Capital Markets Update – Q4 2024

Capstone Partners Q4 2024 Capital Markets Update

How to Predict a Boom, Three Years in the Making

The Merger and Acquisition (M&A) market remained flat in 2024, marking three-years of reduced volumes following the peak of 2021. This is unusual in historic terms. We have to go back to the 2007 through 2009 Global Financial Crises, when M&A volumes decreased by 22.9%, to find a similar, protracted compression of middle market M&A. In comparison, transaction volume dropped 37.5% between 2021 and 2024. Importantly, this represents the largest and longest compression on record. Deal flow in 2024 (11,930 transactions) is the lowest annual volume since 2009 (9,176 deals). By our accounts, over $1 trillion of dry powder is sitting on the sidelines by private equity investors, another historic high. These figures indicate a historic pent-up demand for M&A. Moreover, M&A pricing also hit the lowest level since 2009 (9.1x EV/EBITDA). This figure is especially impactful considering inflation has increased by 50.4% from February 2009 to the same month in 2025. Elevated inflation challenged pro-forma earnings for many operators through much of 2024, contributing to lower transaction multiples.

We have witnessed a historic outlier in the M&A market’s compression. With transaction volume down almost 40% and private equity sitting on the proverbial sidelines for three years, a backlog of demand has been created, the likes of which we have not witnessed. The question isn’t if it will be deployed, but when. A private business owner should be assessing the inevitable re-opening of the M&A market on their long-term strategy.

Ken WasikCo-Head of Investment Banking, Capstone Partners

This past year was remarkable for what didn’t happen, rather than what did. Conflicts in the Middle East and Ukraine failed to resolve, inflation continued, national debt kept climbing and recessionary threats persisted. Perhaps most importantly, we saw a new specter of the election uncertainty. Leading up to the election, the lion’s share (42.5%) of middle market business owners indicated that a party change in the White House (from Democrat to Republican) would have a positive impact on business operations, according to Capstone’s Middle Market Business Owners Survey. However, following the election, an upheaval in several government policies, particularly tariffs, injected significant uncertainty into the market and threatened the reignition of inflation. As a result, 2024 saw many negative M&A market indicators. Compared to 2023, deal volume decreased (-5.8%), multiples paid to middle market business owners declined about a half turn to 9.1x EV/EBITDA, and private equity (PE) transactions fell 3.4% contributing to an increasing PE inventory. Private strategic deal volume continued to decline, falling 9.6% year-over-year (YOY) during 2024.

As a result of the above, 2024 saw a pronounced “flight to quality.” PE buyers, constrained by market uncertainty, flocked to deals possessing foolproof returns regardless of market conditions, which we term “Platform” companies. Platforms have strong financials, leadership positions, highly predictable growth and typically are ideal consolidators of an industry. PE platform investments increased 4.7% YOY, marking the first influx of these acquisitions since 2021 and exemplifying acquisition appetite for attractive, high-quality assets. EBITDA multiples paid for platforms will likely continue to expand as an overabundance of dry powder chases too few deals in the market. Additionally, fund managers realized exits in top performing portfolio companies, providing additional levity to middle market valuations over the year.

Strategic buyers remained active and largely drove the M&A market during 2024, comprising 56.6% of total middle market deal volume. Public strategics displayed a clear appetite for scaled, highly synergistic targets with average deal value from these buyers increasing 33.6% YOY to $90.8 million. While middle market private strategic volume was down, we also saw these privately-owned businesses pay targets valuations more than two turns higher than 2023, recording an average of 10.2x EV/EBITDA during 2024. The drastic increase shows a return to normalcy rather than outlying strength in valuations. The average EV/EBITDA multiple paid by these companies from 2006 to 2024 is 10.6x.

Select industries have stood out and exemplified the development of market trends in the years following 2021. The flight to quality was clearly visible at an industry level, where there has been an inverse relationship between industry deal volume and valuation movements since the down market began in many areas. Since 2021, M&A volume decreased most significantly in Healthcare (-47.1%), Energy (-41.3%), and FinTech & Services (-35.7%). At the same time, these industries were among the few that saw average EBITDA multiples expand over the period with Healthcare (+13.4%), Energy (+39.7%), and FinTech & Services (+102%) all experiencing significant valuation growth. Looking at broader middle market deal volume trends, 11 of the 12 Capstone-covered industries (Building Products excluded) have experienced a transaction decline of more than 22% since 2021’s peak. The robust compression in middle market M&A begs the question, what will it take to break this logjam?

There are three fundamental catalysts that will help uncork the M&A market. First, the “nature” of market cycles indicates we are well past the 12-24 month down market and typical three year rebound, or bull run. History implies the market will turn, and the turn may be equally as unprecedented as the current down market. If we go back to the 2007-2009 Global Financial Crises, M&A volume fell 22.9%. Then, in 2010, the M&A markets uncorked, and deal volume increased 83% over the following three years. In contrast, the current market has not only persisted longer than the Global Financial Crisis but deal volume has declined 14.6% further. The market can only take so much compression before M&A activity unleashes out of the necessity for business growth and expansion.

The second component, “biology,” has also continued to serve as a catalyst that will undam deal flow. The majority (80%) of business owners have continued to enter the prime harvest age (between 56 and 72), indicating an abundant pipeline of M&A targets with the potential to transact. Additionally, the geopolitical landscape has grown much more complex and volatile, creating expectations of a more challenging environment to navigate dealmaking in the mid-term and making the pursuit of a liquidity event more attractive.

“Capitalism,” the third fundamental to an M&A rebound, has continued to build and pressure conservative practices employed by fund managers. More than $1 trillion of dry powder remains for PE to deploy in the U.S. alone. The majority (51.1%) of these PE capital reserves have sat on the sidelines for three or more years. Sponsors will soon have to put capital to work more aggressively to generate returns and accelerate future fund formation. PE exit value to deal value has remained significantly subdued, averaging 0.36x from 2018 to 2024, almost half of the 0.6x average between 2014 and 2017, according to PitchBook’s 2024 Annual U.S. PE Middle Market Report. These underlying economics support an impending return of PE to the M&A market as buyers and sellers. Capstone believes the unavoidable nature of these factors are primed to unleash, particularly as the uncertainty around the new administration, tariffs, and monetary policy settle.

Download our full Q4 2024 Capital Markets Update Report Publication:

Request instant access to the full Capital Markets Update for a deep dive into recent Middle Market activity and trends including:

• Key considerations for middle market business owners regarding dry powder levels, buyer appetite, lending conditions, and M&A pricing trends.
• A breakdown of the top sectors preferred by Capstone’s sponsor network through 2024.
• An overview on Equity Capital and Credit market conditions, featuring Capstone’s Equity Capital Advisory and Debt Advisory
• Key Automotive industry takeaways for investors and capital providers from Capstone’s Financial Advisory Services Group.