CIBC US Middle Market Investment Banking’s Alex Eskra and Ryan Olsta join Ron Miller to discuss the current state of U.S. middle market M&A. They discuss M&A transaction volume, private equity activity, valuations, and the credit markets. Ryan also provides his insights on current trends within the business services sector.
Ron Miller: Welcome to The Monitor by CIBC's US Middle Market Investment Banking Group, a podcast series focusing on key insights, strategies and trends in the US Middle Market landscape. I'm your host, Ron Miller. In today's episode, I'm joined by Alex Eskra, Director at CIBC US Middle Market Investment Banking, and Ryan Olsta, Managing Director and Head of our Business Services Vertical. Alex and Ryan bring deep expertise from their respective areas of focus. Alex will be discussing the broader M&A market, including transaction volumes, private equity activity, valuations, and the debt market. And Ryan will bring his insights into the business service sector and trends. Additionally, we'll explore the ongoing impact of tariff uncertainty and the outlook for the remainder of 2025. Alex and Ryan, thanks for joining me today.
Alex Eskra: Thanks for having me back on Ron.
Ryan Olsta: Looking forward to the discussion.
Ron Miller: Let's talk about transaction volumes. Alex, let's start with the big picture. How did transaction volumes perform in the first half of 2025?
Alex Eskra: Yeah, it's a good question, Ron. So first half of 2025, you know, continued much of the challenging environment we've been navigating since the tariff announcements in April. According to Bayard's report, U.S. lower middle market M&A deal volume declined by about 13% year over year during the first half of 2025. And, you know, this decline reflects some of the persistent headwinds from the tariff uncertainty, broader macroeconomic instability that shaped a lot of the deal making through the first half of the year. In Q3, I would say that, you know, we've seen a lot of pickup and pitch activity and have managed through, you know, some of that disruption. It remains to be seen, you know, how the data shapes up for Q3, but I think we're collectively a lot more optimistic going into Q4.
Ron Miller: Alex, that's pretty consistent with what we've seen in our group. Where are you seeing more resiliency in the market?
Alex Eskra: That's a good question, Ron. So I think there are, you know, there's some sellers that have viewed this really as an opportunity to move forward with sale processes in hopes that they can capitalize on some of these market dynamics in terms of, you know, scarcity. When you have a high quality asset, you can generally command a strong valuation. For example, we're seeing certain sectors like industrials tied to the built environment. So, HVACs, data centers, concrete, similar types of businesses have remained a bright spot within the lower middle market.
Ron Miller: I agree. What do you think is driving performance in those sectors?
Alex Eskra: A couple of things. So the trade war and new rounds of tariffs have made buyers, you know, sort of increasingly wary of trade exposed industries, which has led to really a preference for stable domestic industrial manufacturers and essential services businesses. Buyers are basically seeking tariff resistant assets. As a group, we think that once buyers and sellers gain confidence that the U.S. has reached a point of sort of trade policy certainty, we'll see an uptick in deal volume from what we saw in the first half of 2025. More importantly, I think the fundamentals for the lower middle market remains strong. It's really the uncertainty that's the primary impediment. And I think we're going to get a little bit more clarity when the Supreme Court hears the case on the Trump tariffs.
Ron Miller: Ryan, let's turn to business services. What have you seen in the first half of 2025?
Ryan Olsta: The business services has experienced similar headwinds to the broader market. I think deal volumes have actually declined by 13% in the first half of 2025 compared to the same period for 2024. So very, very much in line with what Alex referenced earlier. This reflects the same challenging deal making environment, elevated interest rates, macroeconomic uncertainty, including sort of trade war disruptions. I am encouraged, however, but what I've seen beneath the surface, the annualized transaction count for the first half of 2025 still remains above pre-pandemic benchmarks, which showcases the sector's durable long-term growth and resilience. The recurring revenue nature of many of these sort of business services companies combined with their essential service offering continues to attract investors despite sort of the challenging micro and macro environment and some of these headwinds.
Ron Miller: Let's turn to private equity overall. And I think, anecdotally, the first half of this year, we had more private sellers than private equity. But Alex, I'd like you to comment on trends you're seeing in the private equity activity this year.
Alex Eskra: It's a good topic to bring up, Ron. So, you know, I think there’s sort of an interesting story here. Unsurprisingly, we saw a pullback in Q2. Exit counts experienced a nearly 25% decline from Q1, which, you know, interestingly enough, Q1 was the strongest exit quarter for PE in three years. So definitely a meaningful decline, especially when we were sort of hoping for more private equity exit activity. The exit metrics are essentially slipping below pre-pandemic averages and mirroring the broader middle market M&A headwinds we've been talking about. A lot of that, again, just comes from that policy and macroeconomic uncertainty, which has caused a lot of sponsors to essentially just pause or delay exit decisions.
Ron Miller: With these challenges in the market for PE exits, are there alternatives that PE sellers are looking to right now?
Alex Eskra: We're seeing a lot of acceleration in sort of continuation vehicles to give LPs liquidity. So the first half of 2025, you know, according to PitchBook, there were about 70 CV transactions, which puts us sort of well above the pace that led to a record year last year, which was about 127 exits through continuation vehicles. You know, this would suggest that, 2025 could be another record year for this is. You know, sponsors are increasingly getting pressured to sort of return liquidity to LPs and, you know, matched against sort of a rather tepid traditional exit environment.
Ron Miller: Alex, what has this all meant for holding periods for private equity?
Alex Eskra: Yeah, so hold periods remain elevated. They are showing some improvement. And I know we've talked about this, you know, previously Ron, you know, the median hold period declined to six years in the first half of 2025, which is down from sort of that seven year peak that we've talked about in the past that was in 2023. I would note, however, that this is still well above the historical average of just, you know, over five years prior to 2020. Again, this really underscores that the inventory of private equity assets is aging as exit activity remains constrained. Again, if we get more clarity on sort of trade and regulatory conditions, we could see sort of a pent-up wave of exits that would reset holding periods closer to those pre-pandemic levels.
Ron Miller: Ryan, I want to turn back to that comment on continuation vehicles that Alex said. What are you seeing in business services?
Ryan Olsta: Yeah, seeing the same trend in the business services sector. Not surprisingly, business services are particularly well positioned for these continuation vehicles. Predictable cash flows, sticky customer relationships, and proven business models are really exactly the type of assets that work well for CVs. When sponsors can't achieve the multiple they want in the market due to uncertainty or timing, a continuation vehicle really allows them to hold on to these quality assets longer and sort of time it upright while still providing some liquidity to their LPs.
Ron Miller: Great. I want to turn to valuations overall. And Alex, you mentioned a couple of trends in my mind that are actually conflicting on valuations. What have you seen in the first half of 2025 in the market?
Alex Eskra: We've talked a lot about sort of how challenging the market is. And, interestingly enough, lower middle market valuations have remained remarkably consistent. So, according to GF data, average EBITDA multiple for lower middle market deals was just 7.2 times, which is exactly the same as what it was in 2023 and 2024, which suggests that, you know, the M&A pricing is stabilized sort of, you know, post pandemic. Given 2021 and 2022, we saw the average EBITDA multiple at about 7.6 times. I'd say that the valuation in 2025, it's still elevated compared to kind of the long-term average prior to COVID, which was just under seven times. But again, indicates that buyers are willing to compete on price for those high quality assets and haven't been quite as impacted by certain headwinds like tariffs and inflation. That said, given sort of what could happen in the remainder of the year, we'll see what happens to multiples if more lower quality assets start to trade if the M&A floodgates open here.
Ron Miller: Ryan, look at valuations in business services. You highlighted a couple trends that suggest business service companies might be worth more. Has that played out in the data?
Ryan Olsta: Definitely has, Ron. Overall, the average EBITDA multiples for business services have risen to 7.5 times EBITDA in the first half of 2025, and that's up from 7.2 times for the full year 2023 and 2024 respectively. The sector's elevated multiples really stand out amid sort of broader market uncertainty and signal that buyers are particularly focused on scalable businesses with proven profitability and resilience. That's not to say there aren't sort of winners and losers within the business services sector from the multiple perspective, but as a whole, it's been a pretty good place to be.
Ron Miller: Let's drill down a little bit on that. What specific kinds of industries are gaining higher valuations?
Ryan Olsta: Yeah, the best performing companies fall into a couple of key categories. Anything related to sort of IT consulting or managed services has been very strong in terms of demand, as well as anything that sort of works with digital workflow automation. A lot of those businesses benefit from recurring revenue models and they have very strong adoption drivers during this timeframe. And so not surprisingly, those are being well looked upon. On the flip side, less competitive segments tend to be traditional back office administration services, as well as I'll call it, commoditized facility management providers. Leading tech enabled platforms really do stand out as sort of the preferred investment targets for many of these PE groups, while lower margin labor intensive operations are not getting as much attention sort of in today's market.
Ron Miller: Okay, very interesting. I'd like to turn the conversation with both of you over to the debt markets. Alex, how supportive has the debt markets been for transactions during the last six months?
Alex Eskra: Yeah. So, I mean, the debt markets have been remarkably resilient, actually strengthening in the first half of 2025. So total debt multiples for lower middle market transactions rose to about four times EBITDA, which continuing that post-pandemic recovery. And I'd say this aligns with the more aggressive capital structure environment that we saw prior to all the rate hikes. So, in 2021, 2022, marks an increase in sort of the long-term debt average prior to COVID that was mid three times EBITDA. The persistence of a sort of a 4X multiple reflects sustained lender confidence, appetite for risk. And this is really just supported by a healthy liquidity market, competing sources of capital. So, notably, transactions structured at maximum leverage reached five times total debt to EBITDA, demonstrating that private equity is comfortable with an elevated risk profile when trying to push for attractive acquisition opportunities.
Ron Miller: The debt markets really interesting right now because this is probably one of the first times where the market is constrained a little bit in terms of number of deal flow. But it's not really because of the debt markets. Debt markets have been quite strong and resilient. So digging into that, Alex, what do you think is driving that higher leverage, even given the market uncertainty?
Alex Eskra: To your point, a lot of lenders are willing to chase those high quality assets. And I'd say there's a couple other factors, right? So like add-on acquisitions are demonstrating notably higher leverage than platform deals. Add-ons, you know, can achieve sort of total debt multiples, call it the mid 4X of EBITDA compared to platforms, which are kind of mid 3X of EBITDA and this represents lenders greater comfort with those bolt-on acquisitions and benefit from an established platform, proven management teams and the relationship that they have with those companies. And then I'd say the other factor here is senior lenders have maintained more aggressive terms and continue their willingness to underwrite deals at attractive levels as they're competing with direct lenders. sponsors appear to be comfortable pushing that financial risk, in pursuit of strong returns, and definitely have benefited from the competitive dynamics between traditional banks and direct lenders.
Ron Miller: Ryan, what are you seeing in business services? Same or different?
Ryan Olsta: The same, even maybe with a little bit more of a positive bent. The business services sector has been really a beneficiary of this aggressive lending environment. Business services companies typically have predictable cash flows, recurring revenue models, and asset light structures that make them very attractive to lenders. We're seeing very competitive financing terms, even for companies that might be more exposed to economic cycles. Simply because the underlying business models are so compelling to the debt providers. And candidly, they've had a strong track record over the last few years, sort of coming out of the pandemic. The availability of debt at attractive terms has actually helped sustain business services valuations. When buyers can finance transactions at four times debt to EBITDA with favorable terms, they can justify paying higher EBITDA multiples. And I think that's what you're seeing a little bit here in the first half of 2025.
Ron Miller: So for the last topic, I just have a couple questions, Ryan, for you on business services. Dig in a little more on the competitive landscape and what transactions are attractive and not.
Ryan Olsta: I touched on this a little bit earlier. The business services landscape, it’s increasingly bifurcated. You know, one hand you have best in class tech enabled business service providers that are really commanding premium valuations and seeing strong investor demand. On the other hand, traditional labor intensive service providers are facing some margin pressures and candidly not as much interest, which could result in a longer sale process or lower valuations. Looking forward, the outlook for business services M&A is increasingly positive for the remainder of 2025 and into 2026. Investor interest remains strong, particularly in those sub-sectors where you have stable recurring cash flows and scalable operating models. We're seeing particular strength in essential services. Some sectors like HVAC services, for instance, are really doing well at the moment. Managed IT and things in the legal services are great.
Ron Miller: I think you've covered it quite well. And a lot of that just ties right to margins. A lot of the characteristics you suggested will drive double-digit EBITDA margins and scalable growth. And some of our most successful transactions right now are in the business services sector. But there's also a few that are challenged, face some headwinds in the market and in their margin profile. Let me make just a couple final reflections and takeaways. Alex and Ryan, thank you for your insights today. To summarize what I've heard, lower middle market deal volumes declined about 13% year over year in the first half of 2025, reflecting some real headwinds, still tariff uncertainty, macroeconomic uncertainty. However, we seem to be coming out of that a little bit. Despite volume challenges, valuations remain stable. 7.2 times EBITDA for the broader market, even higher for business services. That supply and demand factors are really still favorable in the marketplace. PE hold periods have declined to six years from seven years. That's still high in a historical perspective. So that shows there's some pent up demand. The debt markets have been very resilient, supportive of four times plus total debt multiples. And business services sectors seem to be faring even better with slightly higher transaction multiples and debt levels driven by their recurring revenue models, the tech enabled platforms, low capex, predictable cash flows. All of this leads us to some cautious optimism over the next six months and into 2026. If we're through some of these headwinds, have a little more visibility in the market. some of that pent up demand, both from private equity and entrepreneurial sellers, is likely to come back into the market. So Alex, Ryan, thanks again for your insights and our help in navigating this evolving market environment.
Alex Eskra: Thanks for having us.
Ryan Olsta: Thank you, Ron, for having us on.
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