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US Middle Market Private Equity Market Update
Adapting and Leaning Into Uncertainty and Turbulence to Improve the Deal Landscape in 2026
In last year’s Looking Ahead Guide, we predicted the 2025 deal landscape would improve over 2024 year-end results in terms of the number of closed buyout transactions, transaction values, and exits. The rationale for this was: lessening uncertainty (or a better comfort level with the persisting uncertainty), stabilized inflation, and a new administration (including a consolidated Republican government), which has historically suggested a positive outlook for the US economy and private equity.
Early data initially supported this view. We saw an uptick in deal flow in Q4 2024 and into Q1 2025, suggesting positive momentum. Yet this momentum was stifled in Q2 2025 by ongoing tariff fallout and a Federal Reserve unwilling to cut interest rates further (in September 2025, the Federal Reserve did cut rates).
However, after several years of uncertainty—COVID, rising inflation, wars in Ukraine/Russia and Israel/Palestine, and rising interest rates)—the US private equity (PE) market is learning to adapt to these challenges to get deals across the finish line. We saw this in late 2024 and Q1 2025, and while tariffs and interest rates may have weakened deal flow in exits in Q2, we expect Q3 and Q4 will see an increase in US deal activity.
Supporting this view, Pitchbook’s Q2 PE Breakdown reports that while deal flow in Q2 2025 was down 5% compared to Q1, it was actually up 6.3% year over year compared to Q2 2024. We see this as positive momentum, although it may not feel significant quarter to quarter. Bain and Company’s Mid-Year Report further notes: “There’s nothing fundamentally broken in the market. Buyers and sellers can still transact—and history shows that strategic buyers with a strong M&A agenda remain active in turbulent times. General partners (GPs) are under pressure to do deals.”
At the end of 2024, US assets under management (AUM) approached $3.7 trillion, with more than $1 trillion in dry powder available in the marketplace, according to Pitchbook. With dry powder exceeding $1 trillion for the second straight year, PE firms are continuing to adapt to uncertainty to get deals across the finish line.
Even in a tougher deal environment, PE firms are managing to put capital to work by keeping deal sizes small, engaging in add-on transactions, or finding alternative sources of capital to finance transactions. As we mentioned in last year’s Guide, take-privates and carveouts are viable and prevalent, as the leveraged buyout (LBO) market struggles with continued uncertainty. Woodruff Sawyer’s Private Equity team was involved with several large take-private and carveout transactions in 2024, and these transactions are part of a broader market trend expected to continue through 2025.
Looking forward to Q4 2025 and into 2026, we believe that while the deal landscape may continue to evolve and new structures develop, deal flow will increase compared to 1H 2025. Private equity buyers will remain focused on operational improvements within each portfolio company to enhance EBITDA margins before taking assets to market.
From an insurance perspective, what does this macro backdrop mean for PE firms engaged in completing due diligence and seeking to close transactions in Q4 2025 and 2026? As Bain noted in its Mid-Year Report, “Whatever switchback turns lie ahead, PE firms must excel at creative dealmaking, due diligence, and value creation to make the most of the opportunities that will flow out of today’s uncertainty.”
From our perspective, insurance due diligence (including post-close diligence) will continue to be a critical workstream as deal teams and operating professionals seek ways to improve and maximize EBITDA margin and mitigate risk to their investment assets. In pre-close due diligence, firms can identify strategies and efficiencies as well as project their financial impact, while in post-close diligence, firms can implement new strategies.
Post close, according to the Bain report, “GPs may need to refresh or extend their value-creation plans for portfolio companies to convince buyers that there are new chapters of growth ahead. Clear evidence of progress on EBITDA growth will be necessary for that narrative to be convincing.”
From an insurance perspective, our clients and the broader PE market are constantly looking for ways to maximize efficiencies, decrease costs, and improve overall portfolio company performance. An insurance advisor with expertise in working with PE firms and portfolio companies can add significant value to these processes in two ways:
- Maximizing the total cost of risk and insurance program structure to maximize EBITDA margin improvement; and
- Creating efficiencies in scale and cost effectiveness of the employee benefits programs, often the second largest cost driver for a portfolio company, second to payroll.
Insurance and employee benefits due diligence often takes a backseat to operational, legal, financial, or accounting diligence. But, if executed poorly, acquirers and investors alike may leave themselves exposed to increased risks that could negatively impact EBITDA in the short term and diminish the long-term value of the asset.
Including an expert insurance advisor on the due diligence team of advisors will help companies avoid these risky land mines, protect the investment in the short- and long-term, and ensure a cleaner exit.