Craig Checks In: Midyear M&A Report: What We’re Seeing in 2026

Craig Castelli (00:05):
Welcome to The Close M&A Podcast with Caber Hill Advisors. I’m your host, Craig Castelli, and today I’m back for another solo recording in which I’d like to give an update on M&A for the first half of 2026. Recording today, Friday, June 12th. The big news today is the SpaceX IPO and I already got a push notification saying it opened much higher than the published opening price. So I think everybody’s fascinated to see where that goes. But let’s turn our attention to the lower middle market, the Caber Hill audience and the news that everybody watching and listening here wants to hear about how deal activity has been for the first half of this year and what we expect for the remainder of the year. I think it’s fair to say we entered the year full of cautious optimism and both the cautious and the optimistic side of that phrase proved to be true.

(01:01):
There were very bullish expectations for deal activity this year on the heels of a somewhat up and down 2025. I know that pipelines were full. Capital was available and everybody was excited to get back to work. Since that time, we’ve entered into a shooting war in the Middle East. We’ve seen a massive run up in oil prices. Most recent inflation numbers show inflation is back above 4% and the Fed signaled that they’re unlikely to lower interest rates anytime soon. The next Fed meeting is next week, so we’ll see what actually happens there. The expectation is that rates are held steady coming out of that meeting. And the headlines about deal activity tend to be somewhat contradictory. S&P Global says that first quarter transaction volume tanked across the board by about 30%. It’s important to note that this tracker only measures deals that are publicly announced and exceed the public announcement threshold.

(02:05):
So it’s somewhat of a limited view and PitchBook tells a very different story. PitchBook is one of our primary sources for data and they track the middle market and private capital market activity very closely. Their statistic is that U.S. PE deal volume was up 6.2% in the first quarter. So that’s a much more positive view of deals actually getting done to start the year. What I thought was very interesting is construction and engineering deals hit all time highs. I think that speaks a lot to the bullishness over grid-oriented and infrastructure-oriented businesses and that entire supply chain as well as the need for companies to secure the supply chain. We’ll drill into that a little bit more closely when I get into specific industry commentary. On the private equity side, what is most noteworthy is focus continues to shift towards add-on transactions over new platforms.

(03:06):
According to PitchBook, again, add-ons are now 76.3% of all US private equity buyouts. That’s an all time high. So if you’re a lower middle market business owner, call it sub-$15 million of EBITDA. The more likely case is that your buyer is a private equity portfolio company if you’re in a roll-up sector, than it is a PE firm looking to invest in you as a new platform. That’s obviously sector dependent and even more so business dependent because we’re finding that there is still strong appetite for new platforms when all of the quality thresholds are met. Private equity firms are still paying premium prices for premium assets, but we’re also finding that their hold periods continue to get longer and longer. Roughly 40% of all private equity portfolio companies were invested in prior to the pandemic. So they’re getting really long in the tooth. The reason is that they’re having a hard time exiting those platforms in the first place.

(04:11):
And so they’re turning their attention to continuing add-on acquisition strategies that will strengthen the businesses, close key gaps, and make them more attractive to a seller in the next couple of years. The positive on the PE front is that private equity firms globally are still sitting on four plus trillion of dry powder. In the US, that figure is north of a trillion. The interesting nuance is a lot of that capital is getting dated. Roughly half of private equity dry powder is starting to reach use it or lose it category. So PE firms have real pressure to deploy capital. This has always been a force that artificially raises the floor and I guess it’s not even artificial. It just raises the floor for deal activity and valuations because capital that needs to be deployed needs to be deployed somewhere. Deals have to get done in order for that to happen.

(05:13):
I think to sum it all up, and this is not my line, this actually, I’m stealing this from Hugh MacArthur at Bain. He’s the chair of their global private equity practice and runs a great podcast called Dry Powder. His line was, “The market is open, but it’s unforgiving.” I think what we are finding is that private equity firms are paying premium prices for premium assets, but they may be passing on any business that doesn’t fully meet that quality threshold. They want those A plus businesses. A couple years ago, B companies were fetching A prices. There was such a frenzy coming out of the pandemic. Money was still cheap. There was more macro certainty overall and it was a rush to get deals done. So much has changed since then and it’s forced investors to really lean into quality businesses and really focus on bifurcating their efforts so that they’re not bogged down by substandard companies and investing in more platforms that they’re ultimately unable to sell.

(06:23):
I’d like to take a deeper dive into a couple of the core sectors that we cover here at Caber Hill starting with healthcare. Healthcare services PE deal count fell roughly 16% in the first quarter. Deal value fell roughly 23%. So this is really that second stat speaks more to the absence of mega deals and the fact that private equity firms are focused on add-on acquisitions more so than valuations overall. Declining deal value is not an average price paid, it’s just the total money spent. Physician practice management deal volume is projected down roughly 16%. Those numbers were estimates at the time of reporting. But what’s interesting is it’s not affecting all sectors or sub-sectors universally. Dental, dermatology, musculoskeletal, and vision were all active. Oral surgery grew last year by almost 10%. Pediatric dentistry is still white hot and because of the age of portfolio companies and the need to strengthen assets via add-ons, dental generally remains strong.

(07:41):
Exit counts in healthcare services rose over 5% year over year. So sponsors are starting to find some liquidity and that’ll have a trickle down effect. If you ask DSO executives, they’ll tell you they expect their own acquisitions to increase in 2026 and most will tell you they expect to recap in the next 12 to 36 months. In the core sector, facility services may be one of the hottest sectors on the planet, or at least in U.S. private equity M&A these days. HVAC is up 240% year over year in terms of actual deals completed. Electrical contracting posted its highest single quarter deal value on record, almost a billion dollars in announced private equity deals. I don’t have stats on landscaping, but the number of landscaping companies that are trading for 10 times or more is mind blowing just what we see through our day-to-day deal activity.

(08:46):
And that’s not unique to landscaping. Any service heavy businesses with recurring revenue in any sort of critical facility service is generally fetching these high double-digit multiples. New sectors that are gaining a lot of attention are security and access control and exterior building facade services. These are more early innings platforms that PE is starting to get really, really excited about. Across the board in these sectors, there’s a major shortage of technicians. And so as a business owner, if you have a trained and retained workforce, you have a high skill workforce and you’re showing the ability to retain your employees over the long term, you’re worth a premium to investors because they’re struggling in their own platforms to find workers to continue to grow. And so acqui-hire deals are just as valuable as traditional acquisitions. Looking into business services, PwC came out with a very bullish outlook saying that they expect business services to be one of the most active M&A areas of 2026.

(10:01):
Business services, we’re talking more white collar here as opposed to facility services that we just touched on, legal staffing, any type of business process outsourcing, compliance, managed IT, cybersecurity, accounting. Business services has really moved hard into professional services. We’ve seen a lot of roll up activity in the accounting space and we can expect that to move into legal. It’s already starting to a little bit on the personal injury front and private equity is sniffing around other types of legal investments. Can they take that accounting playbook and replicate it in the legal space? Recurring and tech enabled revenue is the premium asset. That is what private equity wants to invest in, in any of these categories. So as a business owner, don’t ignore your tech stack, lean into customers that can generate this type of revenue services that can generate this type of revenue. More project-oriented businesses, while still sellable, don’t fetch the same premium valuations and generally have slimmer buyer lists and fewer LOIs submitted.

(11:14):
Lastly, touching on industrials, lot of interest in buy and build strategies in any types of engineered components and industrial technology. The phrase mission critical is key. Do you make or sell something that your customers cannot live without your product engineered specifically by you for them? Does their entire process fall apart? If that’s the case, you have a very valuable business that private equity wants to invest in. If you’re a commodity and there are 10 other competitors that could easily step in and replace you, doesn’t mean you don’t have a sellable business, but certainly the valuation gap between that type of business and one that has that mission critical element is large and growing. Anything linked to infrastructure sub-sectors is white hot right now. Anything with recurring aftermarket revenue is also super attractive in the current climate. Lastly, buyers are looking for domestic capacity. So this onshoring trend is real.

(12:25):
It’s not going anywhere. Supreme Court struck down tariffs. The administration is looking at other ways to enact tariffs. At the end of the day, domestic manufacturers that have the ability to continue to grow domestically will fetch a premium. So that’s it for the sector deep dive. Just some closing thoughts here. It has been an interesting year. The headlines can be confusing. Our activity just internally at Caper Hill is strong and ahead of schedule for this year. We’ve especially seen in the second quarter new inquiries, new opportunities have surged, deals in market are getting multiple bids. What we ultimately want is every one of our clients to be in that multiple offer scenario and that has not changed. Lenders are difficult. Lenders are always difficult and that gets back to that market is open, but market is unforgiving. So if you’re preparing to sell in the next couple of years, you really want to focus on a couple key features of your business.

(13:36):
Obviously, you want to grow and you want to be profitable, but a modernized tech stack, clean, easy to access data and retention of any … Well, really all employees ideally, but specifically any employees that are licensed or have specific unique skill sets is going to be ultimately critical. You may or may not be able to do anything about customer concentration or the project nature of your work. So focus on what you can control, focus on building a business so that you’re checking every single box not seven out of 10 before you go to market. If you’re curious what that means for you, what that means for your business, reach out to me, reach out to anybody on the Caber Hill team. We’re always happy to have that conversation. We want to take businesses to market that sell that result in happy sellers who are walking away feeling like they got the best deal that they could and you don’t just wake up one day and decide to sell and realize that outcome.

(14:41):
It takes a lot of preparation and we’re here to help with that prep. That’s it for today. Thanks everybody for watching on The Close M&A Podcast.