The industrial sector has long been a cornerstone of private equity investment, but in 2025, the landscape is evolving rapidly. Shifts in capital deployment, supply chain realignment, and macroeconomic uncertainty are reshaping the way deals are structured and executed.
To gain insight into the current M&A climate, I sat down with Jimmy Watson, Managing Director at Clavis Capital Partners, a private equity firm specializing in control investments within the industrial sector. Clavis focuses on founder-led, middle-market companies in specialty distribution, industrial services, and niche manufacturing—sectors experiencing profound transformation.
Jimmy shared his perspective on deal flow, geographic trends, value creation, and the forces shaping M&A strategy this year.
See the full interview here.
A Strong M&A Market in Texas and the Southeast
The DFW region continues to be one of the hottest areas for middle-market transactions, and Clavis Capital Partners is witnessing this firsthand.
Jimmy noted that business owners are increasingly looking for liquidity, either due to long-term succession planning or institutional ownership strategies.
“We’re seeing a flood of not just talent, but companies coming to Dallas or wanting to expand into Dallas,” he explained. “There’s a disproportionate amount of deal flow happening in the Southwest and Southeast compared to the Northeast or West Coast.”
Key reasons for this trend include:
- A business-friendly regulatory environment in states like Texas and Florida.
- The influx of corporate relocations and new headquarters.
- Greater availability of private capital in the region.
- A strong labor market, particularly in industrial services and niche manufacturing.
Companies outside of Texas are also seeking to establish a presence in the state, either through acquisitions or expansion strategies.
“We’re seeing a lot of businesses in peripheral states that want to grow into Texas,” Jimmy added. “They’re looking for Texas-based or Texas investment partners that understand the market.”
Where Is Value Being Created?
Finding value in industrial investments requires a mix of operational expertise and strategic positioning. Clavis Capital Partners focuses on businesses at an inflection point—firms that are stable but need help transitioning to a more sophisticated operating model.
Jimmy described their approach:
“Our whole team comes from P&L leadership, hands-on consulting, and entrepreneurial backgrounds. We don’t just invest; we actively partner with companies to unlock growth.”
Some of the areas where Clavis is finding value include:
- Industries positioned for long-term demand growth, such as data center infrastructure and industrial services.
- Companies with strong labor pools that can sustain operational growth.
- Founder-led businesses with untapped operational efficiencies.
One sector where Clavis sees significant opportunity is data center infrastructure.
“We went to a trade show a few weeks ago, and every booth had ‘data center’ somewhere on their signage,” Jimmy said. “Whether they actually worked with data centers or not, everyone was trying to be a part of the conversation.”
To capitalize on this trend, Clavis has invested in companies that support the data center boom, such as HVAC distribution and industrial equipment suppliers.
The Impact of Interest Rates and Tariffs on M&A
Macroeconomic conditions have been a dominant factor in shaping M&A strategy over the past two years, with interest rates and tariffs leading the discussion.
Interest Rates: Stability Matters More Than the Absolute Level
While higher interest rates have made deal financing more expensive, the biggest challenge has been uncertainty.
“There’s no doubt that interest rate fluctuations have impacted dealmaking,” Jimmy explained. “But what we focus on is having a playbook for different scenarios—whether rates go up, down, or stay flat.”
The key for Clavis has been structuring deals with flexibility:
- Proactively diversifying financing sources, including private credit and alternative lending structures.
- Reassessing capital expenditures to ensure portfolio companies can weather rate fluctuations.
- Identifying businesses with strong pricing power, which allows them to absorb higher borrowing costs.
Tariffs: A Growing Concern for Industrial Buyers
Newly introduced tariffs are also affecting deal structures, particularly for companies that source components globally.
“We’ve had to rethink supply chain strategy for several portfolio companies,” Jimmy noted. “Even if tariffs don’t get fully implemented, businesses need a backup plan.”
Clavis has proactively diversified supply chains, ensuring that key components can be sourced domestically or through multiple suppliers to avoid reliance on a single country.
Another approach has been transparent communication with customers, particularly regarding pricing strategies.
“Some companies are introducing surge pricing models so customers understand that price increases might be temporary,” Jimmy said. “This way, we maintain trust and avoid looking like we’re just passing along costs without reason.”
How Deal Structures Are Evolving in 2025
The past two years have seen a significant mismatch between buyer and seller expectations, particularly regarding valuations. This has led to more creative deal structures, including:
- Higher earnouts and seller financing to bridge valuation gaps.
- Stronger equity rollover requirements to align incentives.
- Longer due diligence periods to account for economic uncertainty.
Jimmy noted that earnouts have become more sophisticated:
“Earnouts have always been part of dealmaking, but we’re seeing more creativity in structuring them. Some sellers want higher certainty, so we’re working on smaller earnouts with equity participation instead of just milestone-based payouts.”
Additionally, certainty of close has become a more significant negotiation point.
“Most of our sellers are also rolling over equity, so they’re participating in the next phase of growth,” he said. “The sooner they can transition ownership, the better positioned we are to scale the business.”
The Outlook for M&A in 2025
While 2024 was a year of caution, many dealmakers are anticipating a significant increase in M&A activity in the second half of 2025.
“Everyone we talk to is saying that the second half of the year will be the big boom,” Jimmy said. “There’s a lot of dry powder, and investors are getting anxious to deploy capital.”
However, a key question remains: Will dealmakers continue to focus only on A-grade assets, or will investors start considering B-quality opportunities as well?
“I think at some point, investors will need to start looking beyond the top-tier assets,” Jimmy predicted. “With so much capital on the sidelines, someone is going to start deploying into overlooked opportunities.”
For Clavis, the hands-on investment approach allows them to target businesses that others might overlook, leveraging operational improvements to create value.
Final Thoughts: Positioning for a Busy Year
2025 is shaping up to be a highly active year for industrial M&A.
Key takeaways from Clavis Capital Partners’ strategy include:
- Texas and the Southeast remain prime markets for dealmaking.
- Data center infrastructure and industrial services present strong opportunities.
- Interest rates and tariffs require a proactive risk management approach.
- Earnouts and alternative financing are becoming more common in deal structures.
- A strong second half of the year is expected, with more deals coming to market.
For business owners considering an exit, preparation is key. Having clear financials, a resilient supply chain, and a compelling growth story will maximize valuation and attract strong investment partners.
For more insights on M&A strategy and market trends, visit the Dealmakers Series here.
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