The M&A landscape for middle-market firms is evolving rapidly, influenced by various economic and geopolitical factors. To gain a deeper understanding of these market dynamics, I spoke with Jack Sadden, Co-Founder and Partner at Valesco Industries, a seasoned private equity firm based in Dallas, Texas.
Valesco Industries, established three decades ago, has consistently targeted investments in niche manufacturing, high-value distribution, and product-centric service businesses. Typically operating within the lower middle-market, their investment sweet spot is firms with enterprise values ranging between $25 million to $75 million. However, as Sadden notes, “We can do larger and we’ve also done smaller, but that range is typical for us.”
See the full interview available here.
Current State of Middle-Market Dealmaking
The present state of M&A activity has been somewhat mixed, following years of significant volatility. “If you look back over the last decade, it has truly been a golden era,” Sadden explains, highlighting the dramatic spike in activity during 2021 following a brief slowdown due to COVID-19 in 2020. While the market remains robust compared to pre-pandemic levels, a downward trend from the peak of 2021 continues into 2025, leading to cautious optimism.
Sadden observes, “Q1 2025 has not quite lived up to expectations. In fact, we’re showing a flat to downward trend since 2024.” Several factors have contributed to this market hesitation, including uncertainty surrounding the availability and pricing of debt financing, the quality of available investment opportunities, political and regulatory uncertainty, and the lingering impacts of excess capital competing within the market.
Impact of Interest Rates and Tariffs
Interest rates and tariffs have become significant talking points, injecting uncertainty into the decision-making process of many investors and businesses alike. According to Sadden, “The most used word on the airwaves right now and out in the market is uncertainty.” This uncertainty has been fueled by rapid regulatory shifts and economic strategies implemented by policymakers, creating a challenging environment for investors.
“Proposed tariff actions will likely bring about material inflation, potentially leading to stagflation,” notes Sadden.
This challenging macroeconomic climate forces investors and businesses into cautious stances, potentially delaying deals or restructuring transactions.
Despite these challenges, Sadden remains confident in the opportunities presented by such volatile conditions, stating, “We’ve always found that volatile and chaotic times usually create great opportunities.”
Trends in Capital Structuring
In response to the conservative lending practices now prevalent among traditional banks, private equity and alternative financing methods have increasingly filled gaps. Sadden describes the current environment as “conservative to very conservative,” with banks demanding tighter covenants, lower advance rates, and potentially higher interest rates.
This conservative stance by traditional lenders has resulted in the increased prominence of junior capital within the capital stack. “There is an ask for more junior capital—mezzanine or subordinated debt and more equity—creating a more conservative capital structure,” Sadden elaborates. This shift can create pressure on investor returns, particularly if a company’s performance is not robust.
Finding Value in a Complex Market
Valesco Industries has maintained its investment strategy throughout its 30-year history, focusing steadfastly on niche markets that may appear mundane but consistently deliver solid returns. “These business models are typically private or entrepreneurial-owned businesses at a juncture of ownership succession or rapid growth and change,” Sadden points out. Rather than shifting investment strategies significantly, Valesco has adapted its approach to sourcing opportunities.
Historically, Valesco primarily employed direct origination—reaching out directly to targeted businesses. However, there has been a substantial shift.
“We’ve gone from where 90% of our investment opportunities used to come from direct origination, to now only about maybe 10%,” Sadden notes.
Currently, the majority of opportunities come from external channels, including third-party advisory firms, social media outreach, LP networks, independent sponsors, investment banks, and business brokers.
Outlook for 2025 and Beyond
Looking ahead, Sadden is cautiously optimistic. “There was a lot of excitement and anticipation for 2025 to be robust. Q1 suggests that might be a hard goal to accomplish,” he explains. However, he maintains that disciplined and patient investors who stick to their strategic principles will continue finding good opportunities, even amidst volatility.
“We think we can perform at least as well as last year, aiming to invest in four or more platforms compared to three last year,”
he shares, expressing confidence in Valesco’s strategy and adaptability.
Final Thoughts
Jack Sadden’s insights underscore a key lesson for middle-market investors: maintaining flexibility and strategic discipline is crucial in uncertain times. By carefully navigating the complex interplay of economic conditions, financing challenges, and market dynamics, investors can identify and seize high-quality investment opportunities even amidst volatility.
As market conditions continue to evolve, Sadden’s advice remains clear: “Stay to your game plan. Be patient and let things unfold—there will be great rewards down the road.”
