Market Dynamics: What PE Firms Need to Know for Dealflow in 2025

At DealMax 2025, GF Data Managing Director Bob Dunn provided a comprehensive analysis of private equity market conditions and dealflow expectations. His insights revealed several key trends that will shape deal origination in the coming year. For strategic buyers, independent sponsors, and PE firms developing their 2025 strategies, understanding these market dynamics is essential.

The Dealflow Pressure Cooker

Perhaps the most significant insight from Dunn's presentation was the mounting pressure on private equity firms to exit investments.

"With each year private equity waits, that wall is building up," Dunn explained. "You have continuation funds, you have secondary vehicles, but those are not going to be able to absorb the amount of volume of deals out there that need to be exited in the next year or two."

This pressure cooker scenario creates both challenges and opportunities. For deal originators and capital allocators, this signals increased activity on the horizon, particularly in the latter half of 2025.

The Quality Premium Evolution

GF Data tracks what they call the "quality premium" - the valuation differential between above-average performers (companies with at least 10% EBITDA margins and 10% trailing revenue growth) and all other companies in the market.

The data reveals two critical trends:

• The incidence of above-average performers in the transaction market dropped from 57% in 2023 to just 40% in 2024
• The premium these companies commanded also declined, reaching just 7% at the midpoint of 2024 (well below the historical average of 15%)

However, by year-end 2024, this premium rebounded to 15%, suggesting quality companies are beginning to return to market, attracted by improved debt conditions and increased buyer activity. For deal originators, this indicates a potential quality shift in the deal landscape for 2025, with more premium assets becoming available after a period dominated by strategic add-ons.

The Platform vs. Add-On Dynamic

One of the most surprising trends in recent transactions has been the inversion of traditional valuation patterns between platform and add-on acquisitions.

"In 2023 and 2024, for the $10-25 million range, add-ons actually commanded significantly higher valuations than platforms," Dunn noted. This represents a substantial shift from historical norms, where platform acquisitions typically commanded premium valuations.

This trend was driven by several factors:

• Larger firms shopping down-market for smaller companies
• The relative unimportance of half-turn differences at smaller EBITDA levels
• Strategic value of add-ons to existing portfolio companies acquired at 2021's peak valuations

For 2025, Dunn predicts add-on activity will remain elevated but gradually decline from the 44% peak in mid-2024 toward a more normalized level of 38-42% of total transactions.

Debt Market Recovery

The debt market narrative that emerged from Dunn's presentation was one of cautious optimism. After the shock of the Silicon Valley Bank failure in March 2023, traditional bank lending contracted sharply, leading to:

• More debt fund activity with higher pricing
• Increased use of single-tranche financing
• More all-equity transactions at the lower end of the market

By Q4 2024, the average price of senior debt had declined to 8.7% from a peak of 11% in Q4 2023. While still high compared to the past 15 years, this represents substantial improvement.

"We don't need historically low interest rates to facilitate deal flow," Dunn emphasized. "We just need rates that aren't climbing upward."

The increased competition between returning banks and established debt funds should continue to drive favorable financing conditions in 2025, further supporting transaction activity.

Timeline Extension

An important practical consideration for deal professionals is the extended timeline from LOI to close. According to GF Data's new tracking metrics, the average time from LOI to closing has stretched to 9-12 months - significantly longer than pre-pandemic norms.

This extension reflects:

• Market uncertainty
• Increased due diligence requirements
• More specialized PE firms with comprehensive diligence processes

For deal originators, this extended timeline means initiating deal processes earlier and setting appropriate expectations with clients about realistic closing timeframes.

2025 Outlook: A Tale of Two Halves

Dunn's forecast for 2025 painted a picture of two distinct periods. The first half will likely remain subdued, with Q1 activity dampened by:

• Post-election uncertainty
• Policy questions around tariffs and regulatory changes
• Continued wariness among sellers

However, the second half of 2025 should see significant acceleration, driven by:

• PE Exit Pressure: "There's a huge amount of pressure for limited partners in those funds to get some returns back from private equity."
• Dry Powder Deployment: "2023 saw the largest fundraising area within private equity was middle market fundraising...you have a ton of dry powder that needs to be invested."
• Seller Timeline Urgency: "Most of the owners are now five or ten years older than when they first started thinking about exiting...time is not on the side of entrepreneurs and families with these businesses."
• Post-COVID Reality Check: Many companies that saw significant COVID-era growth now face more challenging conditions, creating urgency among business owners who recognize that "they don't have the golden ticket based upon that COVID performance."

Strategic Implications for Deal Professionals

For those focused on deal origination and transaction advisory, these insights suggest several strategic priorities for 2025:

• Focus on Pipeline Development Now: The anticipated second-half surge means building relationships and pipelines in H1 2025 will be critical to capitalizing on increased activity later.
• Set Realistic Timeline Expectations: With 9-12 month transaction timelines becoming common, managing seller expectations and planning accordingly is essential.
• Prepare for Quality Shifts: As more premium companies enter the market, calibrate valuation expectations and targeting strategies accordingly.
• Monitor Add-On vs. Platform Dynamics: The rebalancing of add-on versus platform acquisitions may create opportunities for strategic positioning of assets.
• Leverage Improved Debt Markets: More favorable and competitive debt markets should be factored into deal structuring and feasibility assessments.

Pipeline Development for the H2 Surge

As the private equity landscape navigates these evolving market dynamics in 2025, firms that proactively build relationships and pipelines now will be best positioned to capitalize on the anticipated second-half surge. Captarget's Pipeline Development service helps PE firms systematically identify opportunities in the $1-10M EBITDA range – precisely where quality opportunities often exist without investment banking representation.

Our approach is uniquely positioned to address the key challenges identified at DealMax 2025:

Building Your Pipeline for the H2 Surge

With dealflow expected to accelerate significantly in the second half of 2025, our structured outreach process helps you initiate relationships today that convert when sellers are ready to transact. By focusing on the underserved lower middle market, we help you access deals before they enter competitive processes.

Navigating Extended Timelines

As transaction cycles stretch to 9–12 months, early relationship development is more critical than ever. Our team supports you in managing seller expectations and process timelines, ensuring consistent momentum through the entire deal lifecycle.

Accessing Quality Without Premium Pricing

While GF Data shows rising premiums for high-quality companies, our focus allows you to uncover fundamentally strong businesses that aren’t yet priced like their larger counterparts, providing value without the competition.

Through partnerships with specialized service providers from CFO advisors for financial diligence, to post-LOI experts and post-acquisition value creation teams. Captarget delivers support across the entire transaction journey.

Contact us today to learn how Captarget and our partners can help you position for success in 2025’s dynamic dealmaking environment.