&A transaction, documentation, disclosure, tax, accounting, antitrust, contractual transfer restrictions, successor liability, antitakeover & fiduciary duties of directors and controlling stockholders. The new edition features over 60 pages of new and updated content on a variety of topics, including:
– Recent Delaware cases addressing “efforts” clauses, earnout terms, reliance disclaimers, the implications of disclosure schedules, tortious interference claims, aiding and abetting claims targeting buyers, and claims targeting controlling stockholder transactions;
– Market practice regarding expectancy damages in merger agreements following the adoption of Section 261(a)(1) of the DGCL;
– Antitrust developments, including the new HSR form, enforcement actions targeting alleged HSR violations, the return of structural remedies and other changes to merger review and enforcement;
– Developments in shareholder activism, including “zero slate” campaigns, the impact of universal proxy on contested elections and activist campaigns, and recent litigation challenging advance notice bylaws;
– The new safe harbor for transactions with officers, directors and controlling stockholders and the other changes to the DGCL put in place by SB 21, and the approach that Nevada and Texas take to conflicted controller transactions.
The Practical M&A Treatise is available online as part of an upgraded DealLawyers.com membership. It’s also incorporated into our “Deal U Workshop” – an essential online course for more junior M&A lawyers, with nearly 60 podcasts and 30+ situational scenarios to test your knowledge. Sign up by emailing us at sales@ccrcorp.com, or by calling 1-800-737-1271 to get access today.