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Middle-market M&A trends: M&A activity, regulatory impacts and future deal drivers with Christian Schiller

Posted by | Fuld & Company

Christian Schiller, Vice Chairman at Cascadia Capital, shares his perspectives on the rise in middle-market M&A activity, the impact of increased regulatory scrutiny, and the challenges of sustaining AI-driven deal growth.

We’ve seen middle-market M&A activity gaining momentum recently. Do you expect this upward trend to continue through Q4 and into 2025? Which sectors do you think are best positioned for heightened deal activity moving forward? 

 

Yes, we are seeing record levels of pitches and new engagements in Q4 and expect that will drive substantial uptick in deal volume throughout 2025. One interesting thing we are seeing is that clients want to engage and get prepared now, but hold off going to market until they have more confidence in the robustness of the M&A market. That will lead to more deals going to market on a delayed basis in Q2 and Q3 vs. Q1. The best positioned sectors are technology, business services and food.

 

Regulatory scrutiny has increased in 2024, particularly in sectors like healthcare and technology. How has this impacted middle-market M&A transactions? Are you seeing deals taking longer to close or more challenges in getting them over the line? 

 

While regulatory scrutiny has increased, especially with HSR complexities and the elimination of early termination back in 2021, this has not had a material effect on middle market deals other than on timing. Deals are taking materially longer to close, but that has been driven more by the additional intensity and layers of buyer due diligence than by the regulatory environment. The new HSR rules released October 10 will add complexity and time (it’s estimated the HSR process will now require more than double the legal hours), but the good news is that they have reinstated early termination which should positively affect many deals in 2025.

 

Looking at specific trends, AI-driven deals in the middle market have surged by around 25% in the first three quarters of 2024. What’s your perspective on the future trajectory for such deals? Are there any challenges that might limit the growth for such deals?

 

We believe AI is a compelling “horizontal” technology that will continue to make most industries more efficient, increase margins, and drive growth. However, there has been significant over-investment in AI point solutions, generating a feeding frenzy and artificial spike, so we see activity reverting to the mean. Many AI companies had early adoption and revenue traction, but churn has been very high, limiting the long-term growth prospects for many players. We believe the best AI companies will still do well in raising capital and selling, but there will be a flight to quality, and a much higher bar for buyers and investors alike, going forward.

 

With M&A becoming increasingly competitive in the recent years, are you seeing a shift toward consolidation among middle-market investment banks as they seek to enhance their capabilities? What has been Cascadia’s own experience?

 

The major M&A consolidation wave for investment banks primarily took place between 2018 and 2021. Since 2022, there has not been limited deal activity because the financial performance of most investment banks has not supported the valuation expectations of previous years. Cascadia is fiercely independent with a unique culture, and a team of 27 MDs and over 120 bankers who all drive and support that culture, so we took the route of raising over $50 million of minority growth capital from Atlas Merchant Capital in late 2022. This has been the right call to facilitate rapid growth through the downturn, retain the key aspects of our culture, and leverage the substantial value-add from Bob Diamond and his colleagues at Atlas, and our board to help us navigate and build the business in this environment.

 

In terms of broader economic factors, the Federal Reserve’s monetary policy has been a key driver for M&A. Do you expect continued monetary easing into 2024, and how do you think this will influence M&A activity and deal valuations?

 

We do foresee multiple additional rate cuts coming from the Fed through 2024 and 2025, which should help drive increased activity, volume and valuations throughout 2025. While interest rates have spiked, the positive impact of private credit driving substantial continued liquidity in the debt capital markets has allowed for more deals to happen than people expected. The combination of that same historical private credit liquidity and bringing interest rates more in line will surely have a very positive impact on driving more PE platform activity in 2025.

 

The U.S. presidential elections in 2024 add another layer of uncertainty. How do you anticipate this political climate will affect middle-market M&A? Are companies becoming more cautious as the elections approach?

 

We have been surprised by the fact that PE, buyers and sellers have mostly experienced little to no effect from the upcoming elections on their strategic planning, activity, or specific deals, other than maybe slightly at the margin. There seems to have been a decoupling of politics and business, where business has decided to focus on what it can control and let the political climate play out around that (vs. the other way around in prior election cycles). That said, clearly the fact that we will soon have certainty – again, surprisingly, whichever way the election goes for President and Congress – will be the key factor that will create a more positive climate for M&A post-election and through 2025.

 

As we see more economic and political uncertainty, do you expect shifts in company valuation expectations? And how will this impact the due diligence process from buyers’ perspectives?

 

We see a bifurcated market for valuations and diligence. “A” companies are receiving valuations near, or sometimes even at/above levels from the 2021 heights, as well as experiencing more smooth diligence processes. However, “B” or lower graded companies are experiencing the opposite with more limited buyer interest, longer and materially more challenging diligence processes, and substantially lower valuations. Thus, it will be absolutely critical for investment banks to focus on deal scrutiny/selection and diligence standards to avoid failed processes, and it will be similarly critical for sellers to be conservative and realistic on their valuation expectations prior to engaging in any sale process to avoid wasted time and opportunity costs.

Lastly, private credit has gained prominence as a financing option in recent transactions. With Citibank and Apollo Global Management announcing their partnership to establish a US$25 billion private credit direct lending program, how do you see this trend evolving in 2025? Are there specific types of deals where private credit is likely to dominate?

 

The revolution in private credit has been among the most important factors in recent history in the M&A and private equity markets across the US. We have seen this play out in most of our deals as private credit has stepped in with historic liquidity to help buyers get deals done. Additional private credit has played a large role in leveraged dividends for PE to return money to LPs in this slow exit environment, and even to provide leverage to the fund GPs. Given these dynamics, we set up a capital markets team in early 2023 and expanded it recently, and we continue to expect private credit to be the main driver for middle market financing in 2025 and beyond.

About Christian Schiller

Christian Schiller Christian Schiller is the Vice Chairman of Market Development at Cascadia Capital, with a focus on providing strategic advisory services to family businesses, private equity firms, and investors. Over the course of his 30-year career, Christian has closed numerous transactions across a broad range of industries and sectors, both in the Pacific Northwest and nationally. His expertise spans M&A, capital raising, and strategic advisory for deals ranging from $50 million to $3 billion.

Christian plays a key role in leading Cascadia’s efforts in marketing, channels, and growing the Southern California market. He has built a vast network of CEO and board-level relationships across the U.S., allowing him to provide differentiated advice and strategic insights to his clients. He has a particular passion for working with family-owned businesses, helping them achieve successful outcomes in complex transactions.

 

Cascadia Capital is an independent investment bank offering advisory services in M&A, capital raising, and strategic planning. The firm works with companies across a range of industries, tailoring its approach to meet the specific needs of each client. Known for its collaborative style, Cascadia emphasizes a thorough understanding of industry dynamics and client goals to guide its advisory work and support businesses through complex transactions, offering practical insights and structured processes to help them achieve their objectives.

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