By Lou Sokolovskiy
A new report from Termgrid Private Capital finds that while mergers and acquisitions and fundraising have continued to slump in 2025, the middle market is bucking the trend, emerging as a haven for private equity investors seeking stability and growth.
Middle Market Emerges as a Strategic Focus for Large-Cap PE
The study underscores a notable strategic pivot among large-cap private equity firms, many of which are increasingly setting their sights on mid- and lower-middle-market deals. Confronted with an uncertain macroeconomic climate and a dwindling supply of large-scale transactions, these firms are finding renewed opportunity in smaller, more resilient segments of the market.
What’s Driving the Shift? Market Volatility and Stalled Deals
“In many respects, overall M&A activity has had a series of bad breaks over the past few years, including the effects of COVID,” said Meredith Laitner, partner and co-head of the M&A Group at Ellenoff Grossman & Schole LLP, as quoted in the report. “Many transactions have continued to stop and start during the first half of 2025 as market conditions globally have continued to change. There are a lot of larger, stalled deals out there.”
The data backs up the shift in focus: more than 75% of large-cap firms surveyed identified the middle market as a key area for expansion. Among the drivers cited were reduced competition (36%) and the desire for broader market exposure (41%).
Middle Market Optimism vs. Large-Cap Caution
Mid-market players themselves are comparatively upbeat. Over 60% of mid- and lower-middle-market respondents expressed optimism about market conditions for the remainder of the year, versus fewer than 50% of large-cap respondents.
Not all sectors are struggling equally. “AI, technology, and crypto transactions are still moving forward, and strategic acquirers remain interested,” said Ms. Laitner. “Private equity firms are holding onto higher-value assets for now, which isn’t surprising. I’m looking forward to more stability—then we’ll see the larger deals return.”
Regional Trends: Americas Lead, Europe Lags
Regional sentiment, the report finds, is far from uniform. Optimism runs highest in the Americas, where 59% of respondents expressed a positive outlook for the remainder of the year, with nearly half attributing their confidence to improving economic conditions.
In Europe, however, the mood is more restrained: just 34% pointed to the economy as a key driver of deal activity, while 32% highlighted mounting pressure to return capital to limited partners (LPs).
Limited Partner Pressure and the Fundraising Outlook
That pressure is not evenly felt. More than 40% of firms with over $100 million in EBITDA cited LP return demands as a major influence on M&A activity, compared to just 15% of firms under $50 million in EBITDA.
The report found broad agreement that economic stability, normalized interest rates, and valuation alignment would do the most to improve deal flow.
On the fundraising front, the outlook is less encouraging. More than 60% of respondents expect a tough environment over the next 12 months, with fewer than one in five anticipating improvement. Among upper-market firms, 70% foresee continued headwinds.
“Until firms are ready to divest assets, fundraising will remain slow,” Ms. Laitner said. “I don’t see that changing for a while.”
Co-Investments Offer a Rare Bright Spot
Still, one area where capital remains available is in co-investments. LPs are increasingly drawn to these structures, particularly in the mid- and lower-middle markets.
“It’s not surprising that co-investments remain an important strategy for LPs,” said Ms. Laitner. “Now that co-investments are widely offered by private equity firms, I don’t see that changing. It’s a great way for LPs to diversify and gain exposure to different industries. Co-investment should continue to grow in popularity.”
Flexible Deal Structures and Emerging Tech Adoption
As large firms move down-market, they’re bringing with them more flexible deal structures. The report found that more than 17% of respondents see looser covenants and lighter documentation becoming common in mid-market transactions. These shifts are most prevalent in Europe, where lenders have shown greater flexibility than their U.S. counterparts.
Technology is also playing a greater role in how deals get done. While Excel remains a mainstay, more firms are adopting platforms like Termgrid to manage deal terms and reduce manual overhead—a change that may become a key differentiator in a competitive market.
Middle Market Positioned to Lead in the Second Half of 2025
Despite persistent macroeconomic headwinds and cautious capital markets, the report concludes that the middle and lower-middle markets are well positioned to capture investment dollars and drive activity through the second half of 2025.
“Co-investment should continue to grow in popularity,” Ms. Laitner said. For many in private equity, that growth may be one of the few bright spots this year.
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July 2025
