Middle-market private equity is evolving.
Cedric Powell, a partner in Squire Patton Boggs’ Global Corporate Practice in Washington, DC, sees the shift as structural.
The Capital Environment
“Driven by lingering valuation gaps, a slower exit environment, and high interest rates, middle-market private equity is being shaped by a shift toward operational value creation,” Powell explains.
Leverage still plays a role. But financial engineering alone no longer defines competitive advantage. Sponsors are focusing more closely on diligence discipline, management evaluation, and long-term structural flexibility.
Private credit has expanded its influence. Continuation vehicles and GP-led secondaries have become more prevalent over the past several years, and the increased use of artificial intelligence in diligence processes will continue to shape how transactions are evaluated and executed.
Bottom line, the current middle market environment demands sharper execution.
Where Transactions Lose Efficiency
Powell identifies recurring friction points in sponsor-backed transactions — many of which are avoidable.
Overreliance on seller-provided data can distort early analysis. Disorganized sale processes slow momentum. Additionally, some sponsors lack structured or staged approaches to diligence, which can compound these problems.
“Buyers must be wary of getting bogged down in certain financial minutiae while potentially overlooking higher-impact risks,” he notes, emphasizing, for example, the importance of properly understanding historical cash conversion as part of the working capital analysis.
Management dynamics matter just as much. Cultural fit, leadership continuity, and retention risk across the broader management team can impact whether projected value is realized after closing.
Founder- and family-owned businesses may introduce additional complexity through unclear capitalization structures. When discovered late in the process, these issues can materially affect timelines and negotiation leverage.
Sponsors who assert structure early in the acquisition process tend to control outcomes more effectively, particularly where sellers or their advisors may be less process oriented. In those situations, taking the lead to ensure information is produced in a timely and organized manner is essential.
Distinguishing Platform Architecture from Add-On Strategy
Powell draws a clear line between platform acquisitions and add-on transactions.
Platform deals serve as the foundation for a portfolio company and are often larger in size. They require durable, long-term architecture. Governance frameworks, equity issuance flexibility — including rollover mechanics, co-investor participation, and incentive equity grants for incoming management — and financing adaptability must all be considered from the outset.
Successful outcomes in add-on acquisitions, by contrast, are often rooted in efficiency. Add-ons often reflect the addition of new capabilities or customer relationships, and the legal focus should follow a synergistic-driven framework designed to streamline execution and mitigate integration risk.
These transactions can also be smaller in size and may involve less sophisticated sellers, so efficiency helps to ward off deal fatigue.
Treating both transaction types with identical structuring assumptions creates downstream friction. Effective counsel understands the strategic function of the deal within the broader investment thesis and the competitive dynamics at play in the specific sale process.
Regulatory Complexity and Transaction Risk
In regulated industries such as aerospace, defense, and government services, regulatory exposure can materially shape transaction design.
“Regulatory complexity can represent significant risk to transaction completion and timing,” Powell explains. That risk, in turn, can affect the attractiveness of a sponsor’s offer as compared to other bidders in a competitive sale process and the availability and cost of financing.
Regulatory regimes can also affect both transaction approval and post-closing operational flexibility. Buyers (and their counsel) should understand how those regimes may create economic risk for the specific business, not just at closing, but throughout the sponsor’s hold period.
Early identification and mitigation planning are essential. Legal strategy in these sectors directly impacts investment feasibility and economic outcomes.
What Distinguishes Effective Counsel
Technical knowledge is foundational. But it is not sufficient.
What separates effective counsel in sponsor-backed transactions, Powell argues, is the ability to merge a highly technical understanding of legal risk with a sophisticated approach to deal negotiation and risk management. “Efficiency and certainty are key,” he says.
Clients depend on transactional counsel to steer deals toward efficient completion while proactively creating value, not focusing solely on risk mitigation. That requires deep familiarity with the relevant industry sector and an understanding of the terms on which comparable transactions are typically completed.
Closing is not the end of the transaction lifecycle. It marks the beginning of ownership. Thus, counsel must understand sector norms, anticipate structural challenges, value the complexities of management integration, and craft tailored — sometimes bespoke — solutions that preserve sponsor flexibility beyond closing.
Negotiating posture and legal advice should reflect the client’s interests across that entire horizon, including avoiding unnecessary post-closing restrictions and obligations that may limit the sponsor’s flexibility to respond to the needs of the business.
