CIBC US Middle Market Investment Banking’s Ron Miller is joined by Alex Eskra and Daniel Riley to discuss 2025 M&A trends, including transaction volumes, valuations, credit markets, and direct lending. Alex covers broader market signals, while Dan highlights software and technology sector momentum and the role of AI. The outlook for 2026 is optimistic, with strong deal pipelines and stable valuations.
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 and Dan Riley at CIBC US Middle Market Investment Banking. Alex focuses on industrial and business services, while Dan focuses on software and technology. Alex and Dan bring extensive experience from their respective areas of focus. Alex will be discussing the broader M&A market trends that we observed during the first three quarters of 2025, including transaction volumes, valuation trends, financing conditions, and some warning signs from the direct lending market that warrant some attention. Dan will provide his insights into the software and technology sectors, which demonstrated strength in 2025 and continue to be a key driver of middle market activity. Alex and Dan, thanks for joining me today.
Alex Eskra: Thanks for having us, Ron.
Dan Riley: Yeah, thanks for having us.
Ron Miller: Alex, let's start with the big picture. How did transaction volume perform during the first three quarters of 2025?
Alex Eskra: Yeah, it's a question, Ron. So we're continuing to see some softness, but also some encouraging signs. So according to Baird, year to date, middle market transactions under $500 million of enterprise value declined by a little over 6% year over year through Q3. However, the narrative isn't quite as simple as sort of that top line number. So while closings remain subdued, we're seeing some significant activity building in the pipeline.
Also, according to Baird, pitch activity and sell-side mandates have reached multi-quarter highs in Q3 2025.
Ron Miller: That's an interesting divergence. What's driving this gap between completed deals and pipeline activity?
Alex Eskra: Yeah, so it ultimately comes down to timing and seller confidence. So there's a lot of market participants that are citing continued friction from the so-called trade war 2.0 and really a key driver of seller hesitation to go to market earlier in the year with tariff volatility causing many buyers to sort scrutinize supply chains and really delay closings. That being said, sentiment has clearly shifted, noticeably in late 2025. According to PitchBook, private equity firms, you know, they continue to sit on record dry powder and are increasingly pressured to deploy capital. If that policy clarity continues to improve sort of through the end of 2025 and into 2026, you know, there's there's enough pent up demand of assets that could go to market and could trigger pretty much a robust rebound in the lower middle market.
Ron Miller: That's interesting. Dan, how has software and technology performed relative to these broader trends that Alex has shared?
Dan Riley: Yeah, I'd say software and technology has actually held up remarkably well, especially when you compare it to the last few years we've had here. So, know, Q3 of 2025, we saw about 980 transactions compared to 995 over the same period in 2024. So essentially a flat year, according to some data from PitchBook. But what's interesting is that that stability, like I said, has come to...come after several years of normalization from that 2021 peak that we saw when software and technology deal volume reached 1800 plus transactions. So we've seen a steady recalibration in 2022 and 2023 as these higher rates, valuation resets and then tighter financing conditions have really pressured activity.
Ron Miller : Dan, thanks. How did the sector perform throughout the year? Was it consistent?
Dan Riley: Yeah, so I'd say in early 2025, it was definitely constrained by some of the same tariff uncertainty and financing volatility that Alex mentioned previously, sponsors and strategics were slower to launch new processes, particularly in Q2. But then in Q3, we saw a notable pickup. We saw some data from PMCF that reported a 12% quarter over quarter increase in software volume.
So that that late cycle acceleration means software and tech volumes are now tracking basically in line or slightly ahead of those pre-2021 historical norms, even if they remain below that 2021 peak.
Ron Miller: That's an interesting acceleration. Any other factors driving this momentum?
Dan Riley: I'd say it's kind of concentrated in a few different areas. So application software, SaaS platforms, tech enabled services have all been big recently. Private equity add-ons and more programmatic strategic acquisitions have also been active despite some macro noise. An interesting data point from CROHL is that software M&A volume by Q3 2025 had actually already matched the full year 2024 levels.
So that underscores how this software led activity is outpacing the broader &A trends. One other thing that I would say as well is that buyers are really continuing to prioritize recurring revenue models, strong unit economics, and then businesses that have a clear path to profitability as well. This 2021 mentality of growth at all costs and negative profitability has really been replaced by this focus on more sustainability and cash flows long-term.
Ron Miller: Now, let's turn the conversation over to valuations in general. Alex, given the volume challenges that we've discussed in the broader market, what have you seen with regard to valuations?
Alex Eskra: Yeah, it's a good question. mean, valuations have remained pretty consistent, sort of year over year. EBITDA multiples for the lower middle market averaged 7.3 times in 2025, and that's data point from GF data. So essentially in line with 7.2 times we saw for both 23 and 24. What's interesting here is that it's meaningfully above the historical long-term average, which was 6.7 times.
And so these multiples suggest that the market has established some kind of evaluation floor above the pre-2021 levels. I would put an asterisk next to that and say it's more for the quality assets that are trading.
Ron Miller: Great. Why do you think this valuation floor has persisted even given the lower deal volumes?
Alex Eskra: Yeah, I'd call it like new equilibrium sort of in scare quotes where ⁓ those higher quality assets are trading in sale processes, which sort of naturally skews those valuation multiples upwards. So even as deal volume has remained constrained relative to prior years, the consistency of pricing above seven times demonstrates that buyers and sellers have reached an equilibrium on what constitutes fair value for those quality assets. In addition to that, I'd say it's important to note that as that transaction activity broadens and there's more of the average or sort of lower quality assets that successfully trade or close, the overall middle market valuation multiples may compress to levels that they're currently at, even if those underlying fundamentals remain unchanged.
Ron Miller: Dan, software and technology valuations are a little different. How have they compared to the broader market?
Dan Riley: I would say that software and tech has actually outperformed on the valuation front, Ron. know, transaction volume stayed roughly flat year over year, but deal value increased through Q2 or Q3 of 25 and reached 209 billion, which is up from 153 billion in the same period of 24. So about a 37% increase. And that already exceeds the 187 billion in total deal value for 2024.
So that again highlights that 25 was really a clear rerating for the software sector.
Ron Miller: That's mean, that's really strong volume. What do you think is driving the valuations and the volume?
Dan Riley: I think there are a few factors that are underpinning the surge, First, we're seeing the return of the larger platforms and take private transactions. Sponsors have also demonstrated a stronger appetite than in the last few years for scale SaaS providers, as well as AI enabled businesses. And then thirdly, financing conditions in Q3 25 have really allowed buyers to be more aggressive.
And then one other factor I'd throw in there as well is that software and tech has just accounted for a rising share of overall private equity deployment in 2025. So as investors leaned into resilient recurring revenue models, they've been willing to underwrite these larger equity checks and close some valuation gaps for the right asset.
Ron Miller: We sure read about that in the papers lately. ⁓ what types of software businesses are commanding the strongest valuations? I think you just referred to it a little bit already.
Dan Riley: Mm-hmm. Yeah, I'd say we're seeing premium valuations for businesses with a few key characteristics. So first, high quality recurring revenue, strong retention metrics. So think gross revenue retention well into the 90s, kind of 95-100%, over 100% net retention rates. You know, anything that's AI enabled or AI native where they can demonstrate a clear productivity gain for their clients or if they're unlocking new use cases. And then thirdly, vertical SaaS solutions that have achieved market leadership and their niche is always going to be viewed positively relative to a more horizontal or generalized solution. On the flip side from a valuation standpoint, we're really seeing some legacy software businesses where they've got less SaaS revenue, more commoditized offerings, maybe some technical debt thrown in there as well, where that is really bringing down valuation multiples and interest in the assets in some cases as well. So I would say the market has really become sophisticated in terms of looking at those different factors and differentiating between assets.
Ron Miller: Okay, let's turn our conversation towards the debt markets and drill down there a little bit. Alex, I'm going to turn it over to you on the financing environment. What are lenders saying?
Alex Eskra: Yeah, so the financing markets tell a pretty interesting story. According to GF data, the total debt multiples for the lower middle market averaged about 3.8 times EBITDA year to date through Q3 2025, which actually reflects a bit of a modest contraction in leverage utilization compared to the 4x that was recorded back in the peak in 2021. However, the 3.8x figure aligns closely with the long term historical average of 3.7 times indicating that while leverage is slightly below the post pandemic peak, it's remained stable. So the market has really set a lies into a normalized, you know, call it more disciplined credit environment.
Ron Miller: I think the lenders are being a little more selective.
Alex Eskra: Certainly. mean, lenders are active, but selective. And they're generally prioritizing credit quality and really favoring borrowers with strong cash flows that can support the debt service. What's particularly interesting is the stability of the 3.8 times multiple, sort of masking a shift in the capital structure composition. So senior lenders have pulled back slightly.
The coverage, senior debt coverage average 2.9 times year to date compared to 3.3 times in 2021. So as a result, sponsors have increasingly turned towards larger equity checks to bridge valuation gaps. And we're seeing, you know, that equity sponsor contribution as a percentage of person, I'll rephrase that.
So as a result, sponsors have increasingly turned to larger equity checks to bridge valuation gaps. We're seeing sponsor equity contribution as a percentage of purchase price at some higher levels in recent years.
Ron Miller: Alex, that's kind of the bank market and the direct lending market. What about the institutional loan pipeline? What is that telling us about heading into 2026?
Alex Eskra: Yeah, great question, Ron. So the institutional loan pipeline is painting a pretty compelling picture for deal making activity in 2026. So according to the London Stock Exchange Group, the pipeline exceeds 60 billion, sort of heading into 2026 for total institutional loan volume, which is pretty much recovering to the same level of the market demand we saw pre-liberation day in early 2025.
The thing that's actually pretty striking about this is in late 2025, 45% of that volume now relates to M &A compared to only 20% at the beginning of 2025. So a pretty dramatic shift that indicates that financing is increasingly being secured for M &A rather than just financing or dividend recaps.
Ron Miller: That's a pretty significant shift. What's enabling this?
Alex Eskra: Yeah, there's a couple of factors. So first, we've seen the OCC and the FDIC withdraw their 2013 Leveraged Lending Guidelines, which has freed up traditional bank lenders to be more aggressive. Secondly, LBO spreads have tightened across both syndicated and private credit markets. And then third, direct lending has really cemented its position in the market as a primary financing source.
So in Q3 2025 alone, direct lenders financed 60 LBOs and deployed over 60 billion of capital, which the resurgence has brought volumes for the three months ending in December to their highest point since Q2 2022.
Ron Miller: We've clearly seen that in our deal flow. ⁓ Why have sponsors turned to the direct lending market?
Alex Eskra: There's a lot of things, right? So speed, certainty, terms, ⁓ direct lenders provide covenant-like structures, no amortization oftentimes, and that's very valuable, particularly in a choppy macro environment. Private equity sponsors value the execution certainty that direct lenders can provide, especially for transactions that really need to move quickly or they have the complexity that traditional lenders might shy away from.
I would say with kind of the robust pipeline that we're seeing and hearing about of deals that are expected to launch at the beginning of 2026, that strong performance of the direct lending market positions it as a critical facilitator of M&A activity in the coming year.
Ron Miller: We've seen it can be quite expensive, but very flexible. And I think we've seen some banks win, but direct lenders as well in certain circumstances are taking the day. Let's move to debt foreclosures. There's some warning signs that seem to be out in the marketplace. Alex, you mentioned the surge in direct lending, but there's also been some distressed activity out in the market. Can you talk about this a little bit?
Alex Eskra: Well, now my glass half empty side is going to come out, Ron. It's certainly an important context for understanding the full picture. What's interesting here is that private credit lenders have continued to take control of distressed assets in 2025 with those foreclosures reaching historic highs. So for example, Lincoln.
You know, sites that private credit lenders took control of portfolio companies that represented about 21 billion in principle, you know, year to date through 2025. So to put that in perspective, that exceeds the combined volume of foreclosures from 2019 to 2024.
Ron Miller: That's a pretty staggering figure. What's driving these foreclosures?
Alex Eskra: So the surge in takeovers is heavily concentrated in sort of specific deal vintages. So over 70% of the foreclosures in 2025 stem from loans that were originated in 21 or 22. So about 40% of foreclosed debt originated in 2021 for the year and a little over 30% came from 2022. To contrast this, older vintages like 2019 and 2020 accounted for just 10% each and newer loans from 23 and 24 were around 3% each. So pretty dramatic in terms of where those foreclosures are coming from.
Ron Miller: What made those 2021 and 2022 deals so vulnerable?
Alex Eskra: Yeah, so we think back to 2021, 2022, a lot of those deals were struck during sort of peak valuations and leverage environments, which were ultimately exposed to rising interest rates, slowing growth. Deals during this time frame were notoriously covenant light and often didn't have triggering mechanisms in place to quickly flag and restructure assets that were struggling.
So by the time any covenants were tripped, these businesses were already in distress. ⁓ The data suggests that there was certainly a clearing of the decks for private credit portfolios where the most troubled assets from the post pandemic boom are being restructured or taken over.
Ron Miller: I think for the last topic, let's turn to just software and technology, Dan, and focus on your area. How are clients navigating the current environment? Do you have any advice for software businesses that might be contemplating a transaction in the next year?
Dan Riley: Yeah, it's a great question and it's very topical to what we're talking with clients about every day. You know, it's a few different factors. would say first off, timing is everything and there's obviously no one size fits all answer for timing. But as we've discussed previously on this podcast, software M&A is really healthy right now and there's strong financing availability and buyer appetite for quality assets. The second factor would be business trajectory.
So buyers want to see consistent growth, clear momentum. You if you're coming off of a strong year with good forward visibility that's going to be a much better time to go to market versus if you're facing near term headwinds or if you've had headwinds over the last few years. From a personal readiness standpoint as well, this is often a very important factor for founders. If you're ready to transition, if you've thought through what comes next post-close, if you're prepared to commit to a fairly rigorous transaction process, those are all pretty important signals for us that the timing might be right for you right now. We typically recommend to founders that we start that conversation about 12 to 18 months before they actually want to be in market. And that gives everyone time to optimize positioning, address any gaps in the team or the business, and then also approach the process more from a position of strength. Private equity sellers have often lived with a business for a few years.
And the business is in more of a sale ready position at that point versus a founder owned business.
Ron Miller: AI is obviously the topic of so many conversations. I'm sure it's very impactful and with the companies you're dealing with. How is AI being handled in the marketplace?
Dan Riley: Yeah, I think it's a topic that's on everyone's mind and it's something that comes up really in every conversation that we have with potential buyers for the software businesses that we're representing. It's really changed the conversation across the board. Every company needs to articulate their AI strategy and that could be AI enablement. It could be AI native applications that they're developing or what is that risk of being disrupted by another AI solution that enters the market. So we're helping clients understand what their AI capabilities are and then position that in a way that resonates with buyers for the business. So that could mean highlighting how they're using AI to improve their core product. It could be how they're leveraging AI to improve unit economics or how they're building defensibility through proprietary AI enablement or even AI native coding. And I would also say that buyers are willing to pay a pretty significant premium for businesses that have integrated AI in some fashion, but they're also heavily scrutinizing companies that are just adding AI features for the sake of it without any clear ROI or differentiation in the market.
Ron Miller: Businesses that really aren't AI enabled, how should they be thinking about the current environment?
Dan Riley: Yeah, it's a great question. And I would say that not every software business is going to be AI enabled or has to be AI enabled. I think it's important just to have a clear perspective on where AI creates value in your market and how your businesses may be positioned relative to that opportunity. So for some businesses, AI might be a feature enhancement that improves the user experience. For others, it could just be an operational tool that improves margins over time. And then for some AI might be a real threat that requires some product repositioning. So as part of our process, we're really helping clients develop that perspective and then communicate it effectively to buyers. The worst thing that you could do is just ignore it completely and say, AI is not going to be a factor in our market. I think buyers are very attuned to that. And they're going to be asking those questions right up front during the process.
Ron Miller: Dan, when you put this all together, what's your outlook for software M&A in 2026?
Dan Riley: Yeah, I'm optimistic, Ron. The fundamentals are strong. You've got record private equity, powder, improved financing conditions, pretty healthy strategic acquire appetite, and then a pipeline of quality companies that have been built or scaled during that 2020 to 2025 period. And we expect to see continued strength, whether it's vertical SaaS, AI enabled platforms, tech enabled services.
This bifurcation that we've seen between best in class assets and everything else that will likely continue, which means that positioning is going to be more important than ever before from our standpoint. And finally, I would say for business owners that are thinking about a transaction now is very much the time to start planning. Like I talked about before, the market's open, buyers are active, and the outlook for 26 is as constructive as anything we've seen in the last few years. So we'd be excited to talk to businesses about that.
Ron Miller: Thank you, Alex and Dan, for those insights. Let me summarize a few themes that came out of our discussion today. Lower middle market deal volume declined about 6.5% year over year through Q3 of 2025. But pitch activity is strong, suggesting there's pent-up demand heading into 2026. Valuations remain stable at about 7.3 times EBITDA for the broader market establishing a durable valuation floor above the pre 2021 levels for quality assets. Software and technology transaction volume has held held flat year over year, but deal value is really surged. The institutional loan pipeline exceeds $60 billion with 45% now M&A related. That's up over 20% since Q1 of 2025.
That is a strong leading indicator for deal activity in 2026. The direct lending market came back strong in 2025, positioning the market as a critical facilitator of M&A activity into 2026. Debt foreclosures reached historic highs with over 70% of the foreclosures stemming from the 2021 and 2022 vintage years.
Software M&A has been driven by recurring revenue models, AI enablement, vertical market leadership, and buyers willing to write large checks for best-in-class assets. And overall, looking forward, the outlook for 2026 is highly constructive, with improving policy clarity, robust financing availability, record PE dry powder, all creating favorable conditions for a broader rebound in middle market activity.
So Alex and Dan, thank you for your time and insights in navigating the complex M&A market right now.
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