Middle-Market Dealmaking Gains Ground as Valuation Gaps Narrow
After a stretch of subdued dealmaking, signs of a rebound are emerging across the middle market, with private equity sponsors returning to both new platform investments and creative exit strategies. Few firms are better positioned to speak to this shift than VSS Capital Partners, a New York-based investment firm with roots dating to 1987 that has built its reputation on its Structured Capital strategy, a hybrid of private credit and private equity investment that the firm makes, often growth investments, meaning minority stake — though the strategy is flexible and does allow for VSS to make majority stake investment as well.
With the fall dealmaking season in swing, Michael Gebhardt, Principal, VSS Capital Partners, offers a timely perspective on where the private equity market stands today, what’s driving renewed activity in certain sectors, and what dealmakers should expect heading into 2027.
CM: Have buyer and seller valuation expectations converged enough to support a meaningful increase in completed transactions?
MG: VSS focuses on investing in founder-owned businesses, often in situations where founders are looking for a financial partner but want to remain meaningful shareholders. When discussing valuation, we often see founders recall the elevated EBITDA multiples seen in 2021.
With each passing year, those benchmarks become less salient, and expectations increasingly reflect today’s financing environment and macro uncertainty. We have not seen a step-change in 2026, but the multi-year trend toward more aligned valuation expectations has continued and could be supportive of dealmaking over time.
CM: Why have add-on acquisitions remained active and more resilient than new platform investments?
MG: Add-ons have a few structural advantages that support dealmaking, even in challenging markets. With add-ons, buyers tend to already understand the end market, competitive dynamics, and management team. These factors can make underwriting significantly easier relative to a new platform investment.
More confident underwriting is especially important today as AI-related risks have complicated long-term forecasting for many businesses. In AI-exposed sectors, add-ons also benefit from being relatively smaller. To the extent managers struggle to make large bets where the long-term impact of AI is unclear, add-on acquisitions provide an opportunity to continue to deploy capital and grow existing platforms while limiting exposure on any single transaction.
CM: How have challenges in private credit this year affected the availability, pricing and flexibility of acquisition financing?
MG: For quality sponsor-backed platform investments, lender appetite for acquisition financing remains strong. Direct lenders continue to have significant capital, and financing is generally accessible at competitive spreads for businesses with resilient cash flow profiles. The primary challenge has been all-in borrowing costs which remain elevated above the levels seen in recent years.
We’ve seen more challenges related to dividend recapitalizations, where pricing and structural flexibility have generally been less attractive than for acquisition financing. Overall, however, the acquisition financing market remains healthy for well-underwritten transactions.