Middle Market PE Optimism Fades as Tariffs and Regulatory Uncertainty Cloud Deal Landscape

What's New

Katten's 2025 Middle-Market Private Equity Report reveals that while dealmakers entered the year with optimism about increased exit opportunities and platform acquisitions, market sentiment has soured significantly, with 60% of investors reporting a worsened outlook since January amid increased uncertainty around tariffs and US policies.

Why It Matters

This shifting sentiment highlights the complex dynamics facing PE investors who initially welcomed the perceived pro-business stance of the new Trump administration but now face destabilizing factors including geopolitical tensions, tariff concerns, and regulatory uncertainty that threaten to derail transaction momentum.

Big Picture Drivers

Technology transformation leads opportunity drivers with 79% of investors citing digital modernization across industries as a primary catalyst for 2025 deals.
All-equity deals continue gaining momentum with 87% of investors expecting an increase as debt markets remain choppy and PE firms adapt to financing transactions themselves.
Regulatory concerns top the list of obstacles, with 51% expecting compliance challenges to remain difficult or worsen under shifting federal oversight priorities.
Capital accessibility has improved but remains fragile, with 52% believing increased capital costs will continue presenting similar or greater challenges than in 2024.
Tariffs have emerged as a significant new concern in early 2025, creating supply chain uncertainty and potential inflationary pressures not fully anticipated in late 2024 projections.

By The Numbers

57% of dealmakers were significantly more confident about deals progressing as planned compared to just 18% in 2023
67% view business services as the top investment opportunity sector, followed by technology (56%)
48% of investors surveyed in March 2025 maintain positive sentiment about middle-market PE activity
80% expect exit opportunities to increase from 2024's sluggish pace

Key Trends to Watch

Health care investments could accelerate as 93% of investors interested in this sector view the administration change as positive, with loosened scrutiny on PE rollups expected to drive activity.
Manufacturing deals may benefit from domestic production initiatives, though 43% of sector-focused investors worry that tariff policy changes could disrupt supply chains.
Sports investments are gaining traction with 43% of respondents considering this area, driven by expanding betting markets and changing league ownership rules.
Business services consolidation may face increased competition as recent high-profile transactions like WSP Global's $1.78 billion POWER Engineers acquisition shrink the available target pool.

Key Quotes

Volatility warning: "The mixed outlook reflects the complex dynamics facing PE investors, who, on the one hand, see short-term upside due to the perceived pro-business and pro-US bent of the new administration. That being said, geopolitical events, tariffs, inflationary concerns and lack of policy specifics tend to be destabilizing." — J. David Washburn, Partner and Co-Chair of Katten's Mergers and Acquisitions and Private Equity Practice
Capital adaptation: "In a landscape where debt markets remain choppy, middle-market PE investors are increasingly accustomed to needing to provide full equity backstops to support transactions in competitive situations." — Christopher S. Atkinson, Partner and Co-Chair of Katten's Mergers and Acquisitions and Private Equity Practice
Market transition: "The increased confidence we saw from respondents regarding a range of transaction types — platform deals, add-ons and exits — signals the potential for improved dealmaking momentum in a market that has swung from the M&A boom of 2021, when money was cheap and more easily available, to the subsequent slump as interest rates soared. However, uncertainty surrounding the impact of tariffs on business forecasts is now casting a shadow over some M&A activity." — Kimberly T. Smith, Partner and Global Chair of Katten's Corporate Department
Sports opportunity: "PE interest in sports has been driven by many factors, including rising team valuations, the benefit of being a non-correlated asset (and having traditionally performed in a somewhat recession-proof manner) and stability created and maintained by strong league governance. The recent shift in policy by US leagues to allow PE investment also came at a critical juncture..." — Daniel H. Render, Sports and Sports Facilities Partner at Katten

The Wrap

Middle-market PE firms now navigate a more complex landscape than anticipated, requiring strategic capital deployment, careful regulatory navigation, and disciplined due diligence to succeed in 2025. Those effectively leveraging digital transformation opportunities while mitigating tariff and regulatory risks will be best positioned to capitalize on the market's underlying strengths.