Craig Checks In: Caber Hill Private Equity Survey Insights

Craig Castelli (00:05):

Welcome to The Close M&A podcast with Caver Hill Advisors. I’m your host, Craig Castelli, and happy new year. It’s early January and today I’m here with you once again solo to talk about our annual survey of private equity partners. We started this in 2024 and in fall of 2025, we sent around our second survey. We asked partners at private equity firms, sent it out to over 2000 firms actually in our database about their thoughts on the year that was and the year up ahead. We had over 50 firms participate this year and we look forward to continued growth of this project. I’m going to share my screen here for those watching on video and we’ll go through some of the key takeaways from this survey.

(00:58):

By the way, if you’re interested in reading a full report or just seeing the results, the survey can be downloaded at our website. You can also reach out to anybody you know on the Caber Hill team and they can send you a copy directly. So here we go. Jump right in. First off, we view 2025 as a year of stabilization. It really was an up and down year. My line was that we lived three business cycles in one year. Everybody started 2025 with the expectation that it was going to be a massive boom for M&A. We had all kinds of momentum and we saw it here in the firm with a huge top of funnel pipeline activity heading into the year. But then quarter two happened. And tariffs took the wind out of the sales. Virtually no deals got done in the second quarter. And we spent the second half of the year rebuilding and we rebuilt like crazy.

(01:48):

Momentum picked right back up. The pendulum swung right back in the right direction, whatever analogy you want to use. But that second quarter was quite the setback. We see that in the results here. Looking at this first data point overall market strength, it really was a mixed bag. Some firms said they had a better year. Some had a worse year. About a third said it was about the same. Deal volume overall was the same or better for most of our respondents. This is an interesting statistic because deal volume usually reflects the number of deals that they’re looking at, not necessarily the number of deals that they get done. And we’re always fighting the value of quantity versus quality in the deal marketing, consistent feedback. We heard from the private equity community over the past year was that we’re seeing a lot of deals. We’re seeing more deals because they track this stuff religiously.

(02:43):

But the deal quality isn’t there. We’re passing on a lot more than we’re pursuing. If we now shift to the forecast for 2026, however, there’s a lot of optimism in the market. And there’s a common thinking that 2026 should be the year that everybody hoped 2025 would be. And we see this again in the survey responses. 74% think that we’ll have a slightly stronger market in 2026, 8%. I think it’ll be a much, much stronger market. So it’s 82% of our responses say 26 is going to be stronger than 25. Similar expectations for deal volume. 86 of our respondents suggest they’re going to see more deal volume in 26 than they did in 25. Nobody expects it to be a slower year for overall deal volume.

(03:41):

Let’s skip over the valuation multiple as you guys will have to download the report to read the responses about valuation. We did ask some questions about deal terms and we did see an increase in the use of earnouts specifically. A little bit of an increase in the ask for seller notes or preferred equity, some sort of structured equity as opposed to standard earnouts or standard rollover equity. Cash at close and rollover equity pretty static. In some cases, we saw both increase. Looking at the factors that plagued 2025. Interestingly, interest rates at this point have kind of settled into the background. Everybody would like them to be lower, but nobody’s citing interest rates at this point as being a real drag on deal momentum. The big issue in ’25 were the tariffs. 90% of respondents said that tariffs had a negative impact on their deal activity in 2025.

(04:47):

We saw it too. The interesting thing about tariffs is that it didn’t necessarily matter if your business had tariff exposure or not. You were still impacted. And the reality is tariffs injected uncertainty. And two, the average entrepreneur, uncertainty is a real problem. If I have uncertainty about the future of my business, or if I have uncertainty about the impact on an overall market and how that’s going to influence or impact a deal, then I may choose to pull back. I may choose not to go to market. I may choose not to accept the offers that are in front of me. If I’m on the buy side, it may influence how I structure a deal. I may need to build in some more padding to make sure that I’m not burned by a certain price or a certain deal structure. So even as a firm at Caber Hill, for those who may not know, we focus on a number of industries, but the bulk is healthcare business services, specifically those with blue collar workforce and industrials, even the healthcare businesses, even the healthcare practices that have virtually no exposure to China or the other really aggressive tariff markets were rattled by the tariff announcements and the uncertainty that that created.

(06:06):

And it really took that fade into the background or disappeared altogether for even those markets to rebound, let alone the heavy industrials where they have much more direct tariff exposure. So the other interesting thing I want to call out here about the friction point from 2025 is that the government shutdown was, for the most part, a non-factor. The majority said it had really no impact and nobody said it as being very, very negative, but seller expectations were a problem. And it’s long been known that the biggest killer of deals is a seller with unrealistic expectations. And lo and behold, even in 2025, we still have seller expectations as a negative influence on the ability to get deals done, selfish plug that highlights the need for a firm like Caber Hill Advisors or another advisory firm to work with the seller to make sure that they’re going to market with their eyes wide open, know exactly what to expect when they put their business on the market so that the deal doesn’t die because of some sort of false hope or country club rumor.

(07:19):

Let’s talk more about 2026 and the opportunity specifically that’ll drive M&A. I think the answers to two questions we asked here are pretty eye-opening. And if I am a business owner thinking of going to market, I’m going to look at these facts as being very encouraging. Reasons why I may consider 2026 as a good year to sell my company. First off, we asked the question, what factors will drive the most M&A opportunities in 2026? Number one, dry powder. Dry powder refers to capital that is available to be deployed. It could be cash sitting on the balance sheet of a large public company. It could be the undeployed funds of a private equity firm. Private equity firms raise funds. They have a limited window to put those funds to work, investing in companies, growing those companies before they get to sell the companies and return the capital to shareholders. There’s a lot of dry powder sitting on the sidelines that has to be put to work.

(08:17):

Investors face pressure to put that capital to work. That’s good for sellers. There’s money out there to be paid to buy your business. Biggest concern about the M&A market in 2026, number one, by a decent margin competition for deals. This means that the private equity investors we surveyed are concerned about the fact that there are going to be other competitive private equity firms, other competitive buyers competing with them for the deals that they want to buy. Driving the price up, making the terms more seller favorable, making it harder for them to get a good deal. If I own a company and I’m thinking about selling it, this is exactly the type of environment I want to sell into. This is the feeding frenzy that we often talk about. When industries are going through rapid consolidation, when they get really, really hot, this is what drives it.

(09:08):

And we expect to see a lot of sectors heating up in 2026, some new names, some old, but by and large, the valuations are going to be there. The buyer appetite is going to be there. We have a lot of momentum heading into the year. Here at Caber Hill, we’re looking at closing three to four deals in this first quarter alone with a massive pipeline behind it in a variety of sectors, some that you used to seen from us, some new. If you’re looking to sell a company, we’d love to talk with you. If you’re in the market to buy, please reach out to someone on our team, make sure we know who you are and what you’re looking for, and let’s all work together to make 2026 the year that we thought ’25 would be, and even better. Thanks for tuning in to my solo rant here.

(09:54):

And as always, thanks for listening to us on The Close.